<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
July 2, 1996
- --------------------------------------------------------------------------------
(Date of earliest event reported)
Peoples Heritage Financial Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maine 0-16947 01-0437984
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
P.O. Box 9540, One Portland Square, Portland, Maine 04112-9540
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(207) 761-8500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
As previously reported by Peoples Heritage Financial Group, Inc. (the
"Company") in its Current Report on Form 8-K, dated April 3, 1996, the Company
completed its acquisition of Bank of New Hampshire Corporation ("BNHC") on April
2, 1996 by means of the merger of First Coastal Banks, Inc. ("First Coastal"), a
wholly-owned subsidiary of the Company, with and into BNHC (the "Merger"). Upon
consummation of the Merger, each outstanding share of BNHC Common Stock was
converted into the right to receive two shares of Company Common Stock. The
Merger was accounted for as a pooling of interests for accounting and financial
reporting purposes.
Following consummation of the Merger, the Company merged its two New
Hampshire-based banking subsidiaries The First National Bank of Portsmouth and
Bank of New Hampshire - under the charter of Bank of New Hampshire effective the
close of business on June 28, 1996. This transaction also was accounted for as a
pooling of interests for accounting and financial reporting purposes.
Also as previously announced by the Company in its Current Report on
Form 8-K, dated June 5, 1996, the Company, Peoples Heritage Merger Corp.
("PHMC"), a newly-formed, wholly-owned subsidiary of the Company, and Family
Bancorp ("Family") have entered into an Agreement and Plan of Merger, dated as
of May 30, 1996, which provides, among other things, for (i) the merger of
Family with and into PHMC (the "Family Merger") and (ii) the conversion of each
share of Family Common Stock outstanding immediately prior to the Family Merger
(other than any dissenting shares under Massachusetts law and certain shares
held by the Company) into the right to receive 1.26 shares of Company Common
Stock, subject to possible adjustment under certain circumstances, plus cash in
lieu of any fractional share interest.
The Company intends to file a registration statement on Form S-4 in
connection with its pending acquisition of Family. In accordance with Item 10 of
Form S-4, the Company has submitted herewith under Item 7 of this Form 8-K, (i)
supplemental financial information, including restated supplemental consolidated
financial statements, as of December 31, 1995 and 1994 and for the three years
ended December 31, 1995 and (ii) supplemental financial information, including
restated supplemental consolidated financial statements, as of March 31, 1996
and for the three months ended March 31, 1996 and 1995, in each case giving
retroactive effect to the acquisition of BNHC for all periods presented. The
supplemental consolidated financial statements will become, in all material
respects, the historical financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Not applicable.
(b) Not applicable.
2
<PAGE> 3
(c) The following exhibits are included with this Report:
Exhibit 23 Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedules at December 31, 1995
and March 31, 1996
Exhibit 99(a) Supplemental financial information as of
December 31, 1995 and 1994 and for the three
years ended December 31, 1995
Exhibit 99(b) Supplemental financial information as of
March 31, 1996 and for the three months
ended March 31, 1996 and 1995
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date: July 2, 1996 By: /s/ Peter J. Verrill
-----------------------------------------
Name: Peter J. Verrill
Title: Executive Vice President, Chief
Operating Officer, Chief Financial
Officer and Treasurer
4
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Nos. 33-22205, 33-22206, and 33-80310) on Form S-8 of Peoples
Heritage Financial Group, Inc. (the "Company") of our report, dated June 25,
1996, relating to the supplemental consolidated balance sheets of the Company as
of December 31, 1995 and 1994 and the related supplemental consolidated
statements of income, changes in shareholders' equity and cash flows, for each
of the years in the three-year period ended December 31, 1995, which report
appears in the Current Report on Form 8-K of the Company dated July 3, 1996. Our
report refers to a change in method of accounting for mortgage servicing rights
effective January 1, 1995.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 1, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 164,587
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 49,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 767,539
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,022,443
<ALLOWANCE> 65,533
<TOTAL-ASSETS> 4,257,912
<DEPOSITS> 3,347,427
<SHORT-TERM> 497,720
<LIABILITIES-OTHER> 50,610
<LONG-TERM> 0
<COMMON> 256
0
0
<OTHER-SE> 361,899
<TOTAL-LIABILITIES-AND-EQUITY> 4,257,912
<INTEREST-LOAN> 67,930
<INTEREST-INVEST> 12,400
<INTEREST-OTHER> 424
<INTEREST-TOTAL> 80,754
<INTEREST-DEPOSIT> 29,568
<INTEREST-EXPENSE> 6,047
<INTEREST-INCOME-NET> 45,139
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 504
<EXPENSE-OTHER> 34,582
<INCOME-PRETAX> 19,576
<INCOME-PRE-EXTRAORDINARY> 19,576
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,606
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 4.79
<LOANS-NON> 32,736
<LOANS-PAST> 5,090
<LOANS-TROUBLED> 3,142
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 60,975
<CHARGE-OFFS> 2,918
<RECOVERIES> 2,716
<ALLOWANCE-CLOSE> 65,533
<ALLOWANCE-DOMESTIC> 65,533
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 190,436
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 100,255
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 766,648
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,778,583
<ALLOWANCE> 60,975
<TOTAL-ASSETS> 4,058,126
<DEPOSITS> 3,197,138
<SHORT-TERM> 456,932
<LIABILITIES-OTHER> 49,131
<LONG-TERM> 0
<COMMON> 256
0
0
<OTHER-SE> 354,669
<TOTAL-LIABILITIES-AND-EQUITY> 4,058,126
<INTEREST-LOAN> 253,787
<INTEREST-INVEST> 50,148
<INTEREST-OTHER> 1,914
<INTEREST-TOTAL> 305,849
<INTEREST-DEPOSIT> 108,209
<INTEREST-EXPENSE> 26,686
<INTEREST-INCOME-NET> 170,954
<LOAN-LOSSES> 4,230
<SECURITIES-GAINS> 116
<EXPENSE-OTHER> 130,280
<INCOME-PRETAX> 67,861
<INCOME-PRE-EXTRAORDINARY> 67,861
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,486
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
<YIELD-ACTUAL> 4.79
<LOANS-NON> 33,063
<LOANS-PAST> 4,412
<LOANS-TROUBLED> 5,045
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 63,675
<CHARGE-OFFS> 17,968
<RECOVERIES> 8,724
<ALLOWANCE-CLOSE> 60,975
<ALLOWANCE-DOMESTIC> 60,975
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
Page
----
Selected Supplemental Consolidated Financial Data 1
Supplemental Management's Discussion and Analysis
of Financial Condition and Results of Operations 3
Supplemental Consolidated Financial Statements 33
Notes to Supplemental Consolidated Financial Statements 61
Report of Independent Public Accountants 62
<PAGE> 2
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
BALANCE SHEET DATA: 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $4,058,126 $3,737,906 $3,624,641 $3,523,094 $3,750,333
Debt and equity securities, net(1) 766,648 719,194 717,467 557,787 548,226
Total loans, net(2) 2,717,608 2,575,902 2,368,348 2,425,020 2,603,780
Goodwill and other intangibles 22,792 20,713 22,758 22,310 26,470
Deposits 3,197,138 2,885,845 2,939,826 2,948,549 3,198,366
Borrowings 456,932 505,347 359,935 288,024 308,469
Shareholders' equity 354,925 304,439 287,438 249,862 216,462
Nonperforming assets(3) 56,752 78,339 120,076 185,733 253,857
Allowance for loan and lease losses 60,975 63,675 67,385 71,223 88,067
Book value per share 14.16 12.26 11.61 10.73 13.20
Tangible book value per share 13.25 11.42 10.69 9.77 11.59
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
OPERATIONS DATA: 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 305,849 $ 256,597 $ 243,452 $ 272,596 $ 343,316
Interest expense 134,895 108,002 112,305 150,458 224,739
---------- ---------- ---------- ---------- ----------
Net interest income 170,954 148,595 131,147 122,138 118,577
Provision for loan losses 4,230 3,374 14,047 32,025 71,480
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for loan
losses 166,724 145,221 117,100 90,113 47,097
---------- ---------- ---------- ---------- ----------
Net securities gains (losses) 116 (254) 1,183 2,859 1,520
Net gains on sales of
consumer loans -- 33 2,576 -- --
Other noninterest income 31,301 27,847 24,842 26,747 21,310
Noninterest expense 130,280 125,137 122,391 125,091 116,610
---------- ---------- ---------- ---------- ----------
Income (loss) before income
tax expense (benefit) and
cumulative effect of a change in
accounting principle 67,861 47,710 23,310 (5,372) (46,683)
Income tax expense (benefit) 23,375 13,662 799(4) 1,510 (15,095)
Cumulative effect on years prior
to 1992 of a change in accounting
principle -- -- -- 1,100(5) --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 44,486 $ 34,048 $ 22,511 $ (5,782) $ (31,588)
========== ========== ========== ========== ==========
Net income (loss) per share $ 1.80 $ 1.37 $ 0.95 $ (0.36) $ (1.95)
Dividends per share $ 0.46 $ 0.23 $ 0.01 $ 0.00 $ 0.00
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------
OTHER DATA(6): 1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.16% 0.94% 0.64% (0.16)% (0.83)%
Return on average equity(7) 13.53 11.42 8.57 (2.69) (14.22)
Average equity to average
assets(7) 8.55 8.21 7.50 5.98 5.85
Interest rate spread(8) 4.20 4.01 3.76 3.41 3.56
Net interest margin(8) 4.79 4.44 4.11 3.71 3.43
Tier I leverage capital ratio
at end of period 8.33 7.96 7.63 7.00 5.73
Dividend payout ratio 25.42 16.45 1.44 0.00 0.00
Nonperforming loans as a percent
of total loans at end of period(3) 1.53 2.13 3.18 4.36 6.11
Nonperforming assets as a percent
of total assets at end of
period(3) 1.40 2.10 3.31 5.29 6.77
Allowance for loan and lease losses
as a percent of nonperforming loans 143.40 113.17 86.95 65.39 53.50
at end of period
Full service banking offices 106 96 98 100 103
</TABLE>
- -------------------------------
(1) All securities were classified as available for sale at December 31, 1995.
(2) Does not include loans held for sale.
(3) Nonperforming assets consist of nonperforming loans, other real estate
owned and repossessions, net of related reserves where appropriate.
Nonperforming loans consist of non-accrual loans, accruing loans 90 days or
more overdue and troubled debt restructurings.
(4) PHFG's results of operations for 1993 reflect the elimination of the
valuation allowance relating to deferred income tax assets of $6.5 million.
(5) Reflects the adoption of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," effective January 1, 1992.
(6) With the exception of end of period ratios, all ratios are based on average
daily balances during the indicated periods and are annualized where
appropriate.
(7) Average equity excludes the effect of unrealized gains or losses on
securities available for sale.
(8) Calculated on a fully-taxable equivalent basis.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Peoples Heritage Financial Group, Inc. (the "Company") is a
Maine-chartered, multi-bank holding company which conducts business from its
headquarters in Portland, Maine and 110 offices located throughout the States of
Maine and New Hampshire. Based on $4.1 billion of total assets at December 31,
1995, the Company is the largest independent bank holding company headquartered
in the State of Maine and the fifth largest independent bank holding company
headquartered in New England.
The Company offers a broad range of commercial and consumer banking
services and products and trust and investment advisory services through two
wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB") and Bank of New
Hampshire ("BNH"). PHB is a Maine-chartered savings bank which operates 61
offices throughout Maine and, through subsidiaries, engages in mortgage banking,
financial planning and equipment leasing activities. At December 31, 1995, PHB
had consolidated assets of $2.5 billion and consolidated shareholder's equity of
$187.2 million. BNH is a New Hampshire-chartered commercial bank which operates
49 offices (including five offices acquired in February 1996) throughout New
Hampshire. At December 31, 1995, BNH had consolidated assets of $1.5 billion and
consolidated shareholder's equity of $127.6 million. Each of PHB and BNH is a
member of the Bank Insurance Fund ("BIF") administered by the Federal Deposit
Insurance Corporation ("FDIC").
The Company's goal is to sustain profitable, controlled growth by
focusing on increased loan and deposit market share in Maine and New Hampshire,
developing new financial products, services and delivery channels, closely
managing yields on interest-earning assets and rates on interest-bearing
liabilities, increasing noninterest income through, among other things, expanded
trust and investment advisory services and mortgage servicing operations, and
controlling growth of noninterest expenses. It also is a part of the business
strategy of the Company to supplement internal growth with targeted acquisitions
of other banking or thrift institutions in Northern New England. During the
periods covered by this discussion, the Company engaged in numerous merger and
acquisition related activities. For further information see Note 18 to the
Supplemental Consolidated Financial Statements and "Acquisitions" below.
MAINE AND NEW HAMPSHIRE ECONOMIES
The success of the Company is closely linked to the overall health and
vitality of the Maine and New Hampshire economies. Starting in the late 1980s
through 1992 the region experienced an economic decline, including severe
problems in the local real estate markets. During this period excess real estate
inventory contributed substantially to increases in the Company's nonperforming
assets. Since 1992, the Company has been able to significantly reduce its
nonperforming assets and related costs.
The Company believes that Maine, New Hampshire and New England in
general have witnessed slow but steady economic growth since 1992. Although
economic activity is
3
<PAGE> 5
just beginning to reach levels experienced in the mid-to-late 1980s, the
Northern New England economy appears stable at this time. The economies and real
estate markets in the Company's primary market areas will continue to be
significant determinants of the quality of the Company's assets in future
periods and, thus, its results of operations.
RESULTS OF OPERATIONS
The Company reported net income of $44.5 million or $1.80 per share in
1995, as compared to net income of $34.0 million or $1.37 per share in 1994 and
$22.5 million or $0.95 per share in 1993. Return on average assets amounted to
1.16% in 1995, as compared to .94% and .64% during 1994 and 1993, respectively,
and return an average equity amounted to 13.53% in 1995, as compared to 11.42%
and 8.57% during 1994 and 1993, respectively. The primary reasons for the
improved results in 1995 and 1994 were substantial increases in net interest
income, which on a fully-taxable equivalent basis amounted to $172.0 million,
$149.3 million and $132.1 million during 1995, 1994 and 1993, respectively, and,
to a lesser extent, increases in noninterest income, particularly mortgage
banking services and customer services income, a decrease in collection and
carrying costs related to reductions in nonperforming assets and a decrease in
deposit insurance assessment expense, which were offset in part by higher salary
and employee benefit costs and income tax expense and, in 1995, one-time merger
related expenses.
Net Interest Income. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e., the difference between
the yield earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative amount of interest-earning assets
and interest-bearing liabilities, which is reflected in an institution's net
interest margin (net interest income divided by average interest-earning assets)
and the degree of mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities.
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. For purposes of the table and the following discussion, (i)
income from interest-earning assets and net interest income is presented on a
fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) 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.
4
<PAGE> 6
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1994
----------------------------- ------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- --------- ------- ---------- ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases(1) $2,732,318 $ 254,484 9.31% $2,529,723 $ 215,587 8.52%
Investment securities(2) 771,462 47,392 6.14 749,507 38,434 5.13
Federal funds sold 85,191 5,066 5.95 81,376 3,295 4.05
---------- --------- ---------- ----------
Total earning assets 3,588,971 306,942 8.55 3,360,606 257,316 7.66
--------- ----------
Nonearning assets 256,797 269,352
---------- ----------
Total assets $3,845,768 $3,629,958
========== ==========
Interest-bearing deposits:
Regular savings $ 588,581 16,753 2.85 $ 596,254 16,313 2.74
NOW accounts 328,238 4,697 1.43 307,021 5,014 1.63
Money market access accounts 414,025 15,507 3.75 367,820 9,770 2.66
Brokered deposits -- -- -- -- -- --
Certificates of deposit 1,299,735 71,252 5.48 1,275,805 56,823 4.45
---------- --------- ---------- ----------
Total interest-bearing deposits 2,630,579 108,209 4.11 2,546,900 87,920 3.45
Borrowed funds 471,456 26,686 5.66 414,956 20,082 4.84
---------- --------- ---------- ----------
Total interest-bearing liabilities 3,102,035 134,895 4.35 2,961,856 108,002 3.65
---------- --------- ---------- ----------
Demand deposit accounts 368,832 325,615
Other liabilities 46,197 44,357
Shareholders' equity(2) 328,704 298,130
---------- ----------
Total liabilities and shareholders' equity $3,845,768 $3,629,958
========== ==========
Net earning assets $ 486,936 $ 398,750
========== ==========
Net interest income (fully-taxable
equivalent) 172,047 149,314
Less: fully-taxable equivalent adjustments (1,093) (719)
--------- ----------
Net interest income $ 170,954 $ 148,595
========= ==========
Net interest rate spread (fully-taxable
equivalent) 4.20 4.01
Net interest margin (fully-taxable
equivalent) 4.79 4.44
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1993
-----------------------------------
Average Yield/
Balance Interest Rate
---------- ---------- ----------
<S> <C> <C> <C>
Loans and leases(1) $2,473,666 $ 209,258 8.46%
Investment securities(2) 626,590 31,729 5.06
Federal funds sold 110,308 3,377 3.06
---------- ----------
Total earning assets 3,210,564 244,364 7.61
----------
Nonearning assets 288,015
----------
Total assets $3,498,579
==========
Interest-bearing deposits:
Regular savings $ 536,788 15,414 2.87
NOW accounts 309,137 5,911 1.91
Money market access accounts 466,948 13,364 2.86
Brokered deposits 15,000 550 3.67
Certificates of deposit 1,274,423 61,554 4.83
---------- ----------
Total interest-bearing deposits 2,602,296 96,793 3.72
Borrowed funds 311,639 15,512 4.98
---------- ----------
Total interest-bearing liabilities 2,913,935 112,305 3.85
---------- ----------
Demand deposit accounts 294,516
Other liabilities 27,599
Shareholders' equity(2) 262,529
----------
Total liabilities and shareholders' equity $3,498,579
==========
Net earning assets $ 296,629
==========
Net interest income (fully-taxable equivalent) 132,059
Less: fully-taxable equivalent adjustments (912)
----------
Net interest income $ 131,147
==========
Net interest rate spread (fully-taxable equivalent) 3.76
Net interest margin (fully-taxable equivalent) 4.11
</TABLE>
(1) Loans and leases include portfolio loans and leases, loans held for sale and
nonperforming loans.
(2) Excludes effect of unrealized gains or losses on securities available for
sale.
5
<PAGE> 7
Rate/Volume Analysis. The following table presents certain information
on a fully-taxable equivalent basis regarding changes in interest income and
interest expense of the Company for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided with respect to changes attributable to (1) changes in rate (change in
rate multiplied by old volume), (2) changes in volume (change in volume
multiplied by old rate) and (3) changes in rate/volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
Year Ended December 31, 1995 vs. 1994
----------------------------------------------
Increase (Decrease) Due to
----------------------------------
Rate/
Rate Volume Volume Total
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans and leases(1) $ 20,028 $ 17,265 $ 1,604 $ 38,897
Investment securities 7,609 1,126 223 8,958
Federal funds sold 1,544 155 72 1,771
---------- ---------- ---------- ----------
Total 29,181 18,546 1,899 49,626
---------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Regular savings 658 (210) (8) 440
NOW accounts (621) 347 (43) (317)
Money market access accounts 4,007 1,227 503 5,737
Brokered deposits -- -- -- --
Certificates of deposit 13,117 1,066 246 14,429
---------- ---------- ---------- ----------
Total deposits 17,161 2,430 698 20,289
Borrowed funds 3,406 2,734 464 6,604
---------- ---------- ---------- ----------
Total 20,567 5,164 1,162 26,893
---------- ---------- ---------- ----------
Net interest income (fully taxable equivalent) $ 8,614 $ 13,382 $ 737 $ 22,733
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994 vs. 1993
----------------------------------------
Increase (Decrease) Due to
----------------------------------
Rate/
Rate Volume Volume Total
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans and leases(1) $ 1,552 $ 4,742 $ 35 $ 6,329
Investment securities 402 6,224 79 6,705
Federal funds sold 1,089 (885) (286) (82)
---------- ---------- ---------- ----------
Total 3,043 10,081 (172) 12,952
---------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
Regular savings (728) 1,708 (81) 899
NOW accounts (862) (41) 6 (897)
Money market access accounts (961) (2,837) 204 (3,594)
Brokered deposits (550) (550) 550 (550)
Certificates of deposit (4,793) 67 (5) (4,731)
---------- ---------- ---------- ----------
Total deposits (7,894) (1,653) 674 (8,873)
Borrowed funds (430) 5,143 (143) 4,570
---------- ---------- ---------- ----------
Total (8,324) 3,490 531 (4,303)
---------- ---------- ---------- ----------
Net interest income (fully taxable equivalent) $ 11,367 $ 6,591 $ (703) $ 17,255
========== ========== ========== ==========
<FN>
- ---------------
(1) Loans and leases include portfolio loans and leases, loans held for sale and nonperforming
loans.
</TABLE>
6
<PAGE> 8
Net interest income increased by $22.7 million or 15.2% during 1995.
This increase was primarily attributable to changes in the volume of
interest-earning assets and interest-bearing liabilities, which resulted from an
$88.2 million or 22.1% increase in net earning assets from 1994 to 1995 and an
increase in the Company's net interest margin from 4.44% to 4.79% during the
same respective periods, and to a lesser extent to changes in the yields earned
on interest-earning assets and the rates paid on interest-bearing liabilities,
which resulted in an increase in the Company's interest rate spread from 4.01%
to 4.20% during 1994 and 1995, respectively.
Interest and dividend income increased by $49.6 million or 19.3% during
1995 primarily as a result of a $38.9 million or 18.0% increase in interest on
loans and leases available for sale and held for investment (collectively "loans
and leases"). The increase in interest on loans and leases was attributable to
both an increase in the weighted average yield on loans and leases from 8.52%
during 1994 to 9.31% during 1995, which reflected increases in all loan
categories, and a $202.6 million or 8.0% increase in the average balance of
loans and leases from 1994 to 1995, which also reflected increases in all loan
categories. At December 31, 1995, the percentage of the Company's loans and
leases which had adjustable or floating rates amounted to 45.3%.
Interest and dividend income also increased in 1995 as a result of a
$9.0 million or 23.3% increase in interest income on investment securities,
which was primarily attributable to an increase in the weighted average yield
earned on investment securities from 5.13% to 6.14% during 1994 and 1995,
respectively.
Interest expense increased by $26.9 million or 24.9% during 1995 as a
result of a $20.3 million or 23.1% increase in interest expense on
interest-bearing deposits and a $6.6 million or 32.9% increase in interest
expense on borrowed funds, which consist primarily of advances from the Federal
Home Loan Bank of Boston and, to a lesser extent, securities sold under
agreements to repurchase and federal funds purchased. These increases were
primarily attributable to an increase in the weighted average rate paid on
interest-bearing liabilities, which increased from 3.65% to 4.35% during 1994 to
1995, respectively. Interest expense also increased during 1995 as a result of a
$140.2 million or 4.7% increase in the average balance of interest-bearing
liabilities, which was attributable to increases in both interest-bearing
deposits, particularly money market accounts, and borrowings.
Net interest income increased by $17.3 million or 13.1% during 1994.
This increase was primarily attributable to changes in the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities,
which resulted in an increase in the Company's interest rate spread from 3.76%
to 4.01% during 1993 and 1994, respectively, and to a lesser extent to changes
in the volume of interest-earning assets and interest-bearing liabilities, which
resulted in a $102.1 million or 34.4% increase in net earning assets from 1993
to 1994 and an increase in the Company's net interest margin from 4.11% to 4.44%
during the same respective periods.
Interest and dividend income increased by $13.0 million or 5.3% during
1994 primarily as a result of a $6.7 million or 21.1% increase in interest and
dividend income on investment securities and a $6.3 million or 3.0% increase in
interest on loans and leases. These increases were primarily attributable to
increases in the average balances of investment securities and loans and leases
from 1993 to 1994, which in the latter case reflected substantial increases in
residential loans and consumer loans and leases.
7
<PAGE> 9
Interest expense decreased by $4.3 million or 3.8% during 1994 as a
result of a decrease in the weighted average rate on interest-bearing
liabilities from 3.85% during 1993 to 3.65% during 1994, which more than offset
a $47.9 million or 1.6% increase in the average balance of such liabilities from
1993 to 1994.
Provision for Loan Losses. The provision for loan losses increased
$856,000 from $3.4 million in 1994 to $4.2 million in 1995. In 1994, the
provision for loan losses decreased $10.7 million from $14.0 million in 1993 to
$3.4 million in 1994. The lower provisions in 1995 and 1994 as compared with
1993 resulted from management's ongoing evaluation of the adequacy of the
allowance for loan and lease losses, which includes, among other procedures,
monitoring trends in nonperforming loans, delinquent loans and net charge-offs,
as well as new loan originations and other asset quality factors.
Although management utilizes its best judgment in providing for
possible losses, there can be no assurance that the Company will not have to
change its provisions for possible loan losses in subsequent periods to a higher
level from that recorded during 1995. Changing economic and business conditions
in Northern New England, fluctuations in local markets for real estate, future
changes in nonperforming asset trends, large upward movements in market-based
interest rates or other reasons could affect the Company's future provisions for
loan losses.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the adequacy of 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 judgment about
information available to them at the time of examination.
Noninterest Income. Noninterest income amounted to $31.4 million, $27.6
million and $28.6 million during 1995, 1994 and 1993, respectively. The $3.8
million or 13.7% increase in noninterest income during 1995 was primarily
attributable to a $2.4 million or 28.5% increase in mortgage banking services
income and a $1.4 million or 13.6% increase in customer services income. The
$975,000 or 3.4% decrease in noninterest income during 1994 was primarily
attributable to a $2.5 million decrease in gains on sales of consumer loans and
a $1.4 million decrease in net securities gains, which were offset in part by
increases in all other categories of noninterest income from 1993 to 1994.
8
<PAGE> 10
The following table sets forth information relating to the Company's
noninterest income during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Mortgage banking services $ 10,849 $ 8,446 $ 7,150
Customer services 11,908 10,481 9,852
Trust and investment advisory services 5,850 5,471 4,694
Loan related services 1,907 1,847 1,588
Net securities gains (losses) 116 (254) 1,183
Net gains on sales of consumer loans -- 33 2,576
Other noninterest income 787 1,602 1,558
------------ ------------ ------------
$ 31,417 $ 27,626 $ 28,601
============ ============ ============
</TABLE>
Mortgage banking services income, which is comprised of residential
mortgage sales income and residential mortgage servicing income, increased by
$2.4 million or 28.5% during 1995 and by $1.3 million or 18.1% during 1994. The
increase in mortgage banking services income in 1995 was primarily attributable
to an increase in residential mortgage sales income and the increase in mortgage
banking services income in 1994 was attributable to an increase in residential
mortgage servicing income.
The following table sets forth certain information relating to the
Company's mortgage banking activities during the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Residential mortgages serviced for investors $ 2,595,049 $ 2,089,972 $ 1,602,333
============ ============ ============
Residential mortgage sales income $ 4,224 $ 1,915 $ 4,381
Residential mortgage servicing income 6,625 6,531 2,769
------------ ------------ ------------
Mortgage banking services income $ 10,849 $ 8,446 $ 7,150
============ ============ ============
</TABLE>
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
changed the method of accounting for certain mortgage banking activities. The
Company elected early adoption of SFAS No. 122 and as a result capitalized $2.5
million of originated mortgage servicing rights in 1995. Income related to the
capitalization of originated mortgage servicing rights is included in
residential mortgage sales income.
Residential mortgage sales income increased by $2.3 million or 120.6%
in 1995 primarily as a result of the Company's adoption of SFAS No. 122. Also
included in residential mortgage sales income in 1995 is $642,000 of gains
recognized on the sale of residential mortgage servicing rights. There were no
sales of residential mortgage servicing rights in 1994 or 1993. Excluding the
income related to the Company's adoption of SFAS No. 122 and the gains
recognized on the sale of mortgage servicing rights, mortgages sales
9
<PAGE> 11
income would have decreased by $833,000 in 1995 as compared with 1994. The
decrease in mortgage sales income, excluding income related to SFAS No. 122 and
gains on sales of mortgage servicing rights, was in part attributable to a more
competitive market for retail originations and correspondent loan purchases, as
well as an increase in the amount of costs directly allocated to retail mortgage
loan originations. Residential mortgage sales income decreased by $2.5 million
or 56.3% in 1994 primarily as a result of a $64.1 million or 13.5% decrease in
originations of residential mortgage loans.
Residential mortgage servicing income increased by $94,000 in 1995 and
by $3.8 million or 135.9% in 1994. These increases reflected increases in the
Company's portfolio of residential mortgages serviced for investors, which
increased by $505.1 million or 24.2% during 1995 and by $487.6 million or 30.4%
during 1994, in each case net of amortization and prepayments. These increases
were primarily attributable to the Company's strategy to originate fixed-rate
residential real estate mortgages for sale in the secondary market while
retaining the rights to service these loans and the Company's selective purchase
of mortgage servicing rights for portfolios of residential mortgages. The
increase in residential mortgage servicing income during 1994 also reflected
accelerated amortization and write downs of purchased mortgage servicing rights
during 1993 as a result of increased prepayments of loans following decreases in
market interest rates.
Residential mortgage servicing income was negatively impacted in 1995
by the Company's adoption of SFAS No. 122, which 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
adoption 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 the pools of loans with small outstanding
balances and the amortization expense related to adoption of SFAS No. 122 during
1995 was $445,000.
The net gains on sale of consumer loans of $2.6 million in 1993
resulted primarily from PHB's decision to exit its retail credit card product
line. The generation of mortgage sales income and the recognition of net gains
on the sales of securities, consumer loans and other assets 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 interperiod variations in the results from
such activities.
Customer services income increased by $1.4 million or 13.6% during 1995
and by $629,000 or 6.4% during 1994. These increases generally reflect the
Company's efforts to increase the number and volume of transaction accounts, the
increased use of and fees generated by automatic teller machines and the
increased volume associated with expansion of the Company's retail branch
franchise from 98 offices at December 31, 1993 to 106 offices at December 31,
1995.
Other noninterest income decreased by $815,000 or 50.9% during 1995 as
a result of $1.3 million of interest income accrued and received on federal tax
receivables during 1994.
10
<PAGE> 12
Noninterest Expenses. Noninterest expenses amounted to $130.3 million,
$125.1 million and $122.4 million during 1995, 1994 and 1993, respectively.
Noninterest expenses increased by $5.1 million or 4.1% during 1995 and by $2.7
million or 2.2% during 1994 primarily as a result of increases in salaries and
employee benefits, data processing expenses and merger expenses, which more
than offset decreases in deposit and other assessments and collection and
carrying costs of nonperforming assets. (Exclusive of merger expenses,
noninterest expenses increased by $185,000 or .1% during 1995.) The current
strategy of the Company includes controlled asset growth, new product
development, enhancement of alternative delivery systems, geographic expansion
in Northern New England, greater market share in existing markets, revenue
enhancement and diversification. As the Company made investments in new systems,
products and employees during the past two years to support the current business
strategy, the Company also was able to substantially reduce the collection and
carrying costs of nonperforming assets.
The following table sets forth information relating to the Company's
noninterest expenses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Salaries and employee benefits $ 67,472 $ 61,799 $ 56,287
Occupancy 10,574 10,454 9,837
Data processing 8,924 7,306 6,762
Equipment 6,844 6,233 6,168
Advertising and marketing 4,642 4,642 2,668
Deposit and other assessments 4,497 7,899 8,367
Collection and carrying costs of
nonperforming assets 2,595 6,033 14,840
Merger expenses 4,958 559 300
Other noninterest expenses:
Amortization of goodwill 1,925 1,801 2,756
Other 17,849 18,411 14,306
------------ ------------ ------------
Total other noninterest expenses 19,774 20,771 17,462
------------ ------------ ------------
Total noninterest expenses $ 130,280 $ 125,137 $ 122,391
============ ============ ============
</TABLE>
Salaries and employee benefits increased by $5.7 million or 9.2% during
1995 and by $5.5 million or 9.8% during 1994. These increases reflect normal
salary increases, as well as staff additions related to the Company's mortgage
banking operations, initiation of supermarket banking and Sunday banking hours,
expanded telephone banking services, new deposit products and the establishment
of a trust department at PHB.
Data processing expense increased by $1.6 million or 22.1% during 1995
and by $544,000 or 8.0% during 1994. Investment in expanded operational
capabilities to support new product offerings and improve customer service and a
higher level of transactions related to the larger mortgage servicing portfolio
were the primary factors behind the increases in data processing expenses during
1995 and 1994.
Deposit and other assessment expenses consist primarily of deposit
insurance paid by the Company's subsidiary banks to either the BIF or the
Savings Association Insurance Fund ("SAIF") administered by the FDIC. At
December 31, 1995, approximately 84.0% and 16.0% of the Company's deposits were
insured by the BIF and the SAIF, respectively. The
11
<PAGE> 13
$3.4 million or 43.1% decrease in deposit and other assessment expenses in 1995
was primarily attributable to the reduction in the deposit insurance premium
rate paid on the Company's BIF-insured deposits from $0.23 per $100 of
assessable deposits to $0.04 per $100 of assessable deposits beginning in June
1995, as compared with $0.23 per $100 of assessable deposits for all of 1994.
There has been much discussion but no clear resolution regarding the
recapitalization of the SAIF. Based on various legislative proposals which have
been made in the U.S. Congress in recent periods, it is anticipated that there
will be a one-time assessment on all SAIF-insured institutions in order to
recapitalize the SAIF and that the BIF and the SAIF eventually will be merged.
If an assessment of between $0.65 and $0.85 per $100 of assessable deposits was
effected on SAIF deposits of the Company's banking subsidiaries, the one-time
assessment would aggregate between $2.5 million and $3.3 million on a pre-tax
basis.
The Company continued to benefit in 1995 from lower collection and
carrying costs associated with the reduction of nonperforming assets. Collection
and carrying costs of nonperforming assets decreased by $3.4 million or 57.0%
during 1995 and by $8.8 million or 59.3% during 1994. See "Financial Condition -
Nonperforming Assets" below.
Merger expenses in 1995 consist primarily of $3.7 million of expenses
related to the Company's combination wtih Bank of New Hampshire Corporation
("BNHC"), which was consummated on April 2, 1996. Merger expenses related to
the combination with BNHC which were incurred in 1995 consisted primarily of
$3.1 million of severance costs, $441,000 of investment banking fees and
$90,000 of legal and accounting fees. Following consummation of the combination
with BNHC, the Company incurred $4.7 million of additional merger-related
expenses in connection with this transaction, which consisted primarily of
$1.8 million of employee severance costs, $1.5 million of branch consolidation
expenses and $1.3 million of professional fees. These expenses will reduce the
Company's income during the three months ended June 30, 1996 by approximately
$3.0 million or $.12 per share. Other merger expenses in 1995 relate to the
Company's acquisition of Bankcore, Inc. ("Bankcore") in mid-1995 and consist
primarily of severance and other employee-related costs.
Advertising and marketing expenses increased by $2.0 million or 74.0%
during 1994. The higher levels of advertising and marketing expenses during 1995
and 1994, as compared to the 1993 level, reflect 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 customer dissatisfaction caused by major changes that have
occurred and are anticipated to occur in the structure of the banking industries
in Maine and New Hampshire.
Amortization of goodwill increased by $124,000 or 6.9% during 1995 and
decreased by $955,000 or 34.7% during 1994. The increase in goodwill
amortization expense in 1995 reflects the amortization of goodwill recorded in
connection with the acquisition of Bankcore. The decrease in goodwill
amortization expense in 1994 resulted primarily from the Company's decision in
1993 to accelerate the amortization of goodwill recorded in connection with the
acquisition by Peoples Heritage Leasing Company, Inc. (a wholly-owned subsidiary
of PHB) of assets (primarily leases) of Emerald Leasing Co. in 1988.
Amortization of goodwill associated with Emerald Leasing Co. amounted to
$914,000 during 1993, which included a $520,000 write-off of the remaining
balance during the fourth quarter of 1993. For additional information relating
to goodwill, see Notes 1 and 8 to the Supplemental Consolidated Financial
Statements.
12
<PAGE> 14
Other noninterest expenses decreased by $1.1 million or 5.9% during
1995 and increased by $4.3 million or 29.0% during 1994. Other noninterest
expenses decreased in 1995 primarily as a result of the Company's completion of
the operational conversion of Mid Maine Savings Bank, F.S.B. ("MMSB"), which was
acquired in mid-1994, and the closure of MMSB's New Hampshire operations center.
Income Tax Expense. Income tax expense amounted to $23.4 million, $13.7
million and $799,000 during 1995, 1994 and 1993, respectively, which resulted in
effective tax rates of 34.4%, 28.6% and 3.4% during the respective periods. The
low effective tax rates in 1994 and 1993 were primarily attributable to the
reversal of valuation allowances established pursuant to SFAS No. 109,
"Accounting for Income Taxes," which the Company adopted as of January 1, 1993.
At the time of adoption of SFAS No. 109, the Company (prior to the acquisition
of MMSB) determined that its net deferred tax asset exceeded the amount
previously reported under APB Opinion 11 by $5.7 million at January 1, 1993.
Under SFAS No. 109, however, the Company established a valuation allowance
against the deferred tax asset, which in its opinion at the time was not more
likely than not to be realized. The $5.7 million valuation allowance offset the
positive impact of adjusting the Company's deferred tax assets and liabilities
as provided for under SFAS No. 109. At December 31, 1993, this valuation
allowance was reversed because the Company then believed, as a result of recent
profitable operations, that it was more likely than not that all net deferred
taxes would be realized.
MMSB also adopted SFAS No. 109 as of January 1, 1993 and determined
that its deferred tax asset exceeded the amount previously reported under APB
Opinion 11. Because MMSB also was not in a position to substantiate that it was
more likely than not that it would be able to utilize the net deferred tax
assets, it established a valuation allowance for $3.4 million. At December 31,
1993, MMSB was still not able to substantiate that it was more likely than not
that it would be able to utilize the net deferred tax asset. Upon the
acquisition of MMSB by the Company in mid-1994, the Company recorded a one-time
$1.7 million tax benefit from the reversal of the valuation allowance for net
deferred tax assets. This one-time tax benefit is reflected in the Company's
income tax expense for 1994.
For additional information relating to income taxes, see Note 11 to the
Supplemental Consolidated Financial Statements.
FINANCIAL CONDITION
General. The Company's total assets increased by $320.2 million or 8.6%
from $3.7 billion at December 31, 1994 to $4.1 billion at December 31, 1995.
This increase reflected internal growth, as well as the Company's acquisition of
all the branches and associated deposits, as well as certain loans, of Fleet
Bank of Maine in Aroostook, County, Maine, which added $46.1 million of assets,
and the Company's acquisition of Bankcore, which added $132.8 million of assets.
Securities Available for Sale. The Company invests in a wide variety of
investment securities, which may be classified as available for sale, held for
investment or trading securities in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, debt
and equity securities that an institution has the positive intent and ability to
hold to maturity are reported at amortized cost; debt and equity securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; and other debt and equity securities are
classified as available for sale and reported at fair value, with unrealized
13
<PAGE> 15
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity. The Company adopted SFAS No. 115 at December 31, 1993 and
decided to classify all of its investment securities (prior to the acquisition
of BNHC) as available for sale. In accordance with the FASB's Special Report, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities," issued November 15, 1995, the Company
reclassified the investment securities held by BNHC, substantially all of which
were classified as held to maturity, to available for sale. At December 31,
1995, the Company had a net unrealized gain (net of related taxes) of $3.8
million on its securities available for sale, as compared to a net unrealized
loss of $9.1 million at December 31, 1994.
Total securities held to maturity and available for sale increased by
$47.5 million or 6.6% during 1995. This increase was primarily attributable to
the investment of proceeds received from securities sold under agreements to
repurchase, which are collateralized by investment securities and increased by
$53.4 million or 41.9% during 1995.
The following table sets forth the carrying value of the Company's
securities available for sale and securities held to maturity at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Securities available for sale:
Bonds and other debt securities:
U.S. Government and federal agencies $ 526,576 $ 219,220 $ 201,607
Tax-exempt bonds and notes 10,837 11,085 6,779
Other bonds and notes 5,694 2,706 7,581
Mortgage-backed securities 195,823 172,466 225,609
------------ ------------ ------------
Total debt securities 738,930 405,477 441,576
------------ ------------ ------------
Equities:
FHLB stock 23,793 23,236 17,321
Other equity securities 3,925 3,904 178
------------ ------------ ------------
Total equity securities 27,718 27,140 17,499
------------ ------------ ------------
Total investment securities $ 766,648 $ 432,617 $ 459,075
============ ============ ============
Securities held for investment:
Bonds and other debt securities:
U.S. Government and federal agencies $ -- $ 285,392 $ 256,380
Tax-exempt bonds and notes -- 908 1,215
Other bonds and notes -- 277 191
------------ ------------ ------------
Total debt securities -- 286,577 257,786
------------ ------------ ------------
Equities:
Other equity securities -- -- 606
------------ ------------ ------------
Total equity securities -- -- 606
------------ ------------ ------------
Total investment securities $ -- $ 286,577 $ 258,392
============ ============ ============
</TABLE>
14
<PAGE> 16
The following table sets forth the scheduled maturities and weighted
average yields of the Company's debt securities available for sale at December
31, 1995, based on amortized cost.
<TABLE>
<CAPTION>
Amortized Cost Maturing in
------------------------------------------------------------------------------------
One Year or Less More than One to Five Years More than Five to Ten Years
---------------------- --------------------------- ----------------------------
Amount Yield(1) Amount Yield(1) Amount Yield(1)
---------- ---------- ------------ ------------ ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 338,795 5.99% $ 180,525 6.18% $ 2,187 5.62%
Tax-exempt bonds and
notes 5,608 4.99 4,881 5.29 -- --
Other bonds and notes 3,434 6.31 2,106 7.07 105 7.19
Mortgage-backed
securities 256 8.14 1,993 6.29 32,537 6.98
---------- ------------- ------------
Total $ 348,093 5.98 $189,505 6.15 $ 34,829 6.89
========== ============= ============
</TABLE>
<TABLE>
<CAPTION>
Amortized Cost
Maturing in
-------------------
More than Ten Years Total
------------------- ---------------------
Amount Yield(1) Amount Yield(1)
--------- --------- ----------- -----
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 1,316 8.50% $ 522,823 6.06%
Tax-exempt bonds and
notes 307 0.00 10,796 4.98
Other bonds and notes -- -- 5,645 6.61
Mortgage-backed
securities 159,231 6.91 194,017 6.92
--------- -------
Total $ 160,854 6.93 733,281(2) 6.27
========= =======
</TABLE>
- ------------------------------------------
(1) Fully-taxable equivalent basis.
(2) The market value of these securities amounted to $738.9 million at
December 31, 1995.
15
<PAGE> 17
Loans Held for Sale. Loans held for sale increased by $59.9 million or
539.9% during 1995. This increase was due to an increased volume of residential
mortgages originated for sale in the secondary market at the end of 1995 as
compared with the end of 1994, which was attributable to favorable interest
rates for refinancing of existing mortgages and an increase in the volume of
loans originated through the correspondent loan network utilized by the Company.
For additional information, see Notes 1 and 4 to the Supplemental Consolidated
Financial Statements and "Financial Condition-Loans and Leases" below.
Loans and Leases. Total loans and leases increased by $139.0 million or
5.3% during 1995 as a $5.4 million or 0.7% decrease in residential real estate
loans was offset by an $84.2 million or 26.0% increase in commercial business
loans and leases, a $33.1 million or 4.5% increase in consumer loans and leases
and a $27.1 million or 3.5% increase in commercial real estate loans. A
significant amount of the increase in loans and leases during 1995 was
attributable to $78 million of loans acquired in connection with the acquisition
of Bankcore and $16.5 million of loans acquired in connection with the
acquisition of the Fleet Bank of Maine branch offices in Aroostock County Maine.
16
<PAGE> 18
The following table sets forth information concerning the Company's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
% of % of % of
Amount Loans Amount Loans Amount Loans
---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate
loans:
Adjustable rate $ 402,695 14.49% $ 418,653 15.86% $ 382,485 15.70%
Fixed rate 395,381 14.23 384,845 14.58 336,391 13.81
---------- -------- ---------- -------- ---------- --------
Total 798,076 28.72 803,498 30.44 718,876 29.51
---------- -------- ---------- -------- ---------- --------
Commercial real estate loans:
Permanent first mortgage
loans 753,857 27.13 745,356 28.24 731,074 30.01
Construction and development 43,829 1.58 25,216 0.96 21,260 0.87
---------- -------- ---------- -------- ---------- --------
Total 797,686 28.71 770,572 29.20 752,334 30.88
---------- -------- ---------- -------- ---------- --------
Commercial loans
and leases:
Loans 397,652 14.31 315,200 11.94 292,645 12.01
Leases 10,940 0.39 9,208 0.35 10,949 0.45
---------- -------- ---------- -------- ---------- --------
Total 408,592 14.70 324,408 12.29 303,594 12.46
Consumer loans and leases:
Home equity 283,008 10.19 247,751 9.39 222,262 9.13
Mobile home 214,761 7.73 222,600 8.43 210,682 8.65
Automobile 127,969 4.61 125,887 4.77 95,449 3.92
Boat and recreational
vehicle 22,716 0.82 20,680 0.78 24,992 1.03
Other 125,775 4.52 124,181 4.70 107,544 4.42
---------- -------- ---------- -------- ---------- --------
Total 774,229 27.87 741,099 28.07 660,929 27.15
---------- -------- ---------- -------- ---------- --------
Total loans receivable 2,778,583 100.00% 2,639,577 100.00% 2,435,733 100.00%
---------- ======== ---------- ======== ---------- ========
Allowance for loan and lease
losses 60,975 63,675 67,385
---------- ------ ----------
Net loans receivable $2,717,608 $2,575,902 $2,368,348
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1992 1991
-------------------- --------------------
% of % of
Amount Loans Amount Loans
---------- -------- ---------- --------
Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate
loans:
Adjustable rate $ 303,437 12.16% $ 321,318 11.94%
Fixed rate 391,160 15.67 401,258 14.91
---------- -------- ---------- --------
Total 694,597 27.83 722,576 26.85
---------- -------- ---------- --------
Commercial real estate loans:
Permanent first mortgage
loans 793,019 31.77 829,074 30.80
Construction and development 27,235 1.09 61,972 2.30
---------- -------- ---------- --------
Total 820,254 32.86 891,046 33.10
---------- -------- ---------- --------
Commercial loans
and leases:
Loans 314,550 12.60 410,357 15.25
Leases 18,467 0.74 33,118 1.23
---------- -------- ---------- --------
Total 333,017 13.34 443,475 16.48
Consumer loans and leases:
Home equity 220,674 8.84 217,700 8.09
Mobile home 189,732 7.60 167,484 6.22
Automobile 77,942 3.12 68,653 2.55
Boat and recreational
vehicle 28,767 1.15 32,358 1.20
Other 131,260 5.26 148,456 5.51
---------- -------- ---------- --------
Total 648,375 25.97 634,651 23.57
---------- -------- ---------- --------
Total loans receivable 2,496,243 100.00% 2,691,748 100.00%
---------- ======== ---------- ========
Allowance for loan and lease
losses 71,223 87,968
------ ------
Net loans receivable $2,425,020 $2,603,780
========= =========
</TABLE>
17
<PAGE> 19
<TABLE>
The following table sets forth scheduled contractual amortization of loans
in the Company's portfolio at December 31, 1995, as well as the dollar amount of
loans which are scheduled to mature after one year which have fixed or
adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdraft loans are reported as due in
one year or less.
<CAPTION>
Commercial
Residential Commercial Business Consumer
Real Estate Real Estate Loans and Loans and
Loans Loans Leases Leases Total(1)
----------- ----------- ---------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 38,429 $154,714 $187,169 $ 80,171 $ 460,483
After one year through five
years 89,183 368,346 165,954 254,082 877,565
Beyond five years 670,464 274,626 55,469 439,976 1,440,535
-------- -------- -------- -------- ----------
Total $798,076 $797,686 $408,592 $774,229 $2,778,583
======== ======== ======== ======== ==========
Interest rate terms on amounts
due after one year:
Fixed $404,300 $258,461 $ 66,692 $330,362 $1,059,815
======== ======== ======== ======== ==========
Adjustable $355,347 $384,511 $154,731 $363,696 $1,258,285
======== ======== ======== ======== ==========
<FN>
- -------------
(1) Scheduled contractual amortization does not reflect the actual maturities of loans because of prepayments
and, in the case of conventional mortgage loans, due-on-sale clauses, which give the lender the right to require
repayment of a mortgage loan in connection with a transfer of the related property.
</TABLE>
Substantially all of the mortgage loans in the Company's loan portfolio are
secured by properties located in Maine and New Hampshire. Moreover,
substantially all of the Company's non-mortgage loan portfolio consists of loans
made to residents of and businesses located in Maine and New Hampshire.
Residential real estate loans consist of loans secured by single-family
(one-to-four units) residences and consist primarily of conventional loans,
which are neither insured by the Federal Housing Administration nor partially
guaranteed by the Department of Veterans' Affairs. The Company generally
originates fixed-rate residential real estate loans for sale to the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association and other
institutional investors in the secondary market and generally retains
adjustable-rate residential real estate loans in its loan portfolio.
Originations of residential real estate loans increased by $311.3 million or
75.9% from $410.1 million in 1994 to $721.4 million in 1995. This increase
reflected a lower interest rate environment during the second half of 1995 and
loans originated through the Company's correspondent lending network, which
increased by $285.0 million or 304.8% from $93.5 million in 1994 to $378.5
million in 1995. During 1995, the Company substantially increased its
correspondent lenders, the vast majority of which are located outside of New
England, in order to leverage existing secondary market capabilities and add
mortgage servicing income at a low marginal cost. Substantially all of the loans
originated through the Company's correspondent lending network are sold in the
secondary mortgage market.
Commercial real estate loans consist of loans secured by income-producing
commercial real estate (including office buildings and industrial buildings),
service industry real estate (including hotels and health care facilities),
multi-family (over four units) residential real estate and retail trade real
estate (including restaurants, automotive-related properties and food stores),
as well as loans for the acquisition, development and
18
<PAGE> 20
construction of such commercial real estate. Originations of commercial real
estate loans decreased by $25.1 million or 14.6% from $171.1 million in 1995.
The Company generally has decreased its emphasis on commercial real estate loans
in recent periods in order to reduce its relative exposure to such loans,
although its business plan is to continue to lend within its geographic markets
to sound commercial businesses which collateralize their borrowings with
existing commercial real estate and to refinance existing commercial real estate
loans in the Company's loan portfolio. The increase in the balance of commercial
real estate loans from December 31, 1994 to December 31, 1995 was largely
attributable to the Company's acquisitions during the period.
Commercial business loans and leases are made to sound, small to medium
sized businesses within the Company's geographic markets and are a principal
focus of the Company's current lending strategy. Commercial business loans
consist primarily of loans secured by various equipment, machinery and other
corporate assets, as well as loans to provide working capital to businesses in
the form of lines of credit, which may be secured by inventory, accounts
receivable or other assets or unsecured. The Company also originates commercial
business leases, primarily through Peoples Heritage Leasing Company, Inc., a
wholly-owned subsidiary of PHB. Originations of commercial business loans and
leases increased by $139.9 million or 44.5% from $314.0 million in 1994 to
$453.9 million in 1995 as a result of the Company's current focus in this area.
Consumer loans consist of a wide variety of loans which have been
emphasized by the Company in recent years in order to provide a full range of
financial services to its customers and because such loans generally have
shorter terms and higher interest rates than mortgage loans. Consumer loans are
originated directly by the Company or, in the case of mobile home loans,
automobile loans, boat loans and certain other loans, indirectly through various
dealers in products financed by the Company. Originations of consumer loans
decreased by $30.3 million or 9.4% from $320.8 million in 1994 to $290.6 million
in 1995. This decrease was primarily attributable to a decrease in indirect
consumer loan originations, which decreased by $35.2 million or 34.6% from
$101.6 million in 1994 to $66.4 million in 1995 primarily as a result of a
decrease in indirect originations of mobile home loans. Exclusive of indirect
consumer loan originations, consumer loan originations increased by $5.0 million
or 2.3% in 1995, primarily as a result of originations of home equity loans.
Nonperforming Assets. Nonperforming assets decreased by $21.6 million or
27.6% from $78.3 million at December 31, 1994 to $56.8 million at December 31,
1995. The decrease in nonperforming assets in 1995 was a continuation of the
decline in nonperforming assets in recent periods and was attributable to a
$13.7 million decrease in nonperforming loans and a $7.8 million decrease in
other nonperforming assets. Nonperforming assets as a percentage of total assets
decreased from 2.10% at December 31, 1994 to 1.40% at December 31, 1995.
The Company continues to focus on asset quality issues and to allocate
significant resources to the key asset quality control functions of credit
policy and administration and loan review. The collection, workout and asset
management functions continue to focus on the further reduction of nonperforming
asset levels. Despite the ongoing focus on asset quality and the reductions of
nonperforming asset levels, there can be no assurance that adverse changes in
the real estate markets and economic conditions in the Company's primary market
areas will not result in higher nonperforming asset levels in the future and
negatively impact the Company's operations through higher provisions for loan
losses, net loan chargeoffs, decreased accrual of interest income and increased
noninterest expenses
19
<PAGE> 21
as a result of the allocation of resources to the collection and workout of
nonperforming assets.
The following table sets forth information regarding nonperforming
loans and leases and other nonperforming assets held by the Company at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Non-accrual loans $ 5,713 $ 3,317 $ 4,806 $ 8,555 $ 9,711
Accruing loans 90 days overdue 3,728 4,473 4,479 4,316 6,635
Troubled debt restructurings -- -- 111 1,097 --
------- ------- -------- -------- --------
Total 9,441 7,790 9,396 13,968 16,346
------- ------- -------- -------- --------
Commercial real estate loans:
Non-accrual loans 17,029 26,978 30,780 43,731 65,835
Accruing loans 90 days overdue -- 1,020 454 1,704 2,478
Troubled debt restructurings 3,186 6,284 15,275 18,155 30,853
------- ------- -------- -------- --------
Total 20,215 34,282 46,509 63,590 99,166
------- ------- -------- -------- --------
Commercial business loans and leases:
Non-accrual loans 6,735 6,871 14,399 24,252 39,434
Accruing loans 90 days overdue 25 30 336 1,163 3,130
Troubled debt restructurings 1,859 2,684 2,547 1,649 1,224
------- ------- -------- -------- --------
Total 8,619 9,585 17,282 27,064 43,788
------- ------- -------- -------- --------
Consumer loans:
Non-accrual loans 3,586 3,775 3,386 3,038 2,031
Accruing loans 90 days overdue 659 831 897 1,268 3,199
Troubled debt restructurings -- -- 26 -- 70
------- ------- -------- -------- --------
Total 4,245 4,606 4,309 4,306 5,300
------- ------- -------- -------- --------
Total nonperforming loans:
Non-accrual loans 33,063 40,941 53,371 79,576 117,011
Accruing loans 90 days overdue 4,412 6,354 6,166 8,451 15,442
Troubled debt restructurings 5,045 8,968 17,959 20,901 32,147
------- ------- -------- -------- --------
Total 42,520 56,263 77,496 108,928 164,600
------- ------- -------- -------- --------
Other nonperforming assets:
Other real estate owned, net of related
reserves 12,679 16,682 28,867 37,657 40,540
In-substance foreclosures, net of related
reserves -- 3,391 11,752 36,582 46,083
Repossessions, net of related reserves 1,553 2,003 1,961 2,566 2,664
------- ------- -------- -------- --------
Total 14,232 22,076 42,580 76,805 89,287
------- ------- -------- -------- --------
Total nonperforming assets $56,752 $78,339 $120,076 $185,733 $253,887
======= ======= ======== ======== ========
Total nonperforming loans as a
percentage of total loans 1.53% 2.13% 3.18% 4.36% 6.11%
Total nonperforming assets as a
percentage of total assets 1.40 2.10 3.31 5.29 6.77
Total nonperforming assets as a
percentage of total loans and total
other nonperforming assets 2.03 2.94 4.85 7.22 9.13
</TABLE>
It is the policy of the Company to generally place all commercial
real estate loans and commercial business loans and leases which are 90 days
or more past due, unless secured by 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 and leases are placed
on nonaccrual status generally at 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
therefore nonperforming status loans currently less than 90 days past due or
performing in accordance with their terms but which in management's judgment are
likely to present future principal and/or interest repayment problems and which
thus ultimately would be classified as nonperforming. At December 31, 1995,
$11.9 million of commercial real estate and
20
<PAGE> 22
commercial business loans and leases, or 28.0% of total nonperforming loans,
were on nonaccrual status and thus disclosed as nonperforming loans even though
they were less than 90 days past due.
Nonperforming residential real estate loans increased by $1.7
million from December 31, 1994 to December 31, 1995. As a percentage of total
residential real estate loans, nonperforming residential real estate loans
increased from 1.0% at December 31, 1994 to 1.2% at December 31, 1995. This
increase was attributable to the low level of nonperforming loans at December
31, 1994 and an increase in past due loans during 1995 to levels approaching but
still below national and regional averages.
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 as other real estate owned, it is
recorded at the lower of carrying or fair value at the date of acquisition or
classification and any writedown resulting therefrom is charged to the allowance
for loan and lease 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 and are included in collection and carrying
costs of nonperforming assets (a component of noninterest expenses). For further
information, see Note 1 to the Supplemental Consolidated Financial Statements.
Potential Nonperforming Assets. The total of commercial real estate
and commercial business loans and leases which are internally graded substandard
or lower, according to the Company's internal loan grading system, but which are
still in a performing status (the population from which future nonperforming
loans would most likely arise), has continued to decrease since the middle of
1992. At December 31, 1995 and 1994, the Company had classified a total of $89.7
million and $124.8 million, respectively, of commercial real estate loans and
commercial business loans and leases as substandard or lower on its risk rating
system. Included in this amount at December 31, 1995 was the Company's $28.8
million of nonperforming commercial real estate loans and commercial business
loans and leases. In the opinion of management, the remaining $60.9 million of
commercial real estate loans and commercial business loans and leases classified
as substandard at December 31, 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
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
and lease losses.
Allowance for Loan and Lease Losses. The allowance for loan and
lease losses is maintained at a level determined to be adequate by management to
absorb future charge-offs of loans deemed noncollectible. This allowance is
increased by provisions charged to operating expense and by recoveries on loans
previously charged off. Arriving at an appropriate level of allowance for loan
and lease losses necessarily involves a high degree of judgment, as discussed
above under "Results of Operations - Provision for Loan Losses."
21
<PAGE> 23
The following table sets forth information concerning the activity
in the Company's allowance for loan and lease losses during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $2,732,318 $2,529,723 $2,473,666 $2,647,479 $2,799,630
========== ========== ========== ========== ==========
Allowance at the beginning of the year $ 63,675 $ 67,385 $ 71,223 $ 88,067 $ 84,429
Additions due to acquisitions and
purchases 2,314 -- -- -- --
---------- ---------- ---------- ---------- ----------
Charges-offs:
Residential real estate mortgages 4,139 4,646 6,607 13,565 7,573
Commercial real estate mortgages 8,964 6,207 8,482 19,053 48,997
Commercial business loans and leases 2,234 4,124 9,622 18,825 15,735
Consumer loans and leases 2,631 2,225 3,861 5,771 6,110
---------- ---------- ---------- ---------- ----------
Total loans charged off 17,968 17,202 28,572 57,214 78,415
---------- ---------- ---------- ---------- ----------
Recoveries:
Residential real estate mortgages 620 904 642 627 647
Commercial real estate mortgages 5,185 4,917 6,293 2,582 1,269
Commercial business loans and leases 2,181 3,440 2,035 2,997 5,116
Consumer loans and leases 738 857 1,717 2,139 3,541
---------- ---------- ---------- ---------- ----------
Total loans recovered 8,724 10,118 10,687 8,345 10,573
---------- ---------- ---------- ---------- ----------
Net charge-offs 9,244 7,084 17,885 48,869 67,842
Additions charged to operating expenses 4,230 3,374 14,047 32,025 71,480
---------- ---------- ---------- ---------- ----------
Allowance at end of year $ 60,975 $ 63,675 $ 67,385 $ 71,223 $ 88,067
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.34% 0.28% 0.72% 1.85% 2.42%
Ratio of allowance to end of period loans
and leases 2.19 2.41 2.77 2.85 3.27
Ratio of allowance to nonperforming
loans and leases at end of period 143.40 113.17 86.95 65.39 53.50
</TABLE>
22
<PAGE> 24
The following table sets forth information concerning the allocation
of the Company's allowance for loan and lease losses by loan categories at the
dates indicated. For information about the percent of total loans in each
category to total loans, see "Financial Condition-Loans and Leases" above.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------- -------------------- -------------------- -------------------- --------------------
Allowance to Allowance to Allowance to Allowance to Allowance to
Percent of Percent of Percent of Percent of Percent of
Total Loans Total Loans Total Loans Total Loans Total Loans
Amount by Category Amount by Category Amount by Category Amount by Category Amount by Category
------- ------------ ------- ------------ ------- ------------ ------- ------------ ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $10,118 1.27% $ 8,567 1.07% $ 9,864 1.37% $13,647 1.96% $11,039 1.53%
Commercial real estate 31,673 3.97 35,505 4.61 38,177 5.07 40,899 4.99 51,512 5.78
Commercial business
loans and leases 9,491 2.32 9,274 2.86 8,734 2.88 12,162 3.65 20,447 4.61
Consumer loans and
leases 9,693 1.25 10,329 1.39 10,610 1.61 4,515 0.70 5,069 0.80
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
$60,975 2.19 $63,675 2.41 $67,385 2.77 $71,223 2.85 $88,067 3.27
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
23
<PAGE> 25
The allowance for loan and lease losses is available for offsetting
credit losses in connection with any loan but is internally allocated to various
loan categories as part of the Company's process for evaluating the adequacy of
the allowance for loan and lease losses.
Deposits. Total deposits increased by $311.3 million or 10.8% during
1995. This increase was attributable to the assumption of $156.9 million of
deposits as a result of acquisitions during 1995 and the success of the
Company's relationship banking products. The change in deposits was comprised of
a $163.2 million or 49.8% increase in money market accounts, a $151.0 million or
12.5% increase in certificates of deposit, a $71.3 million or 19.7% increase in
demand accounts and an $18.3 million or 5.5% increase in NOW accounts, which
collectively more than offset a $92.4 million or 14.2% decrease in regular
savings accounts. The changes in deposit balances reflect the Company's current
strategy to emphasize relationship banking, cash management services and core
deposits, as well as the deposit mix of the deposits assumed in connection with
the Company's acquisitions during 1995.
The following table sets forth the distribution of the Company's
deposits by type of deposit at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-brokered deposits:
Demand accounts $ 434,091 13.58% $ 362,790 12.57% $ 348,599 11.86%
NOW accounts 351,481 10.99 333,192 11.55 331,738 11.28
Savings accounts 557,896 17.45 650,302 22.53 545,274 18.55
Money market accounts 490,575 15.34 327,424 11.35 443,538 15.09
Certificates of deposit:
$100,000 or more 116,472 3.64 91,469 3.17 93,335 3.17
Other 1,246,623 39.00 1,120,668 38.83 1,162,342 39.54
---------- ------ ---------- ------ ---------- ------
1,363,095 42.63 1,212,137 42.00 1,255,677 42.71
---------- ------ ---------- ------ ---------- ------
Total non-brokered deposits 3,197,138 100.00 2,885,845 100.00 2,924,826 99.49
---------- ------ ---------- ------ ---------- ------
Brokered deposits -- -- -- -- 15,000 0.51
---------- ------ ---------- ------ ---------- ------
Total deposits $3,197,138 100.00% $2,885,845 100.00% $2,939,826 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
At December 31, 1995, the Company's $116.5 million of certificates of
deposit in amounts of $100,000 or more were scheduled to mature as follows:
$26.5 million within three months, $19.6 million over three months through six
months, $17.9 million over six months through 12 months and $52.5 million
thereafter.
Other Interest-bearing Liabilities. Other interest-bearing liabilities,
which consist of borrowings from the Federal Home Loan Bank ("FHLB") of Boston,
securities sold under agreements to repurchase ("repurchase agreements"),
federal funds purchased and other interest-bearing liabilities, decreased by
$48.4 million or 9.6% during 1995.
24
<PAGE> 26
The following table sets forth certain information concerning the
Company's borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
FHLB advances $252,446 $362,450 $251,760
Repurchase agreements 180,957 127,519 100,688
Federal funds purchased 1,500 4,404 1,600
Other 22,029 10,974 5,887
-------- -------- --------
Total $456,932 $505,347 $359,935
======== ======== ========
</TABLE>
FHLB advances are the largest non-deposit related interest-bearing
funding source for the Company. In 1995, the Company reduced FHLB advances by
$110.0 million or 30.4%. FHLB advances are secured by qualifying residential
real estate loans, investment securities and certain other assets. For
additional information regarding FHLB advances, see Note 13 to the Supplemental
Consolidated Financial Statements.
Repurchase agreements represent funds received from sales of
securities under agreements to repurchase, which are considered to be borrowings
secured by the securities sold, and generally have maturities of 180 days or
less. Repurchase agreements increased by $53.4 million or 41.9% during 1995.
This increase was primarily attributable to the expansion of both public finance
activities and commercial cash management services at the Company's banking
subsidiaries during 1995. For additional information regarding repurchase
agreements, see Note 12 to the Supplemental Consolidated Financial Statements.
The following table presents certain information regarding the
Company's short-term borrowings having average balances during the period of
greater than 30% of shareholders' equity at the end of the period. During each
reported period, repurchase agreements were the only category of borrowings
meeting this criteria.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Average balance outstanding $152,411 $109,216 $ 81,086
Maximum outstanding at any
month-end during the period 213,104 153,710 112,831
Balance outstanding at end of period 180,957 127,519 100,688
Average interest rate during the period 4.90% 3.36% 2.28%
Average interest rate at end of period 4.64 4.62 2.21
</TABLE>
Other borrowings increased by $11.1 million or 100.7% during 1995.
This increase was primarily attributable to the issuance of five-year debentures
in connection with the Company's acquisition of Bankcore, which had an
outstanding balance of $7.8 million at December 31, 1995.
Shareholders' Equity. Consistent with its long-term goal of
operating a safe, sound and profitable financial organization, the Company
strives to maintain a strong capital base. The Company's shareholders' equity
totaled $354.9 million or 8.7% of total assets at December 31, 1995, as compared
to $304.4 million or 8.1% of total assets at December 31,
25
<PAGE> 27
1994. The increase in shareholders' equity during 1995 was attributable to net
income of $44.5 million, a $12.8 million net unrealized gain (net of tax effect)
in the market value of securities available for sale, $11.3 million related to
the reissuance of treasury stock in conjunction with the Bankcore acquisition
and $1.5 million of treasury stock sales related to various employee benefit
plans of the Company, the effects of which were offset in part by $11.3 million
in dividends paid to shareholders and $8.3 million in treasury stock purchases.
As authorized by the Board of Directors, and in anticipation of the
Bankcore acquisition, the Company initiated a share repurchase program on
December 20, 1994 and repurchased 751,600 shares of its common stock for a total
cost of $9.6 million during 1994 and 1995. A total of 646,600 of these shares,
with a total cost of $8.3 million, were repurchased in 1995; the balance were
repurchased in 1994. All shares repurchased as part of the share repurchase
program were reissued in conjunction with the Bankcore acquisition on July 1,
1995.
For additional information, see Note 14 to the Supplemental
Consolidated Financial Statements and "Regulatory Environment" below.
RISK MANAGEMENT
The Company's success is largely dependent upon its ability to
strategically manage financial and nonfinancial risks. Prominent nonfinancial
challenges facing the Company and addressed through the Company's strategic
planning process include competition from bank and nonbank financial service
companies, changing regulatory and political environments, rapid advances in
technology-based information systems and demographic and economic changes. The
significant financial risks actively managed by the Company include: a) credit
risk; b) interest rate risk, including asset and liability management; c)
liquidity risk; and d) off-balance sheet risks and commitments.
Credit Risk Management. The Company's net loan portfolio accounted
for 67.0% of the assets of the Company at December 31, 1995 and represents its
primary source of credit risk. The Company has dedicated and will continue to
dedicate a substantial amount of time and resources to the management of credit
risk within its loan portfolio. The Company has established systems of checks
and balances to manage the origination, control and collection of loan assets.
For additional information relating to credit risk, see "Results of
Operations Provision for Loan Losses," "Financial Condition - Nonperforming
Assets" and Note 5 to the Supplemental Consolidated Financial Statements.
Interest Rate Risk and Asset/Liability Management. The Company's
actions in regard to interest rate risk and asset and liability management are
the responsibility of a Liquidity and Funds Management Committee which reports
to the Board of Directors and is comprised of members of the Company's senior
management. The Liquidity and Funds Management Committee is actively involved in
formulating the economic projections used by the Company in its planning and
budgeting process and establishes policies which monitor and coordinate the
Company's sources, uses and pricing of funds.
Interest rate risk can be defined as the exposure of the Company's
net income or financial position to adverse movements in interest rates. In
addition to directly impacting
26
<PAGE> 28
net interest income, changes in the level of interest rates also can affect (i)
the amount of loans originated and sold by an institution, (ii) the ability of
borrowers to repay adjustable-rate loans, (iii) the average maturity of mortgage
loans, which tends to increase when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when rates on existing mortgage loans are substantially lower than
current mortgage loan rates (due to refinancings of loans at lower rates), (iv)
the value of an institution's interest-earning assets and the resultant ability
to realize gains on the sale of such assets and (v) the carrying value of
investment securities classified as available for sale and resultant adjustments
to shareholders' equity.
The principal objective of the Company is to maintain an appropriate
balance between income growth and the risks associated with maximizing income
through the mismatch of the timing of interest rate changes between assets and
liabilities. Although perfectly matching asset and liability maturities and
interest rate changes can eliminate interest rate risk, such actions may not
enhance net interest income. The Company seeks to reduce the volatility of its
net interest income by managing the relationship of interest-rate sensitive
assets to interest-rate sensitive liabilities.
To meet its asset and liability management objectives, the Company
has undertaken various steps to increase the ability of the yields earned on its
interest-earning assets to change in accordance with market rates of interest
and to reduce the average maturity of such assets. A principal focus in recent
years has been on the origination of adjustable-rate residential real estate
loans and consumer loans, which generally have shorter maturities than
fixed-rate residential real estate loans. The Company also originates
adjustable-rate and fixed-rate commercial real estate loans and commercial
business loans and leases, which collectively also generally mature or reprice
more quickly than fixed-rate residential real estate loans.
Net interest income sensitivity to movements in interest rates is
measured through use of a simulation model which analyzes resulting net income
under various interest rate scenarios. Projected net interest income is modeled
based on both an immediate rise or fall in interest rates ("rate shock") as well
as gradual movements in interest rates over a twelve month period. The model is
based on the actual maturity and repricing characteristics of interest-rate
sensitive assets and liabilities and factors in budget projections for
anticipated activity levels by major product lines of the Company. The
simulation model incorporates assumptions regarding the impact of changing
interest rates on the prepayment rate of certain assets and liabilities. The
model also takes into account the Company's ability to exert greater control
over the setting of interest rates on certain deposit products than it has over
variable and adjustable-rate loans which are tied to published indices, such as
designated prime lending rates and the rate on U.S. Treasury Bills.
Based on the information and assumptions in effect at December 31,
1995, management of the Company believes that a 200 basis point gradual change
in interest rates over a twelve month period, up or down, would not
significantly affect the Company's annualized net interest income.
As a result of the Company's business strategy to increase
noninterest income related to mortgage banking services, the Company has
increased its portfolio of residential mortgages serviced for investors. As a
result of that strategy, as well as the adoption of SFAS No. 122, the level of
mortgage servicing rights has increased significantly in recent periods.
27
<PAGE> 29
In order to mitigate the prepayment risk associated with mortgage
servicing rights and protect economic value, in 1995 the Company purchased a
constant maturity treasury floor ("CMT") for $555,000. The cost of the CMT is
being amortized over five years using the straight line method of amortization.
The CMT's value is related to movements in market interest rates to which it is
indexed (based on a $30 million, 10-year Constant Maturity Treasury Yield) and
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 market interest rates decrease. Although 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 the value of the
Company's mortgage servicing rights. The CMT is included in other assets on the
Company's balance sheet at December 31, 1995 at amortized cost of $462,000,
which approximates market value.
Liquidity Risk Management. The Company seeks to maintain various
sources of funds and prudent levels of liquid assets in order to satisfy its
varied liquidity demands. Many factors affect the Company's ability to meet its
liquidity needs, including its mix of assets and liabilities, reputation and
credit standing in the marketplace, interest rates and general economic
conditions. The Company's actual inflow and outflow of funds is detailed in the
Supplemental Consolidated Statements of Cash Flows.
Each of the Company's banking subsidiaries monitors its liquidity in
accordance with guidelines established by the Company and applicable regulatory
requirements. The primary sources of funds of the Company's banking subsidiaries
are deposits, borrowings from the FHLB of Boston and other sources, cash flows
from operations, prepayments and maturities of outstanding loans, leases,
investments and mortgage-backed securities and the sale of mortgage loans.
During 1995 and 1994, the Company's banking subsidiaries used their sources of
funds primarily to meet ongoing commitments to pay maturing savings certificates
and savings withdrawals, fund loan and lease commitments and maintain a
substantial portfolio of investment securities.
Management believes that the Company's banking subsidiaries
currently have adequate liquidity available to respond to both expected and
unexpected liquidity demands, according to the measurement system established
during 1991 and set forth in the Company's contingency liquidity plan. This
system, the Reactive Capacity Adequacy Report System, measures the net amount of
marketable assets, after deducting pledged assets, plus lines of credit,
primarily with the FHLB, which are available to fund liquidity requirements. It
then measures the adequacy of that amount against the amount of sensitive or
volatile liabilities, which include core deposit balances in excess of $100,000,
term deposits with short maturities and credit commitments outstanding. This
evaluation is conducted at each banking subsidiary and consolidated for the
Company on a monthly basis. It allows the Company to manage its liquidity
position and funding sources in order to ensure that it has continuing ability
to meet its ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan and lease commitments, meet contractual maturities on
borrowings and maintain a significant portfolio of investment securities.
The Company's liquidity management policies currently include
requirements that the Company maintain a minimum liquidity ratio of no less than
15% with a target of 20%.
28
<PAGE> 30
The Company's consolidated liquidity position increased during 1995 as net cash,
short-term and marketable assets amounted to 26.5% of net deposits and
short-term liabilities at December 31, 1995, as compared to 25.2% at December
31, 1994.
A secondary source of liquidity, not included in the liquidity ratio
calculation, is represented by asset-based liquidity. Asset-based liquidity
consists primarily of single-family residential real estate loans which qualify
for sale in the secondary market.
The liquidity needs of the Company on a parent-only basis consist
primarily of dividends to shareholders and expenses for general corporate
purposes. The primary source of parent-only company cash flow is dividends
received from subsidiary banks. For additional information, see Notes 2 and 14
to the Supplemental Consolidated Financial Statements.
Off-Balance Sheet Risks and Commitments. Set forth below is a
discussion of various off-balance sheet risks and commitments of the Company.
Commitments to extend credit. At December 31, 1995 and 1994, the
total approved loan commitments outstanding amounted to $336.4 million and
$201.7 million, respectively. At the same dates, commitments under unused lines
of credit amounted to $345.6 million and $286.1 million, respectively, and the
unadvanced portion of construction loans amounted to $34.2 million and $25.9
million, respectively.
Derivatives. The Company has only limited involvement with
off-balance sheet derivative financial instruments and does not use them for
trading purposes.
The Company has explored and utilized in the past certain financial
techniques, such as interest rate exchange agreements, to assist in the
management of interest rate risk. The Company believes that such techniques have
benefits under certain market and economic conditions. At December 31, 1995, the
Company did not have any interest rate exchange agreements in place.
The Company makes use of forward commitments to sell loans as part
of its mortgage banking business. Forward commitments are used in the normal
course of business to reduce the Company's exposure to fluctuations in interest
rates.
For additional information, see Note 15 to the Supplemental
Consolidated Financial Statements.
Counterparty risk. The Company does business with a variety of
financial institutions and other companies in the normal course of business. The
Company is subject to potential financial loss if the counterparty is unable to
complete an agreed upon transaction. The Company controls counterparty risk
through financial analysis, dollar limits and other monitoring procedures.
REGULATORY ENVIRONMENT
Regulatory Capital Requirements. Banks and bank holding companies
are subject to a broad scope of laws and regulations. The Company believes that
it is in material compliance with all applicable federal and state laws and
regulations.
29
<PAGE> 31
Regulatory Capital Requirements. Under Federal Reserve Board ("FRB")
guidelines, bank holding companies such as the Company are required to maintain
capital based on "risk-adjusted" assets. Under risk-based capital guidelines,
categories of assets with potentially higher credit risk require more capital
than assets with lower risk. In addition to balance sheet assets, bank holding
companies are required to maintain capital, on a risk-adjusted basis, to support
certain off-balance sheet activities such as loan commitments. The FRB
guidelines classify capital into two tiers, Tier I and Total. Tier I risk-based
capital consists of common shareholders' equity, noncumulative and cumulative
(bank holding companies only) perpetual preferred stock and minority interests,
less goodwill. Total risk-based capital consists of Tier 1 capital plus a
portion of the general allowance for loan losses, hybrid capital instruments,
term subordinated debt and intermediate preferred stock.
In addition to risk-based capital requirements, the FRB requires
bank holding companies to maintain a minimum leverage capital ratio of Tier I
capital to total assets. Total assets for this purpose do not include goodwill
and any other intangible assets and investments that the FRB determines should
be deducted from Tier I capital.
The FDIC has promulgated similar regulations and guidelines
regarding the capital adequacy of state-chartered banks which are not members of
the Federal Reserve System, such as PHB and BNH. These requirements are
substantially similar to those adopted by the FRB, as described above. In
addition, the Maine Bureau of Banking has promulgated a regulation regarding
capital adequacy for Maine-chartered financial institutions such as PHB. This
regulation generally parallels the minimum Tier I leverage capital requirements
of the FDIC.
The following table sets forth the regulatory capital ratios of the
Company, PHB and BNH at December 31, 1995.
<TABLE>
<CAPTION>
December 31, 1995
-----------------------
Required
Minimums Actual
-------- ------
<S> <C> <C>
THE COMPANY:
Risk-based capital ratios:
Tier I 4.00% 12.88%
Total 8.00 14.15
Tier I leverage capital ratio(1) 4.00 8.33
PEOPLES HERITAGE BANK:
Risk-based capital ratios:
Tier I 4.00 10.78
Total 8.00 12.04
Tier I leverage capital ratio(1) 4.00 7.46
BANK OF NEW HAMPSHIRE:
Risk-based capital ratios:
Tier I 4.00 14.25
Total 8.00 15.51
Tier I leverage capital ratio(1) 4.00 7.93
</TABLE>
30
<PAGE> 32
- -------------------
(1) Bank holding companies and banks, including the Company and its banking
subsidiaries, may be required to maintain a Tier I leverage capital ratio of
4.0% to 5.0% or more. The regulatory agencies have not advised the Company or
its banking subsidiaries of a specific Tier I leverage capital ratio requirement
to date.
Recent Accounting Developments. In March 1995, the FASB issued SFAS
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived
Assets to be Disposed Of," which was adopted by the Company on January 1, 1996.
This Statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to such assets
being held and used and for such assets and certain identifiable intangibles to
be disposed of. The implementation of this Statement did not and is not expected
to have a material effect on the Company's results of operations or financial
condition.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which became effective on January 1, 1996. This
Statement establishes a fair-value based method of accounting for stock-based
compensation plans under which compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period.
However, the Statement allows a company to continue to measure compensation cost
for such plans under Accounting Principles Board ("APB") Opinion No. 25,"
Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no
compensation cost is recorded if, at the grant date, the exercise price of the
options is equal to the fair market value of the Company's common stock. The
Company has elected to continue to follow the accounting under APB No. 25. SFAS
No. 123 requires companies which elect to continue to follow the accounting in
APB Opinion No. 25 to disclose in the notes to their financial statements pro
forma net income and earnings per share as if the value-based method of
accounting had been applied. Management has not determined the impact of the
adoption of SFAS No. 123 on the financial position or results of operations of
the Company.
ACQUISITIONS
For information regarding acquisitions completed by the Company
during the years ended December 31, 1995 and 1994, see Note 18 to the
Supplemental Consolidated Financial Statements.
On February 16, 1996, BNH acquired five branch offices and
approximately $160 million of related deposits from Fleet Bank NH. Two of these
offices are located in Manchester, New Hampshire and the others are located in
Bedford, Nashua and Littleton, New Hampshire. In addition to various assets
related to the acquired branches, BNH also acquired approximately $216.4 million
of loans in connection with this transaction, which consisted primarily of
$178.6 million of single-family residential loans.
The Company, Peoples Heritage Merger Corp. ("PHMC") and Family
Bancorp ("Family") have entered into an Agreement and Plan of Merger, dated as
of May 30, 1996 (the "Agreement"), which provides, among other things, for (i)
the merger of Family with and into PHMC (the "Merger") and (ii) the conversion
of each share of Family common stock outstanding immediately prior to the Merger
(other than any dissenting shares under Massachusetts law and certain shares
held by the Company) into the right to receive 1.26 shares of the Company's
common stock, subject to possible adjustment under certain circumstances, plus
cash in lieu of any fractional share interest. Inclusive of the potential
31
<PAGE> 33
effects of outstanding options to acquire Family common stock, a maximum of
5,572,001 shares of common stock of the Company will be issuable upon
consummation of the Merger. Consummation of the Merger is subject to various
conditions, including approval of the Agreement by the shareholders of the
Company and Family and the receipt of all required regulatory approvals.
IMPACT OF INFLATION AND CHANGING PRICES
The Supplemental Consolidated Financial Statements and related Notes
thereto presented elsewhere herein have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the assets
and virtually all of the liabilities of the Company are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as inflation.
32
<PAGE> 34
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(In Thousands, Except Number of Shares -----------------------
and Per Share Data) 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 190,436 $ 165,772
Federal funds sold 100,255 58,735
Investment securities (Notes 3, 12, 13) --- 286,577
Securities available for sale, at market
value (Notes 3, 12, 13) 766,648 432,617
Loans held for sale, market value
$71,872 in 1995 and $11,163 in 1994,
respectively (Note 4) 70,979 11,092
Loans and leases (Notes 5 and 13):
Residential real estate mortgages 798,076 803,498
Commercial real estate mortgages 797,686 770,572
Commercial business loans and leases 408,592 324,408
Consumer loans and leases 774,229 741,099
---------- ----------
2,778,583 2,639,577
Less: Allowance for loan and lease
losses (Note 6) 60,975 63,675
---------- ----------
Net loans and leases 2,717,608 2,575,902
---------- ----------
Premises and equipment (Note 7) 56,021 46,507
Goodwill and other intangibles (Note 8) 22,792 20,713
Mortgage servicing rights (Note 9) 20,309 17,275
Other real estate and repossessed assets
owned (Note 10) 14,232 22,076
Deferred income taxes (Note 11) 32,972 37,692
Interest and dividends receivable 30,726 27,786
Other assets 35,148 35,162
---------- ----------
$4,058,126 $3,737,906
========== ==========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial
Statements.
33
<PAGE> 35
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
(In Thousands, Except Number of Shares ----------------------------
and Per Share Data) 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 557,896 $ 650,302
Money market access accounts 490,575 327,424
Certificates of deposit (including
certificates of $100 or more of
$116,472 and $91,469, respectively) 1,363,095 1,212,137
NOW accounts 351,481 333,192
Demand deposits 434,091 362,790
----------- -----------
3,197,138 2,885,845
----------- -----------
Federal funds purchased 1,500 4,404
Securities sold under repurchase
agreements (Note 12) 180,957 127,519
Borrowings from the Federal Home Loan
Bank of Boston (Note 13) 252,446 362,450
Other borrowings 22,029 10,974
Deferred income taxes (Note 11) 12,577 6,087
Other liabilities (Note 16) 36,554 36,188
----------- -----------
Total liabilities 3,703,201 3,433,467
----------- -----------
Commitments and contingent liabilities
(Notes 14, 15 and 16)
Shareholders' equity (Notes 2, 3, 14 and 18):
Preferred stock, par value $0.01; 5,000,000
shares authorized, none issued -- --
Common stock, par value $0.01; 30,000,000
shares authorized, 25,596,550 shares
and 25,596,426 shares issued, respectively 256 256
Paid-in capital 224,268 224,267
Retained earnings 134,443 99,955
Net unrealized gain (loss), net of
applicable income taxes, on securities
available for sale 3,763 (9,079)
Treasury stock at cost (524,062 shares
and 760,327 shares, respectively) (7,805) (10,960)
----------- -----------
Total shareholders' equity 354,925 304,439
----------- -----------
$ 4,058,126 $ 3,737,906
=========== ===========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial
Statements.
34
<PAGE> 36
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
(In Thousands, Except Number of ----------------------------------------------
Shares and Per Share Data) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases
(Note 5) $ 253,787 $ 215,177 $ 208,547
Interest on mortgage-backed
investments 12,627 12,409 10,266
Interest on other investments 37,521 27,241 23,547
Dividends on equity securities 1,914 1,770 1,092
----------- ------------ ------------
Total interest and dividend
income 305,849 256,597 243,452
----------- ------------ ------------
Interest expense:
Interest on deposits 108,209 87,920 96,793
Interest on borrowed funds 26,686 20,082 15,512
----------- ------------ ------------
Total interest expense 134,895 108,002 112,305
----------- ------------ ------------
Net interest income 170,954 148,595 131,147
Provision for loan losses (Note 6) 4,230 3,374 14,047
----------- ------------ ------------
Net interest income after
provision for loan losses 166,724 145,221 117,100
----------- ------------ ------------
Noninterest income:
Mortgage banking services
(Note 9) 10,849 8,446 7,150
Customer services 11,908 10,481 9,852
Trust and investment advisory
services 5,850 5,471 4,694
Loan related services 1,907 1,847 1,588
Net securities gains (losses)
(Note 3) 116 (254) 1,183
Net gains on sales of consumer
loans (Note 5) -- 33 2,576
Other noninterest income 787 1,602 1,558
----------- ------------ ------------
31,417 27,626 28,601
----------- ------------ ------------
Noninterest expenses:
Salaries and employee benefits
(Note 16) 67,472 61,799 56,287
Occupancy 10,574 10,454 9,837
Data Processing 8,924 7,306 6,762
Equipment 6,844 6,233 6,168
Advertising and marketing 4,642 4,642 2,668
Deposit and other assessments 4,497 7,899 8,367
Collection and carrying costs of
nonperforming assets 2,595 6,033 14,840
Merger expenses 4,958 559 300
Other noninterest expenses
(Note 8) 19,774 20,212 17,162
----------- ------------ ------------
130,280 125,137 122,391
----------- ------------ ------------
Income before income tax expense 67,861 47,710 23,310
Applicable income tax (Note 11) 23,375 13,662 799
----------- ------------ ------------
Net income $ 44,486 $ 34,048 $ 22,511
=========== ============ ============
Weighted average shares outstanding 24,696,393 24,849,800 23,705,195
Earnings per share $ 1.80 $ 1.37 $ 0.95
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial
Statements.
35
<PAGE> 37
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands, Except Number Net
Number of Shares and of Shares Par Paid-In Retained Loan to Unrealized Treasury
Per Share Data) Issued Value Capital Earnings ESOP Gain (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 24,208,336 $242 $213,025 $50,800 $(108) $ -0- $(14,101) $249,858
Proceeds from sale of stock
(net of cost) 1,397,918 14 11,833 -0- -0- -0- -0- 11,847
Treasury stock purchased
(8,044 shares at an
average price of $9.74) -0- -0- -0- -0- -0- -0- (79) (79)
Treasury stock issued for
employee benefits plans
(85,491 shares at an
average price of $9.23) -0- -0- -0- (451) -0- -0- 1,241 790
Retirement of Treasury stock (148) -0- (586) -0- -0- -0- 586 -0-
Purchase and retirement of
common stock (4,000) -0- (29) -0- -0- -0- -0- (29)
Cash dividends paid -0- -0- -0- (325) -0- -0- -0- (325)
Principal reduction in
loan to ESOP -0- -0- -0- -0- 108 -0- -0- 108
Implementation of change in
accounting for investments
in debt and equity securities
net of tax effect of $1,609 -0- -0- -0- -0- -0- 2,694 -0- 2,694
Compensation cost of employee
stock plan -0- -0- 63 -0- -0- -0- -0- 63
Net income -0- -0- -0- 22,511 -0- -0- -0- 22,511
---------- ---- -------- ------- ----- -------- -------- --------
Balances at December 31, 1993 25,602,106 $256 $224,306 $72,535 $ -0- $ 2,694 $(12,353) $287,438
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
36
<PAGE> 38
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Cont'd)
<TABLE>
<CAPTION>
(In Thousands, Except Number Net
Number of Shares and of Shares Par Paid-in Retained Loan to Unrealized Treasury
Per Share Data) Issued Value Capital Earnings ESOP Gain (Loss) Stock Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 25,602,106 $256 $224,306 $72,535 $ -0- $ 2,694 $(12,353) $287,438
Treasury stock purchased
(105,000 shares at an
average price of $12.02) -0- -0- -0- -0- -0- -0- (1,262) (1,262)
Treasury stock issued for
employee benefit plans
(179,426 shares at an
average price of $7.42) -0- -0- -0- (1,027) -0- -0- 2,655 1,628
Purchase and retirement of
common stock (5,680) -0- (60) -0- -0- -0- -0- (60)
Change in unrealized gains
(losses) on securities
available for sale, net
of tax of $6,900 -0- -0- -0- -0- -0- (11,773) -0- (11,773)
Compensation cost of
employee stock plan -0- -0- 21 -0- -0- -0- -0- 21
Net income -0- -0- -0- 34,048 -0- -0- -0- 34,048
Cash dividends paid
$0.23 per share -0- -0- -0- (5,601) -0- -0- -0- (5,601)
---------- ---- -------- ------- ----- -------- -------- --------
Balances at December 31, 1994 25,596,426 $256 $224,267 $99,955 $ -0- $ (9,079) $(10,960) $304,439
</TABLE>
SEE ACCOMPANYING NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
37
<PAGE> 39
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Cont'd)
<TABLE>
<CAPTION>
(In Thousands, Except Number Net
Number of Shares and of Shares Par Paid-in Retained Loan to Unrealized Treasury
Per Share Data) Issued Value Capital Earnings ESOP Gain (Loss) Stock Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 25,596,426 $256 $224,267 $ 99,955 $ -0- $ (9,079) $(10,960) $304,439
Treasury stock purchased
(647,357 shares at an
average price of $12.85) -0- -0- -0- -0- -0- -0- (8,317) (8,317)
Treasury stock issued for
employee benefit
(132,022 shares at an
average price of $9.76) -0- -0- -0- (401) -0- -0- 1,908 1,507
Reissuance of treasury stock
pursuant to acquisition
(751,600 shares at $15.00) -0- -0- -0- 1,710 -0- -0- 9,564 11,274
Change in unrealized gains
(losses) on securities
available for sale, net of
tax effect $7,293 -0- -0- -0- -0- -0- 12,842 -0- 12,842
Compensation cost of
employee stock plan 124 -0- 1 -0- -0- -0- -0- 1
Net income -0- -0- -0- 44,486 -0- -0- -0- 44,486
Cash dividends paid
$0.46 per share -0- -0- -0- (11,307) -0- -0- -0- (11,307)
---------- ---- -------- -------- ----- -------- -------- --------
Balances at December 31, 1995 25,596,550 $256 $224,268 $134,443 $ -0- $ 3,763 $ (7,805) $354,925
========== ==== ======== ======== ===== ======== ======== ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
38
<PAGE> 40
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 44,486 $ 34,048 $ 22,511
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 4,230 3,374 14,047
Provision for depreciation 6,286 5,399 5,111
Provision for losses and writedowns
(credits) of other real estate owned (958) 143 2,658
Amortization of goodwill and other
intangibles 2,211 2,045 3,046
Amortization and sale of servicing
rights 6,067 1,743 2,266
Net (increase) decrease in net
deferred tax assets 3,919 (2,486) (3,875)
Net losses realized from sales
of other real estate owned 528 64 439
Net (gains) losses realized from sales
of securities and consumer loans (116) 221 (3,759)
Net (gains) losses realized from sales
of loans held for sale (a component
of mortgage banking services) 664 491 (4,411)
Gains on capitalized servicing (8,524) (1,100) (883)
Proceeds from sales of securities
held for sale -- -- 36,469
Proceeds from maturities and
principal repayments of
securities held for sale -- -- 55,185
Purchases of securities held for sale -- -- (73,205)
Proceeds from sales of loans held
for sale 552,774 273,287 257,639
Residential loans originated and
purchased for sale (613,171) (218,034) (292,684)
Net (increase) decrease in interest
and dividends receivable and
other assets (2,925) 10,492 10,783
Net increase (decrease) in other
liabilities 366 8,227 (3,731)
--------- --------- ---------
Net cash provided (used) by operating
activities $ ( 4,163) $ 117,914 $ 27,606
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment
securities $ -- $ -- $ 3,379
Proceeds from maturities and principal
repayments of investment securities 125,540 158,211 297,105
Purchases of investment securities (114,491) (186,396) (472,000)
Proceeds from sales of securities
available for sale 9,814 65,380 --
Proceeds from maturities and principal
repayments of securities available
for sale 135,972 110,446 --
Purchases of securities available
for sale (184,040) (168,173) --
Net increase in loans and leases (184,323) (215,590) (12,387)
Proceeds from sale of loans 31,425 7,550 64,566
Purchase of mortgage servicing rights (577) (11,435) (5,882)
Premiums paid on deposits purchased (4,290) (75) --
Net additions to premises and equipment (15,800) (5,323) (3,723)
Proceeds from sales of other real
estate owned 12,722 13,420 17,224
Net decrease in repossessed assets
owned 2,360 4,020 7,708
--------- --------- ---------
Net cash (used) by investing activities $(185,688) $(227,965) $(104,010)
--------- --------- ---------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
39
<PAGE> 41
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 311,293 $ (53,981) $ (8,723)
Net increase in securities sold under
repurchase agreements 53,438 26,831 19,304
Proceeds from Federal Home Loan Bank
of Boston borrowings 415,998 390,284 168,250
Payments on Federal Home Loan Bank of
Boston borrowings (526,002) (279,594) (112,050)
Payoff of subordinated capital notes -- -- (5,000)
Net increase in other borrowings 11,055 5,087 807
Sale of treasury stock 1,507 1,628 790
Issuance of treasury stock for
acquisition 11,274 -- --
Purchase of treasury stock (8,317) (1,262) (79)
Net proceeds from sale of stock -- -- 11,877
Cash dividends paid to shareholders (11,307) (5,601) (325)
Other shareholders' equity, net -- 39 (108)
--------- --------- ---------
Net cash provided (used) by financing
activities $ 258,939 $ 83,431 $ 74,743
Increase (decrease) in cash and cash
equivalents 69,088 (26,620) (1,661)
Cash and cash equivalents at beginning
of period 220,103 246,723 248,384
--------- --------- ---------
Cash and cash equivalents at end of
period $ 289,191 $ 220,103 $ 246,723
========= ========= =========
- ------------------------------------------------------------------------------------
Supplemental disclosures of information:
Interest paid on deposits and
borrowings $ 132,301 $ 107,927 $ 112,487
Income taxes paid (refunded) 18,272 2,429 (207)
Noncash investing transactions:
Investment securities transferred to
securities available for sale $ 275,528 $ -- 335,103
Securities held for sale transferred
to securities available for sale to
adopt SFAS No. 115 -- -- 119,754
Securities held for sale transferred
to investment securities -- -- 33,692
Investment securities transferred to
securities held for sale -- -- 14,018
Loans transferred to other real estate 12,828 9,304 16,598
Loans originated to finance the sales
of other real estate owned 6,020 12,161 22,794
Increases (decreases) resulting from the
adoption of SFAS No. 115:
Securities available for sale 20,133 (18,547) 4,101
Deferred income taxes - liabilities 7,291 (6,859) 1,577
Net unrealized gain (loss) on
securities available for sale,
net of tax 12,842 (11,688) 2,524
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
40
<PAGE> 42
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
(All dollar Amounts Expressed in Thousands, Except Per Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Peoples Heritage Financial Group,
Inc. (the "Company") and its subsidiaries conform to generally accepted
accounting principles and to general practice within the banking industry. The
Company's principal business activities are retail, commercial and mortgage
banking as well as trust and investment advisory services, and are conducted
through the Company's direct wholly-owned subsidiaries located in Maine and New
Hampshire. The Company and its subsidiaries are subject to competition from
other financial institutions and are also subject to regulation of, and periodic
examination by, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, the Maine Bureau of Banking, the New Hampshire
Bank Commissioner and the Federal Reserve Board. The following is a description
of the more significant accounting policies.
Financial Statement Presentation
The consolidated financial statements include the accounts of Peoples Heritage
Financial Group, Inc., the Company's direct wholly-owned subsidiaries Peoples
Heritage Savings Bank (the "Bank") and Bank of New Hampshire Corporation
("BNHC"), which wholly owns Bank of New Hampshire and The First National Bank of
Portsmouth ("Portsmouth"), and other subsidiaries which are wholly-owned by the
Company's direct wholly-owned subsidiaries.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that effect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for possible loan and lease
losses and the net deferred tax asset.
Acquisition of BNHC
On April 2, 1996, the Company acquired BNHC by merging the subsidiary holding
company of Portsmouth into BNHC. The acquisition was accounted for as a pooling
of interests and, accordingly, the financial information for all prior periods
presented has been restated to present the combined financial condition and
results of operations as if the combination had been in effect for all periods
presented. Certain amounts in prior periods have been reclassified to conform to
the current presentation.
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisition of BNHC on April 2, 1996.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
the Company after financial statements convering the date of consummation of
the business combination are issued.
Investments
Investment securities at December 31, 1995 and 1994 consist of U.S.
Treasury, mortgage-backed, corporate debt and equity securities. The Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 115 at December 31, 1993. SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values, and all investments in debt securities. Under SFAS No. 115, the
Company classifies its debt and marketable equity investments in one of three
categories: trading, available for sale, or held to maturity. The Company's
investment accounting policies are as follows.
Securities Available for Sale
Securities available for sale consist of debt and equity securities that
the Company anticipates could be made available for sale in response to
changes in market interest rates, liquidity needs, changes in funding
sources and other similar factors. These assets are specifically identified
and are carried at market value. Changes in market value, net of applicable
income taxes, are recorded in and reported as a separate component of
shareholders' equity. When a decline in market value of a security is
considered other than temporary, the loss is charged to net securities gains
(losses) in the consolidated statements of operations as a writedown.
Securities Held to Maturity
Securities held to maturity consist of debt securities purchased where the
Company has the positive intent and ability to hold such securities until
maturity. Debt securities classified as held to maturity are carried at
amortized cost, adjusted for amortization of premiums and accretion of
discounts.
41
<PAGE> 43
Trading Account Securities
Trading account securities are marketable securities purchased with the
intent to be subsequently sold to provide net securities gains. These
securities are carried at market value and any changes in market value of
these securities, while being held, are reported in the consolidated
statements of operations as a component of net securities gains (losses).
There were no trading account securities at December 31, 1995 or December
31, 1994.
Loans Held for Sale
Loans originated for the purpose of potential subsequent sale are classified
as held for sale. These loans are specifically identified and carried at the
lower of aggregate cost or estimated of market value.
Loans
Loans are carried at the principal amounts outstanding reduced by partial
charge-offs and net deferred loan fees. Loans are generally placed on nonaccrual
status when they are past due 90 days as to either principal or interest, or
when in management's judgment the collectibility of interest or principal of the
loan has been significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is charged to interest on
loans. A loan can be returned to accrual status when collectibility of principal
is reasonably assured and the loan has performed for a period of time, generally
six months. 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." Loans
are classified as impaired when it is probable that the Company will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status and collateral value. At adoption, the Company reclassified $2.2
million of insubstance foreclosures and related reserves of $96 thousand to
loans and leases and allowance for loan and lease losses, respectively.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained at a level determined to
be adequate by management to absorb future charge-offs of loans deemed
uncollectible. This allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off, and reduced by
charge-offs on loans.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and management's estimation of
future potential losses. Although management uses available information to
establish the appropriate level of the allowance for loan and lease losses,
future additions to the allowance may be necessary based on estimates that are
susceptible to change as a result of changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize adjustments to
the allowance based on their judgments about information available to them at
the time of their examination.
Other Real Estate and Repossessed Assets Owned
Other real estate and repossessed assets owned is comprised of (i) properties
or other assets acquired through a foreclosure proceeding, or acceptance of a
deed or title in lieu of foreclosure and (ii) other assets repossessed in
connection with non-real estate loans. Other real estate and repossessed assets
owned are initially carried at the lower of cost or fair value of the collateral
less estimated cost to sell. Losses arising from the acquisition of such
properties are charged against the allowance for loan losses. Operating expenses
and any subsequent provisions to reduce the carrying value are charged to
current period earnings. Gains upon disposition are reflected in earnings as
realized; losses are charged to the valuation allowance.
Restrictions on Cash Availability
The Company is required to comply with various laws and regulations of the
Federal Reserve Bank which require that the Company maintain certain amounts of
cash on deposit and is restricted from investing those amounts.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of related assets.
42
<PAGE> 44
Goodwill and Other Intangibles
Goodwill is amortized on a straight-line basis over periods of fifteen and
twenty years; core deposit premiums are amortized on a level-yield basis over
the estimated life of the associated deposits. Goodwill and other intangible
assets are reviewed for possible impairment when events or changed circumstances
may affect the underlying basis of the asset.
Mortgage Banking
Residential real estate mortgages originated for the purpose of potential
subsequent sale are classified as held for sale. Forward commitments to sell
residential real estate mortgages are contracts which the Company enters into
for the purpose of reducing the market risk associated with originating loans
for sale. In the event the Company is unable to originate loans to fulfill the
contracts, it would normally purchase loans from correspondents or in the open
market to deliver against the contract. Such loans are also classified as held
for sale.
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65." SFAS No. 122 changed the Company's method of accounting for certain
mortgage banking activities. The Company elected early adoption of SFAS No. 122
effective for all mortgage banking activities in 1995 and as a result
capitalized $2.3 million of originated mortgage servicing rights, net of
amortization.
When loans are sold, a gain or loss is recognized to the extent that the sale
proceeds exceed or are less than the carrying value of the loans. Gains and
losses are determined using the specific identification method and recorded as
mortgage sales income, a component of mortgage banking services income. The
gains and losses resulting from the sales of loans with servicing retained are
adjusted to recognize the present value of future servicing fee income over the
estimated lives of the related loans. Purchased mortgage servicing rights are
recorded at cost upon acquisition.
Mortgage servicing rights are amortized on an accelerated method over the
estimated weighted average life of the loans. Amortization is recorded as a
charge against mortgage service fee income, a component of mortgage banking
services income. The Company's assumptions with respect to prepayments, which
affect the estimated average life of the loans, are adjusted periodically to
reflect current circumstances and to ensure that the carrying value of the
remaining mortgage servicing rights do not exceed the present value of the
estimated future net servicing income. In evaluating the realizability of the
carrying values of mortgage servicing rights, the Company assesses the estimated
life of its servicing portfolio based on data which is disaggregated to reflect
note rate, type and term on the underlying loans.
Mortgage servicing fees received from investors for servicing their loan
portfolios are recorded as mortgage servicing fee income when received. Loan
servicing costs are charged to noninterest expenses when incurred.
Pension Accounting
The Company provides pension benefits to its employees under a noncontributory
defined benefit plan which is funded on a current basis in compliance with the
requirements of the Employee Retirement Income Security Act of 1974 and
recognizes costs over the estimated employee service period.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits in banks, and federal funds sold
minus federal funds purchased.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. To the extent that current available
information raises doubt as to the realization of some portion or all of the
deferred tax assets, a valuation allowance must be established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Earnings per share have been computed on the basis of the weighted average
number of shares of common stock outstanding. Common stock equivalents were not
considered in the calculation of weighted average shares outstanding since their
effect was not material.
43
<PAGE> 45
2. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
<TABLE>
<CAPTION>
December 31,
--------------------------
Balance Sheets 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 22,568 $ 11,231
Securities 1,045 948
Investment in bank subsidiaries 311,907 271,699
Goodwill 14,392 15,896
Amounts receivable from subsidiaries 9,363 535
Other assets 5,315 4,551
---------- ----------
Total assets $ 364,590 $ 304,860
========== ==========
Liabilities and shareholders' equity
Amounts payable to subsidiaries $ 132 $ 85
Notes payable 7,836 ---
Other liabilities 1,697 336
Shareholders' equity 354,925 304,439
---------- ----------
Total liabilities and shareholders' equity $ 364,590 $ 304,860
========== ==========
<CAPTION>
- -----------------------------------------------------------------------------
Year Ended December 31,
---------------------------
Statements of Operations 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income:
Dividends from banking subsidiaries $23,007 $10,590 $ 1,009
Gain (loss) on intercompany loan sales -0- (430) 262
Other operating income 474 452 281
------- ------- -------
Total operating income 23,481 10,612 1,552
------- ------- -------
Operating expenses:
Interest on borrowings 363 -0- 138
Amortization of goodwill 1,505 1,505 1,505
Amortization of acquisition premiums 359 359 305
Merger 4,958 --- ---
Other operating expenses 731 1,242 770
------- ------- -------
Total operating expenses 7,916 3,106 2,718
------- ------- -------
Income (loss) before income taxes and equity
in undistributed net income of subsidiaries 15,565 7,506 (1,166)
Income tax benefit (1,492) (432) (186)
------- ------- -------
Income (loss) before equity in undistributed
net income of subsidiaries 17,057 7,938 (980)
Equity in undistributed net income
of subsidiaries 27,429 26,110 23,491
------- ------- -------
Net income $44,486 $34,048 $22,511
======= ======= =======
- --------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Statements of Cash Flows 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 44,486 $ 34,048 $ 22,511
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Undistributed net income from
subsidiaries (27,429) (26,110) (23,491)
Amortization of goodwill 1,505 1,505 1,505
Amortization of acquisition premiums 359 359 305
Securities losses (gains) 1 (165) (177)
Loss (gain) on intercompany loan sales -0- 430 (292)
(Increase) decrease in amounts
receivable from subsidiaries (7,973) (459) 4
Increase in other assets (119) (130) (103)
Increase (decrease) in amounts
payable to subsidiaries 47 79 (530)
Increase (decrease) in other
liabilities 488 (325) (2,219)
Other, net (1,021) (609) 68
-------- -------- --------
Net cash (used) provided by operating
activities 10,344 8,623 (2,419)
-------- -------- --------
Cash flows from investing activities:
Reissuance of treasury stock pursuant
to acquisition 11,274 -- --
Issuance of notes payable pursuant to
acquisition (net) 7,836 -- --
Sales of available for sale securities 622 255 --
Purchases of available for sale
securities (622) -- --
Sales of investment securities -- -- 654
Purchases of investment securities -- -- (230)
Capital invested in subsidiaries -0- -0- (10,100)
-------- -------- --------
Net cash used by investing activities 19,110 255 (9,676)
-------- -------- --------
Cash flows from financing activities:
Dividends paid to shareholders (11,307) (5,601) (325)
Treasury stock acquired (8,317) (1,322) (108)
Treasury stock sold 1,507 1,628 790
Net proceeds from sale of stock -- -- 11,847
-------- -------- --------
Net cash provided (used) by financing
activities (18,117) (5,295) 12,204
-------- -------- --------
Net increase (decrease) in cash and
due from banks 11,337 3,583 109
Cash and due from banks at beginning
of year 11,231 7,648 7,539
-------- -------- --------
Cash and due from banks at end of year $ 22,568 $ 11,231 $ 7,648
======== ======== ========
- ----------------------------------------------------------------------------------------
Supplemental disclosure information:
Interest paid on borrowings $ 363 $ -- $ 138
- ----------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
3. SECURITIES
Investment Securities
The following is a summary of held-to-maturity debt securities at December 31,
1994:
<TABLE>
<CAPTION>
Held-to-Maturity Debt Securities
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $285,392 $ 26 $(3,666) $281,752
State and municipal 908 4 (15) 897
Other debt securities 277 89 -- 366
-------- ---- ------- --------
Total debt securities $286,577 $119 $(3,681) $283,015
======== ==== ======= ========
</TABLE>
The Company chose to reclassify securities held to maturity to available for
sale at December 31, 1995.
Securities Available for Sale
A summary of the amortized cost and market values of securities available for
sale follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Government obligations and
obligations of U.S. Government
agencies and corporations $522,822 $3,981 $(227) $526,576
Tax-exempt bonds and notes 10,796 43 (2) 10,837
Other bonds and notes 5,645 55 (6) 5,694
Mortgage-backed securities 194,018 2,224 (419) 195,823
-------- ------ ----- --------
Total debt securities 733,281 6,303 (654) 738,930
-------- ------ ----- --------
Federal Home Loan Bank of
Boston stock 23,793 -0- -0- 23,793
Other equity securities 3,764 170 (9) 3,925
-------- ------ ----- --------
Total equity securities 27,557 170 (9) 27,718
-------- ------ ----- --------
Total securities available
for sale $760,838 $6,473 $(663) $766,648
======== ====== ===== ========
</TABLE>
The excess of market value over amortized cost of $5.8 million, net of tax
effect of $2.0 million, is recorded and reported as a separate component of
shareholders' equity.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Government obligations and
obligations of U.S. Government
agencies and corporations $225,058 $ 9 $ (5,847) $219,220
Tax-exempt bonds and notes 11,192 6 (113) 11,085
Other bonds and notes 2,751 -0- (45) 2,706
Mortgage-backed securities 180,930 69 (8,533) 172,466
-------- ---- -------- --------
Total debt securities 419,931 84 (14,538) 405,477
-------- ---- -------- --------
Federal Home Loan Bank of
Boston stock 23,236 -0- -0- 23,236
Other equity securities 3,776 152 (24) 3,904
-------- ---- -------- --------
Total equity securities 27,012 152 (24) 27,140
-------- ---- -------- --------
Total securities available
for sale $446,943 $236 $(14,562) $432,617
======== ==== ======== ========
</TABLE>
46
<PAGE> 48
The excess of amortized cost over market value of $14.3 million, net of tax
effect of $5.3 million, is recorded in and reported as a separate component of
shareholders' equity.
The amortized cost and market values of debt securities available for sale at
December 31, 1995 by contractual maturity are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amortized Cost Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1995:
Due in one year or less $348,093 $349,968
Due after one year through five years 189,505 191,442
Due after five years through ten years 34,829 35,143
Due after ten years 160,854 162,377
-------- --------
Total debt securities $733,281 $738,930
======== ========
</TABLE>
A summary of realized gains and losses on investment securities and securities
available for sale for 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
Securities
Available for Sale Investment Securities
------------------------ ------------------------
Gross Gross Gross Gross
Realized Realized Realized Realized
Gains Losses Gains Losses
-------- -------- -------- --------
<C> <C> <C> <C> <C>
1995 $ 305 $189 $-0- $-0-
1994 549 803 -0- -0-
1993 1,035 34 251 69
</TABLE>
47
<PAGE> 49
4. LOANS HELD FOR SALE
The following table summarizes the book value and estimated market value of
loans held for sale at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------ -------------------------
Estimate of Estimate of
Book Value Market Value Book Value Market Value
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fixed-rate residential real
estate loans having a
weighted average note rate
of 7.31% and 7.71% at
December 31, 1995 and
1994, respectively $ 70,979 $ 71,872 $ 11,092 $ 11,163
======== ======== ======== ========
</TABLE>
Included in the portfolio of residential real estate loans held for sale are
gross unrealized gains of $1.8 million and $122 thousand and gross unrealized
losses of $874 thousand and $51 thousand at December 31, 1995 and 1994,
respectively.
5. LOANS AND LEASES
The Company's lending activities are conducted principally in Maine and New
Hampshire. The principal categories of loans in the Company's portfolio are
residential real estate loans, which are secured by single-family (one to four
units) residences; commercial real estate loans, which are secured by
multi-family (five or more units) residential and commercial real estate;
commercial business loans and leases; and consumer loans and leases.
A summary of loans and leases follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
---------- ----------
<S> <C> <C>
Residential real estate mortgages:
Adjustable-rate $ 402,695 $ 418,653
Fixed-rate 395,381 384,845
---------- ----------
798,076 803,498
---------- ----------
Commercial real estate mortgages:
Commercial real estate 753,857 745,356
Construction and development 43,829 25,216
---------- ----------
797,686 770,572
---------- ----------
Commercial business loans and leases:
Business loans 397,652 315,200
Leases 10,940 9,208
---------- ----------
408,592 324,408
---------- ----------
Consumer loans and leases:
Home equity 283,008 247,751
Mobile home 214,761 222,600
Automobile 127,969 125,887
Boat and recreational vehicle 22,716 20,680
Other 125,775 124,181
---------- ----------
774,229 741,099
---------- ----------
Total loans and leases $2,778,583 $2,639,577
========== ==========
</TABLE>
Loan and lease balances are stated net of deferred loan fees totaling $5,022
and $6,623 at December 31, 1995 and 1994, respectively.
During 1993 the Bank sold substantially all of its credit card portfolio. As a
result of this sales transactions, the Company realized a $2.6 million gain.
48
<PAGE> 50
Related Party Transactions
Loans to officers, directors and related parties are made in the ordinary
course of business and on the same terms and conditions prevailing at the time
for comparable transactions. A summary of loans to related parties during 1995
and 1994 follows:
<TABLE>
<S> <C>
Balance at December 31, 1993 $25,345
Loans made/advanced and additions 2,289
Repayments and reductions (6,798)
Other changes (76)
-------
Balance at December 31, 1994 $20,760
Loans made/advanced and additions 4,224
Repayments and reductions (4,191)
Other changes (1,380)
-------
Balance at December 31, 1995 $19,413
=======
</TABLE>
Nonperforming loans
The following table sets forth information regarding nonperforming loans at
the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
------- -------
<S> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 5,713 $ 3,317
Accruing loans which are 90 days overdue 3,728 4,473
------- -------
Total 9,441 7,790
------- -------
Commercial real estate loans:
Nonaccrual loans 17,029 26,978
Accruing loans which are 90 days overdue -0- 1,020
Troubled debt restructurings 3,186 6,284
------- -------
Total 20,215 34,282
------- -------
Commercial business loans and leases:
Nonaccrual loans 6,735 6,871
Accruing loans which are 90 days overdue 25 30
Troubled debt restructurings 1,859 2,684
------- -------
Total 8,619 9,585
------- -------
Consumer loans:
Nonaccrual loans 3,586 3,775
Accruing loans which are 90 days overdue 659 831
------- -------
Total 4,245 4,606
------- -------
Total nonperforming loans:
Nonaccrual loans 33,063 40,941
Accruing loans which are 90 days overdue 4,412 6,354
Troubled debt restructurings 5,045 8,968
------- -------
Total $42,520 $56,263
======= =======
</TABLE>
The ability and willingness of the residential real estate, commercial real
estate, commercial business and consumer borrowers to repay loans is generally
dependent on current economic conditions and real estate values within the
borrowers' geographic areas.
During 1995 and 1994, the Company's policy was generally to limit new loans to
one borrower to $8.0 million. These limitations are substantially below the
limitations set forth in applicable laws and regulations.
Interest income that would have been recognized for 1995, 1994 and 1993, if
nonperforming loans at December 31, 1995, 1994 and 1993 had been performing in
accordance with their original terms, approximated $5.3 million, $8.2 million
and $11.6 million, respectively. The actual amount that was collected on these
loans during the periods and included in interest income approximated $1.6
million, $1.8 million and $3.4 million, respectively. As a result, the reduction
in interest income for 1995, 1994, and 1993 associated with nonperforming loans
held at the end of such periods approximated $3.7 million, $6.4 million and $8.2
million, respectively.
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
49
<PAGE> 51
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 leases and the allowance for loan and lease 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.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and loans on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
as impaired, if (i) it is not probable that the Company will not collect all
amounts due in accordance with the contractual terms of the loan or
(ii) the loan is not a commercial, commercial real estate or an individually
significant mortgage or consumer loan. Factors considered by management in
determining impairment include payment status and collateral value. The amount
of impairment for these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan, using
the original contractual interest rate, and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. Mortgage and consumer loans which are not individually significant
are measured for impairment collectively. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into the
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.
At December 31, 1995, total impaired loans were $27.8 million, of which $24.7
million had related allowances of $5.7 million. During the year ended December
31, 1995, the income recognized related to impaired loans was $1.5 million and
the average balance of outstanding impaired loans was $29.1 million. The Company
recognizes interest on impaired loans on a cash basis when the ability to
collect the principal balance is not in doubt; otherwise, cash received is
applied to principal balance of loan.
6. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses follow:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period $ 63,675 $ 67,385 $ 71,223
Allowance on acquired loans 2,314 -0- -0-
Provisions charged to operations 4,230 3,374 14,047
Loans and leases charged off (17,968) (17,202) (28,572)
Recoveries 8,724 10,118 10,687
-------- -------- --------
Balance at end of period $ 60,975 $ 63,675 $ 67,385
======== ======== ========
</TABLE>
7. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Land $ 11,754 $ 9,991
Buildings and improvements 45,302 41,110
Leasehold improvements 10,090 9,141
Furniture, fixtures and equipment 47,372 38,867
-------- --------
114,518 99,109
-------- --------
Less accumulated depreciation and amortization 58,497 52,602
-------- --------
$ 56,021 $ 46,507
======== ========
</TABLE>
50
<PAGE> 52
8. GOODWILL AND OTHER INTANGIBLES
A summary of goodwill and other intangibles follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Goodwill $ 20,761 $ 19,234
Core deposit premiums 2,031 1,479
-------- --------
$ 22,792 $ 20,713
======== ========
</TABLE>
Amortization of goodwill is included in other noninterest expenses and
amounted to $1,925, $1,801 and $2,756 for the years ended December 31, 1995,
1994 and 1993, respectively.
Amortization of core deposit premiums is included in interest on deposits and
amounted to $286, $244 and $290 for the years ended December 31, 1995, 1994 and
1993, respectively.
9. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31,
1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $17,275 $ 6,483 $ 1,985
Mortgage servicing rights capitalized 9,101 12,535 6,764
Amortization charged against mortgage
service fee income (3,483) (1,743) (2,266)
Mortgage servicing rights sold (2,584) -0- -0-
------- ------- -------
Balance at end of period $20,309 $17,275 $ 6,483
======= ======= =======
</TABLE>
Residential real estate mortgages are originated by the Company generally for
sale into the secondary market. Such loans are sold to institutional investors
such as the Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC"). Under loan sale and servicing agreements
with these investors, the Company generally continues to service the residential
real estate mortgages. The Company pays the investor an agreed-upon rate on the
loan, which, including a guarantee fee paid to FNMA and FHLMC, is less than the
interest rate the Company receives from the borrower. The difference is retained
by the Company as a fee for servicing the residential real estate mortgages. As
required by SFAS No. 122, the Company capitalizes mortgage servicing rights at
their fair value upon sale of the related loans.
The Company periodically purchases residential mortgage servicing rights
through a closed bid process from brokers representing financial institutions
with mortgage servicing portfolios available for sale. The payment made to
purchase such mortgage servicing rights is capitalized by the Company upon
consummation of the purchase agreement.
Residential real estate mortgages serviced for investors at December 31, 1995,
1994 and 1993 amounted to $2.6 billion, $2.1 billion and $1.6 billion,
respectively.
Mortgage servicing rights are generally amortized on a level yield method over
the estimated weighted average life of the loans. Amortization is recorded as a
charge against mortgage service fee income (a component of mortgage banking
services income). The Company's assumptions with respect to prepayments, which
affect the estimated average life of the loans, are adjusted periodically to
reflect current circumstances and to ensure that the carrying value of the
remaining mortgage servicing rights do not exceed the present value of the
estimated future net servicing income. In evaluating the fair value of the
carrying value of mortgage servicing rights, the Company assesses the estimated
life of its servicing portfolio based on data which is disaggregated by note
rate, note type and note term.
10. OTHER REAL ESTATE AND REPOSSESSED ASSETS OWNED
The following table summarizes the composition of other real estate and
repossessed assets owned, net of related reserves:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Real estate properties acquired in settlement of loans $12,679 $20,073
Other assets repossessed in settlement of non-
real estate loans 1,553 2,003
------- -------
$14,232 $22,076
======= =======
</TABLE>
51
<PAGE> 53
As a result of the adoption of 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," the Company reclassified $2.2
million of other real estate and related reserves of $96 thousand to loans and
leases and allowance for loan and lease losses, respectively.
11. INCOME TAXES
The current and deferred components of income tax expense (benefit) follow:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current (including $805, $302, and $113
respectively, of state income tax) $19,480 $16,129 $ 5,467
Deferred 3,895 (2,467) (4,668)
------- ------- -------
$23,375 $13,662 $ 799
======= ======= =======
</TABLE>
The following table reconciles the expected income tax expense (benefit)
(computed by applying the federal statutory tax rate to income (loss) before
taxes) to recorded income tax expense (benefit):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Computed tax expense $23,585 $16,572 $ 8,063
State income tax, net of federal benefits 523 196 72
Dividends received deduction --- (1) (2)
Benefit of tax-exempt income (585) (495) (391)
Merger Expenses 380 --- ---
Amortization of goodwill and other
intangibles 839 842 1,146
Low income/rehabilitation credits (1,265) (1,265) (1,264)
Book net operating loss carryback
limitation --- --- (351)
Tax bad debt reserve recapture on
Mid Maine acquisition --- 1,022 ---
Change in valuation allowance --- (3,322) (5,865)
Change in federal tax rate --- --- (478)
Other, net (102) 113 (131)
------- ------- -------
$23,375 $13,662 $ 799
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1994 follow:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $23,007 $22,991
Reserve for mobile home dealers 2,119 1,384
Accrued pension expense 848 319
Difference of tax and book basis of other
real estate owned 391 1,398
Deferred loan fees 527 1,714
Interest accrued and payments received on
nonperforming loans for tax purposes 1,096 1,606
Unrealized depreciation on investment securities -0- 5,272
Other 4,984 3,008
------- -------
Total gross deferred tax assets 32,972 37,692
Less: valuation allowance --- ---
------- -------
Net deferred tax assets 32,972 37,692
------- -------
Deferred tax liabilities
Difference of tax and book basis of leases 420 842
Difference of tax and book basis of premises
and equipment 1,747 1,556
Difference of tax and book basis of securities 522 1,119
Tax bad debt reserve 5,518 ---
Unrealized appreciation of investment securities 2,025 3
Other 2,345 2,567
------- -------
Total gross deferred tax liabilities 12,577 6,087
------- -------
Net deferred tax asset $20,395 $31,605
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company
52
<PAGE> 54
considers the scheduled reversal of deferred tax liabilities and projected
future taxable income in making this assessment. The Company estimates that
substantially all of its gross deferred tax assets and liabilities will reverse
within the next five years. In order to fully realize the net deferred tax
asset, the Company will need to generate future taxable income of approximately
$58.3 million. Pre-tax book income for the year ended December 31, 1995 was
$67.9 million. Based upon the level of 1995 taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, the Company believes it is more likely than not that it will realize
the benefits of these deductible temporary differences at December 31, 1995.
Accordingly, no valuation allowance has been recorded at December 31, 1995.
12. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The weighted average interest rate on reverse repurchase agreements was 4.64%
and 4.62% at December 31, 1995 and 1994, respectively. These borrowings were
scheduled to generally mature within 180 days. These borrowings were
collateralized by FHLMC and FNMA securities and U.S. Government obligations with
an aggregate market value of $195,861 and $137,304 at December 31, 1995 and
1994, respectively, and an aggregate amortized cost of $194,560 and $141,104 at
December 31, 1995 and 1994, respectively. Securities sold under agreements to
repurchase averaged $152,411 and $109,216 during the years ended December 31,
1995 and 1994, respectively. The maximum amount outstanding at any month-end
during the years ended December 31, 1995 and 1994 was $213,104 and $153,710,
respectively.
13. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
A summary of the borrowings from the Federal Home Loan Bank of Boston is as
follows:
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------
Principal Amounts Interest Rates Maturity Dates
- --------------------------------------------------------------------------------
<C> <C> <C>
$ 31,500 4.26% - 6.57% 1996
72,950 5.82% - 6.87% 1997
82,500 5.30% - 6.02% 1998
64,000 5.71% - 5.78% 2000
1,496 6.70% - 6.90% 2005
- --------
$252,446
========
<CAPTION>
December 31, 1994
- --------------------------------------------------------------------------------
Principal Amounts Interest Rates Maturity Dates
- --------------------------------------------------------------------------------
<C> <C> <C>
$ 54,000 4.08% - 6.31% 1995
25,500 4.26% - 5.87% 1996
252,950 5.62% - 6.87% 1997
30,000 5.30% 1998
- --------
$362,450
========
</TABLE>
Short and long-term borrowings from the Federal Home Loan Bank of Boston,
which consist of both fixed and adjustable rate borrowings, are secured by a
blanket lien on qualified collateral consisting primarily of loans with first
mortgages secured by 1 to 4 family properties, certain unencumbered investment
securities and other qualified assets.
14. SHAREHOLDERS' EQUITY
Regulatory Capital Requirements
At December 31, 1995 and 1994, the Company and each of its banking
subsidiaries were in compliance with all applicable regulatory capital
requirements and had capital ratios in excess of federal regulatory risk-based
and leverage requirements.
Dividend Limitations
Dividends paid by subsidiaries are the primary source of funds available to
the Company for payment of dividends to its shareholders. The Company's
subsidiary banks are subject to certain requirements imposed by state and
federal banking laws and regulations. These requirements, among other things,
establish minimum levels of capital and restrict the amount of dividends that
may be distributed by the subsidiary banks to the Company.
Stockholder Rights Plan
In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan
declaring a dividend of one preferred Stock Purchase Right for each outstanding
share of Common Stock. The rights will remain attached to the Common Stock and
are not exercisable except under limited circumstances
53
<PAGE> 55
relating to acquisition of, the right to acquire beneficial ownership of, or
tender offer for 20% or more of the outstanding shares of Common Stock. The
Rights have no voting or dividend privileges and, until they become exercisable,
have no dilutive effect on the earnings of the Company.
15. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET RISKS
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans, standby letters of credit,
recourse arrangements on serviced loans, and forward commitments to sell loans.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For interest rate exchange agreements and forward commitments to
sell loans, the contract or notional amounts do not represent exposure to credit
loss. The Company controls the credit risk of its forward commitments to sell
loans through credit approvals, limits and monitoring procedures.
Financial instruments with off-balance sheet risk at December 31, 1995 and
1994 follow:
<TABLE>
<CAPTION>
Contract or
Notional Amount
-------------------------
December 31,
-------------------------
1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Financial instruments with contract amounts
which represent credit risk:
Commitments to originate loans $ 336,409 $ 201,745
Unused lines and standby letters of credit 345,627 286,148
Loans serviced with recourse 48,213 74,103
Unadvanced portions of construction loans 34,215 25,940
Financial instruments with notional or contract
amounts which exceed the amount of credit risk:
Forward commitments to sell loans $ 128,000 $ 11,670
</TABLE>
Commitments to originate loans, unused lines of credit and unadvanced portions
of construction loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Because many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the borrower.
Included in commitments to originate loans, the Company had guaranteed the
rate on $83.3 million in fixed rate residential real estate loans with a
weighted average interest rate of 7.26% which were substantially hedged by the
$128.0 million in forward sales commitments noted above.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company has retained credit risk on certain residential mortgage loans
sold with full or partial recourse and on certain residential mortgage loans
whose servicing rights were acquired during 1990.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments.
Forward commitments to sell residential mortgage loans are contracts which the
Company enters into for the purpose of reducing the market risk associated with
originating loans for sale. Risks may arise from the possible inability of the
Company to originate loans to fulfill the contracts, in which case the Company
would normally purchase loans from correspondent banks or in the open market to
deliver against the contract.
54
<PAGE> 56
Legal Proceedings
The Company and certain of its subsidiaries have been named as defendants in
various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, based upon the opinions of
counsel, any such liability will not have a material effect on the consolidated
financial position or results of operations of the Company and its subsidiaries.
Lease Obligations
The Company leases certain properties used in operations under terms of
operating leases which include renewal options. Rental expense under these
leases approximated $3.4 million, $3.6 million and $3.3 million for the years
ended 1995, 1994 and 1993, respectively.
Approximate minimum lease payments over the remaining terms of the leases at
December 31, 1995 follow:
<TABLE>
<S> <C>
1996 $ 3,526
1997 3,410
1998 3,070
1999 2,904
2000 2,612
2001 and after 9,544
-------
$25,066
=======
</TABLE>
16. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit plan covering substantially
all permanent, full-time employees (except BNHC employees). Benefits are based
on career average earnings and length of service. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service-to-date, but also for those expected to be earned in the
future.
The following tables set forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheets at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $14,635 and $12,787 $ 15,181 $ 13,367
======== ========
Projected benefit obligation for service
rendered to date $ 16,599 $ 14,680
Plan assets at fair value, primarily listed
stocks and corporate bonds (16,475) (12,974)
-------- --------
Plan assets less than projected benefit obligation 124 1,706
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions (1,170) (2,753)
Unrecognized prior service cost 872 786
Unrecognized net asset being recognized
over 20.5 years 1,203 1,328
-------- --------
Accrued pension cost included in other liabilities $ 1,029 $ 1,067
======== ========
</TABLE>
Net pension cost for 1995, 1994 and 1994 included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost during the period $ 1,193 $ 987 $ 806
Interest cost on projected benefit obligation 1,053 989 900
Actual return on plan assets (2,762) 72 (1,103)
Net amortization and deferral 1,580 (1,250) (116)
------- ------- -------
Net periodic pension cost $ 1,064 $ 798 $ 487
======= ======= =======
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of
55
<PAGE> 57
projected benefit obligations was 7.0% for both 1995 and 1994. The expected
long-term rate of return on assets was 8.0% for both 1995 and 1994.
Retirement Plans
BNHC maintains a noncontributory defined benefit retirement plan covering
substantially all employees. Benefits are based on compensation and years of
service. A supplemental executive retirement plan ("SERP") was adopted during
1994 for several executive officers. The SERP is designed to offset the impact
of changes in the retirement plan which reduced benefits of highly paid
employees.
The following sets forth the funded status and amounts recognized in the
consolidated balance sheets for BNHC retirement and SERP plans:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------------------------
(In Thousands)
<S> <C> <C>
Projected benefit obligation:
Vested benefits $ 16,190 $ 12,770
Nonvested benefits 324 250
------ ------
Accumulated benefit obligation 16,514 13,020
Effect of projected future compensation levels 1,779 1,335
------ ------
Projected benefit obligation 18,293 14,355
Plan assets at fair value 15,127 12,265
------ ------
Projected benefit obligation in excess
of plan assets 3,166 2,090
Unrecognized prior service cost (322) (350)
Unrecognized net loss (2,551) (1,940)
Unrecognized net asset, net of amortization 718 846
-------- --------
Net pension and SERP liability $ 1,011 $ 646
======== ========
</TABLE>
A summary of the components of net periodic pension and SERP expense follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 504 $ 575 $ 556
Interest cost on the projected benefit
obligation 1,284 1,192 1,190
Actual return on plan assets (2,756) 211 (295)
Net amortization and deferral 1,748 (1,310) (996)
------- ------- ------
Net periodic pension and SERP expense $ 780 $ 668 $ 455
======= ======= ======
</TABLE>
The weighted average discount rates used in determining the actuarial present
value of the projected benefit obligation were 7.50% and 8.75% as of December
31, 1995 and 1994, respectively. The rate of increase in future compensation
levels used was 3.0% as of December 31, 1995 and 1994. The expected long-term
rate of return on plan assets was 9.0% in 1995 and 1994, and 10.0% in 1993. The
impact of changes in the discount rate as of December 31, 1995 was to decrease
the net pension liability by $443,000. The year end 1995 and 1994 net pension
and SERP accrued liability of $1.0 million and $646,000, respectively, is
included in other liabilities.
Thrift Incentive Plan
The Company has a Contributory Thrift Incentive Plan, covering substantially
all permanent employees after completion of one year of service. The Company
matches employee contributions based on a predetermined formula and may make
additional discretionary contributions. The total expense for 1995, 1994 and
1993 was $659 thousand, $620 thousand and $462 thousand, respectively.
Profit Sharing Employee Stock Ownership Plan
In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan
which is designed to invest primarily in Common Stock of the Company.
Substantially all employees are eligible for the Plan following one year of
service. Employees may not make contributions to the Plan but may receive a
discretionary contribution from the Company based on their pro rata share of
eligible compensation. For 1995, 1994 and 1993 the Directors voted to contribute
3%, 5% and 9% of eligible compensation, respectively. The approximate expense of
this contribution for 1995, 1994 and 1993 was $850 thousand, $1.4 million and
$2.1 million, respectively.
Stock Option Plans
The Company has adopted a Stock Option and Stock Appreciation Rights Plan for
key employees. The maximum number of shares which may be granted under the Plan
is 1,670,000 shares, of which 1,454,823 options were outstanding and 190,038
shares had been issued upon the exercise of stock options cumulatively through
December 31, 1995. All options have been issued at not less than fair
56
<PAGE> 58
market value at the date of grant and expire 10 years (10 years plus one month
in the case of non-qualified options) from the date granted. In addition, the
Plan authorizes the Company to issue stock appreciation rights (SARs) to
optionees under certain terms and conditions.
During 1995 the Company granted employees options to purchase 399,139 shares
of common stock at $21.00 per share. During 1994 the Company granted options to
purchase 487,436 shares of common stock at between $12.88 and $14.75 per share.
The Company has adopted a Stock Option Plan for nonemployee directors. The
maximum number of shares which may be granted under the plan is 75,000 shares,
of which 18,000 options, all of which were granted in 1995 at $13.63 per share,
were outstanding and -0- shares had been issued upon the exercise of the stock
options cumulatively through December 31, 1995. All options have been issued at
not less than fair market value at the date of grant and expire 10 years from
date of grant.
A summary of option activity follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of period 1,135,683 817,256
Granted during the year 417,139 487,436
Cancelled during the year 24,902 72,133
Exercised during the year 73,790 96,876
Outstanding at end of period 1,454,130 1,135,683
Exercisable at end of period 636,029 249,873
Average price of options exercisable $9.73 $6.70
Price range of options $2.75-$21.00 $2.75-$14.75
Average price of options outstanding $13.36 $10.31
SARs outstanding at end of period 2,500 2,500
</TABLE>
Employee Stock Purchase Plan
The Company has adopted an Employee Stock Purchase Plan covering all full-time
employees with one year of service. The maximum number of shares which may be
issued under the Employee Stock Purchase Plan is 676,000 shares. Employees have
the right to authorize payroll deductions up to 10% of their salary. As of
December 31, 1995, 300,318 shares had been purchased under this plan.
Supplemental Retirement Plans
The Company has adopted supplemental retirement plans for several key
officers. These plans were designed to offset the impact of changes in the
Pension Plan which reduced benefits for highly paid employees. The cost of these
plans was $537 thousand, $342 thousand and $512 thousand for 1995, 1994 and
1993, respectively.
Postretirement Benefits Other Than Pensions
The Bank sponsors a postretirement benefit program which provides medical
coverage and life insurance benefits to employees and directors who meet minimum
age and service requirements. Active employees and directors accrue benefits
over a 25 year period.
The Company recognizes costs related to post retirement benefits under the
accrual method, which recognizes costs over the employee's period of active
employment. The impact of adopting SFAS No. 106 is being amortized over a twenty
year period beginning January 1, 1993.
The following reconciles the program's funded status with amounts recognized
in the Company's Consolidated Balance Sheet at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Accumulated postretirement benefit obligation: 1995 1994
------- -------
<S> <C> <C>
Retirees $ 1,840 $ 1,994
Fully eligible active program participants 311 463
Other active program participants 542 1,255
------- -------
2,693 3,712
Plan assets --- ---
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets 2,693 3,712
Unrecognized net gain 485 5
Unrecognized prior service cost (2,290) (3,062)
------- -------
Accrued postretirement benefit cost included
in other liabilities $ 888 $ 655
======= =======
</TABLE>
57
<PAGE> 59
Net postretirement benefit cost for the year ended December 31, 1995, 1994 and
1993 included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Service cost $ 29 $ 73 $ 72
Interest cost 187 242 242
Amortization of accumulated postretirement
obligation 141 170 170
------ ------ ------
Net periodic postretirement benefit cost $ 357 $ 485 $ 484
====== ====== ======
</TABLE>
For measurement purposes, an 8% annual rate of increase in the per capita cost
of covered benefits (i.e. health care cost trend rate) was assumed in 1995 and
1994. The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rate by one percentage point would increase the accumulated postretirement
benefit obligation as of December 31, 1995 by $151 thousand and the aggregate of
the service and interest cost components of net periodic post retirement benefit
cost for the year ended December 31, 1995 by $10 thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7% in 1995 and 1994. Currently, the Bank
pays retiree benefit premiums directly on a monthly basis rather than through a
formal funded trust. Consequently, the postretirement benefit program neither
requires nor has any plan assets.
Other Postretirement Benefits
In addition to the BNHC retirement plan and SERP, BNHC sponsors a defined
benefit welfare plan that provides postretirement medical and life insurance
benefits to full-time employees who have worked 10 years and attained age 55
while in service with the Company. The plan is contributory, with retiree
contributions adjusted annually, and contains other cost-sharing features such
as deductibles and coinsurance. The Company's future contributions will be
capped at the 1996 per capita cost. The Company will continue to credit each
retiree based on years of service. Retirees will bear the cost of any future
annual increases above the 1996 cost levels.
The Company's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management. The plan is unfunded at December 31,
1995.
The following table sets forth the plan's accumulated postretirement benefit
obligation reconciled with the amount shown in the Company's balance sheet:
<TABLE>
<CAPTION>
December 31,
1995 1994
---------------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 2,330 $ 2,209
Fully eligible plan participants 506 406
Other active plan participants 1,162 836
------- -------
3,998 3,451
------- -------
Plan assets $ -0- $ -0-
Accumulated postretirement benefit obligation
in excess of plan assets $ 3,998 $ 3,451
Unrecognized net (loss) gain (216) 234
Unrecognized transition obligation (2,929) (3,101)
------- -------
Accrued postretirement benefit cost $ 853 $ 584
======= =======
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 71 $ 72 $ 71
Interest cost 282 272 284
Amortization of transition obligation
over 20 years 172 172 172
---- ---- ----
Net periodic postretirement benefit cost $525 $516 $527
==== ==== ====
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits (i.e. health care cost trend rate) is 9.0% for 1996 and is
assumed to decrease gradually to 5.5% for seven years and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. For example, increasing the assumed health care cost
trend rate by one percentage point would increase the accumulated postretirement
benefit obligation as of December 31, 1995 by $272,000 and the aggregate of the
service and interest cost components of net periodic
58
<PAGE> 60
postretirement benefit cost for 1995 by $21,000. The weighted average discount
rate used in determining the accumulated postretirement benefit obligation was
7.25% at December 31, 1995 and 8.5% at December 31, 1994.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value estimates are made as of a specific point in
time based on the characteristics of the financial instruments and relevant
market information. Where available, quoted market prices are used. In other
cases, fair values are based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and judgments made regarding risk
characteristics of various financial instruments, discount rates, estimates of
future cash flows, future expected loss experience and other factors. Changes in
assumptions could significantly affect these estimates. Derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in an immediate sale of the instrument. Also,
because of differences in methodologies and assumptions used to estimate fair
values, the Company's fair values should not be compared to those of other
banks.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the Company. For certain assets and
liabilities, the information required under SFAS No. 107 is supplemented with
additional information relevant to an understanding of the fair value. Also,
fair values are presented for certain assets that are not financial instruments
under the definition in SFAS No. 107.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments and certain non-financial
instruments:
Cash and cash equivalents, including cash and due from banks, interest-bearing
deposits in banks and federal funds sold. For these cash and cash equivalents,
which have maturities of 90 days or less, the carrying amounts reported in the
balance sheet approximate fair values.
Securities available for sale and loans held for sale. Fair values, including
fair values of mortgage-backed securities, are based on quoted bid market
prices, where available. Where quoted market prices for an instrument are not
available, fair values are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instrument being
valued. Fair values are calculated based on the value of one unit without regard
to premiums or discounts that might result from selling all of the Company's
holdings of a particular security in one transaction.
Loans and leases. The fair values of commercial, commercial real estate,
residential real estate, and certain consumer loans are estimated by discounting
the contractual cash flows using interest rates currently being offered for
loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of
credit and credit card receivables, carrying value approximates fair value. This
method of estimating the fair value of the credit card portfolio excluded the
value of the ongoing customer relationships, a factor which can represent a
significant premium over book value.
Lease financing receivables are similar to loans in many respects, fair values
are provided and were estimated using the methodologies used for the loan
portfolio.
For nonperforming loans and certain loans where the credit quality of the
borrower has deteriorated significantly, fair values are estimated by
discounting cash flows at a rate commensurate with the risk associated with
those cash flows.
Mortgage servicing rights. The fair value of the Company's mortgage servicing
rights is based on the expected present value of future mortgage servicing
income, net of estimated servicing costs.
Interest and dividends receivable. The carrying amount of interest and
dividends receivable approximates its fair value.
Deposits. The fair value of deposits with no stated maturity is equal to the
carrying amount. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered
on the deposit products of similar maturities.
The fair value estimates for deposits do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of alternative forms of funding ("deposit base intangibles")
Borrowings, including federal funds purchased, securities sold under
repurchase agreements, borrowings from the Federal Home Loan Bank of Boston,
subordinated capital notes and other borrowings. The fair value of the Company's
long-term borrowings is estimated based on quoted market prices for
59
<PAGE> 61
the issues for which there is a market, or by discounting cash flows based on
current rates available to the Company for similar types of borrowing
arrangements. For short-term borrowings that mature or reprice in 90 days or
less, carrying value approximates fair value.
Off-balance sheet instruments:
Interest rate exchange agreements. Fair values for interest rate exchange
agreements are based on established pricing models.
Commitments to originate loans and commitments to extend credit and standby
letters of credit. In the course of originating loans and extending credit and
standby letters of credit, the Company will charge fees in exchange for its
lending commitment. While these commitment fees have value, the Company has not
estimated their value due to the short-term nature of the underlying
commitments.
Forward commitments to sell loans. The fair value of the Company's forward
commitments to sell loans reflects the value of origination fees and excess
servicing recognizable upon sale of loans net of any cost to the Company if it
fails to meet its sale obligation. Of the $128.0 million of forward sales
commitments at December 31, 1995, the Company had $71.9 million available to
sell at that date as well as sufficient loan originations subsequent to December
31, 1995 to fulfill the commitments. Consequently, the Company has no unmet
sales obligation to value and due to the short-term nature of the commitments
has not estimated the value of the fees and servicing.
Loans serviced with recourse. Under certain of the Company's servicing
arrangements with investors, the Company has recourse obligation to those
serviced loan portfolios. In the event of foreclosure on a serviced loan, the
Company is obligated to repay the investor to the extent of the investor's
remaining balance after application of proceeds from the sale of the underlying
collateral. To date, losses related to these recourse arrangements have been
insignificant and while the Company cannot project future losses, the fair value
of this recourse obligation is deemed to be likewise insignificant.
A summary of the fair values of the Company's significant financial
instruments and certain non-financial instruments at December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ON-BALANCE SHEET ASSETS AND LIABILITIES
Assets:
Cash and cash equivalents $ 290,691 $ 290,691 $ 224,507 $ 224,507
Securities 766,648 766,648 719,194 715,632
Loans held for sale 70,979 71,872 11,092 11,163
Net loans and leases 2,717,608 2,776,912 2,575,902 2,540,052
Mortgage servicing rights 20,309 22,140 17,275 21,502
Interest and dividends
receivable 30,756 30,756 27,806 27,806
Liabilities:
Deposit (with no stated
maturity) 1,834,043 1,834,043 1,673,708 1,673,708
Time deposits 1,363,095 1,382,145 1,212,137 1,190,933
Borrowings 456,932 458,116 505,347 496,649
Interest payable 9,816 9,816 7,229 7,229
</TABLE>
18. MERGERS AND ACQUISITIONS (UNAUDITED)
Completed During 1995 and 1994
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 the 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 in 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-interest 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
60
<PAGE> 62
of $170.5 million and total shareholders' equity of $11.4 million. Substantially
concurrently with the merger of MMSB into the Bank, the Bank sold all the assets
and liabilities relating to MMSB's Hampton (New Hampshire) Division to
Portsmouth.
Pending at December 31, 1995
On September 29, 1995 and amended as of October 31, 1995, the Company entered
into an agreement with Shawmut Bank NH ("Shawmut") to acquire five branches of
Shawmut (the "Branch Acquisition). The purchase will result in the transfer of
approximately $212 million in loans to the Company and its assumption of
approximately $160 million in deposits. The purchase was completed during the
first quarter of 1996.
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995
--------------------------------------------
Fourth(1) Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $80,162 $79,490 $74,364 $71,833
Interest expense 35,854 35,344 32,970 30,727
Provision for loan losses 1,080 1,080 1,040 1,030
Net interest income after
provision for loan losses 43,228 43,066 40,354 40,076
Noninterest income 8,379 8,325 7,616 7,097
Noninterest expenses 35,253 31,901 30,983 32,143
Income before income taxes 16,354 19,490 16,987 15,030
Income tax expense 5,930 6,701 5,776 4,968
Net income 10,424 12,789 11,211 10,062
Earnings per share $ 0.42 $ 0.51 $ 0.46 $ 0.41
</TABLE>
(1) In the fourth quarter of 1995, the Company recorded $3.7 million ($2.7
million after tax), or $0.11 per share of nonrecurring merger expenses.
<TABLE>
<CAPTION>
1994
--------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $69,669 $66,043 $62,090 $58,795
Interest expense 28,805 27,169 26,070 25,958
Provision for loan losses 490 252 1,182 1,450
Net interest income after
provision for loan losses 40,374 38,622 34,838 31,387
Noninterest income 5,855 7,210 6,626 7,935
Noninterest expenses 32,016 32,983 30,111 30,027
Income before income taxes 14,213 12,849 11,353 9,295
Income tax expense 4,365 3,072 3,479 2,746
Net income 9,848 9,777 7,874 6,549
Earnings per share $ 0.40 $ 0.39 $ 0.32 $ 0.26
</TABLE>
61
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Peoples Heritage Financial Group, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Peoples Heritage Financial Group, Inc. and subsidiaries (the "Company") as of
December 31, 1995 and 1994, and the related supplemental consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These supplemental
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Peoples Heritage Financial Group, Inc. and Bank of New Hampshire
Corporation on April 2, 1996, which has been accounted for as a
pooling-of-interests as described in Note 1 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the date
of consummation. These financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Peoples Heritage Financial Group, Inc. and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Heritage Financial Group, Inc. and subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each of
the years in the three-year period ending December 31, 1995, in conformity with
generally accepted accounting principles applicable after financial statements
are issued for a period which includes the date of consummation of the business
combination.
As discussed in Note 1, the Company changed its method of accounting for
mortgage servicing rights effective January 1, 1995.
Boston, Massachusetts
June 25, 1996
62
<PAGE> 1
EXHIBIT 99(b)
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Supplemental Consolidated Financial Statements 1
Notes to Supplemental Consolidated Financial Statements 6
Selected Supplemental Consolidated Financial Data 7
</TABLE>
<PAGE> 2
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 164,587 $ 190,436
Federal funds sold 49,000 100,255
Securities available for sale,
at market value 767,539 766,648
Loans held for sale, market value
$88,342 and $71,872, respectively 88,185 70,979
Loans and leases:
Residential real estate mortgages 984,722 798,076
Commercial real estate mortgages 836,935 797,686
Commercial business loans and leases 410,476 408,592
Consumer loans and leases 790,310 774,229
----------- -----------
3,022,443 2,778,583
----------- -----------
Less: Allowance for loan and
lease losses 65,533 60,975
----------- -----------
Net loans and leases 2,956,910 2,717,608
----------- -----------
Bank premises and equipment 56,809 56,021
Goodwill and other intangibles 40,100 22,792
Mortgage servicing rights 23,187 20,309
Other real estate and repossessed
assets owned 12,954 14,232
Deferred income taxes 33,045 32,972
Interest and dividends receivable 31,019 30,726
Other assets 34,577 35,148
----------- -----------
$ 4,257,912 $ 4,058,126
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 599,424 $ 557,896
Money market access accounts 510,216 490,575
Certificates of deposit (including
certificates of $100 or more of
$138,468 and $116,472, respectively) 1,463,867 1,363,095
NOW accounts 357,891 351,481
Demand deposits 416,029 434,091
----------- -----------
Total deposits 3,347,427 3,197,138
----------- -----------
Federal funds purchased 20,337 1,500
Securities sold under repurchase
agreements 164,674 180,957
Borrowings from Federal Home Loan
Bank of Boston 291,444 252,446
Other borrowings 21,265 22,029
Deferred income taxes 10,566 12,577
Other liabilities 40,044 36,554
----------- -----------
Total liabilities 3,895,757 3,703,201
----------- -----------
Shareholders' Equity:
Preferred stock (par value $0.01 per share,
5,000,000 shares authorized, none issued) -0- -0-
Common stock (par value $0.01 per share,
30,000,000 shares authorized, 25,596,220
shares issued) 256 256
Paid-in capital 224,268 224,268
Retained earnings 143,379 134,443
Net unrealized gain on securities
available for sale 807 3,763
Treasury stock at cost (440,091 shares and
524,062 shares, respectively) (6,555) (7,805)
----------- -----------
Total shareholders' equity 362,155 354,925
----------- -----------
$ 4,257,912 $ 4,058,126
=========== ===========
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
1
<PAGE> 3
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
----------- ------------
<S> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 67,930 $ 60,037
Interest on mortgage-backed investments 3,496 3,098
Interest on other investments 8,904 8,142
Dividends on equity securities 424 556
----------- ------------
Total interest and dividend income 80,754 71,833
----------- ------------
Interest expense:
Interest on deposits 29,568 23,588
Interest on borrowed funds 6,047 7,139
----------- ------------
Total interest expense 35,615 30,727
----------- ------------
Net interest income 45,139 41,106
Provision for loan losses 450 1,030
----------- ------------
Net interest income after
provision for loan losses 44,689 40,076
----------- ------------
Noninterest income:
Mortgage banking services 3,364 2,218
Customer services 3,269 2,717
Trust and investment advisory services 1,644 1,349
Loan related services 442 383
Net securities gains (losses) 504 (95)
Other noninterest income 246 525
----------- ------------
9,469 7,097
----------- ------------
Noninterest expenses:
Salaries and employee benefits 18,238 16,419
Occupancy 3,297 2,657
Data processing 2,798 2,044
Equipment 2,008 1,478
Advertising and marketing 993 1,176
Deposit and other assessments 345 1,879
Collection and carrying costs of
nonperforming assets 504 814
Merger expenses 453 300
Other noninterest expenses 5,946 5,376
----------- ------------
34,582 32,143
----------- ------------
Income before income tax 19,576 15,030
Applicable income tax 6,970 4,969
----------- ------------
Net income $ 12,606 $ 10,061
=========== ============
Weighted average shares outstanding 25,128,427 24,477,164
Earnings per share $ 0.50 $ 0.41
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
2
<PAGE> 4
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NET
PAR PAID IN RETAINED UNREALIZED TREASURY
VALUE CAPITAL EARNINGS GAIN (LOSS) STOCK TOTAL
----- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $256 $224,267 $ 99,955 $(9,079) $(10,960) $304,439
Treasury stock purchased 646,600
shares at an average price of $12.84) -- -- -- -- (8,301) (8,301)
Treasury stock issued for employee
benefit plans (27,789 shares at
an average price of $6.12) -- -- (162) -- 387 225
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- 5,313 -- 5,313
Net income -- -- 10,061 -- -- 10,061
Cash dividends $0.09 -- -- (2,424) -- -- (2,424)
---- -------- -------- -------- -------- --------
Balances at March 31, 1995 $256 $224,267 $107,430 $ (3,766) $(18,874) $309,313
==== ======== ======== ======== ======== ========
Balances at December 31, 1995 $256 $224,268 $134,443 $ 3,763 $ (7,805) $354,925
Treasury stock issued for employee
benefit plans (83,971 shares at
an average price of $8.75) -- -- (215) -- 1,250 1,035
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- (2,956) -- (2,956)
Net income -- -- 12,606 -- -- 12,606
Cash dividends $0.14 -- -- (3,455) -- -- (3,455)
---- -------- -------- -------- -------- --------
Balances at March 31, 1996 $256 $224,268 $143,379 $ 807 $ (6,555) $362,155
==== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
3
<PAGE> 5
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,606 $ 10,061
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 450 1,030
Provision for depreciation 1,689 1,818
Provision for losses and writedowns
(credits) of other real estate owned -0- (869)
Amortization of goodwill and other
intangibles 923 511
Amortization of servicing rights 944 814
Net (increase) decrease in net
deferred tax assets (452) 137
Net losses realized from sales of
other real estate owned 54 894
Net (gains) losses realized from sales
of securities and consumer loans (504) 95
Net (gains) losses realized from sales
of loans held for sale (a component
of mortgage banking services) 510 (529)
Proceeds from sales of loans and
loans held for sale 233,363 70,955
Residential loans originated and
purchased for sale (251,079) (52,544)
Net decrease in interest and dividends
receivable and other assets 276 2,266
Net increase (decrease) in other
liabilities 3,493 (4,469)
--------- --------
Net cash provided by operating activities $ 2,273 $ 30,170
--------- --------
Cash flows from investing activities:
Maturities of investment securities $ -0- $ 45,362
Purchases of investment securities -0- (44,923)
Proceeds from sales of securities
available for sale 31,143 7,228
Proceeds from maturities and principal
repayments of securities available
for sale 150,528 39,058
Purchases of securities available
for sale (186,647) (45,261)
Net (increase) decrease in loans and
leases (239,570) (14,098)
Purchase of mortgage servicing rights (3,822) (273)
Premiums paid on deposits purchased (18,231) -0-
Net additions to premises and equipment (2,477) (1,590)
Proceeds from sales of other real
estate owned 545 3,541
Net decrease in repossessed
assets owned 498 1,674
--------- --------
Net cash (used) by investing activities $(268,033) $ (9,282)
--------- --------
</TABLE>
4
<PAGE> 6
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 150,289 $ (12,966)
Net increase (decrease) in securities
sold under repurchase agreements (16,283) 18,627
Advances from Federal Home Loan Bank
of Boston borrowings 110,000 50,000
Payments on Federal Home Loan Bank of
Boston borrowings (71,002) (55,000)
Net (decrease) in other borrowings (765) (3,725)
Sale of treasury stock 1,035 225
Purchase of treasury stock -0- (8,301)
Cash dividends paid to shareholders (3,455) (2,423)
--------- ---------
Net cash provided (used) by financing
activities $ 169,819 $ (13,563)
--------- ---------
Increase (decrease) in cash and cash
equivalents $ (95,941) $ 7,325
Cash and cash equivalents at beginning
of period 289,191 220,103
--------- ---------
Cash and cash equivalents at end of
period $ 193,250 $ 227,428
========= =========
Supplemental disclosures of information:
Interest paid on deposits and borrowings $ 34,002 $ 29,964
Income taxes paid 371 525
Income tax refunds 38 44
Noncash investing transactions:
Loans transferred to other real estate
owned 790 2,302
Loans originated to finance the sales of
other real estate owned 971 2,886
Increases (decreases) resulting from the
adoption of SFAS No. 115:
Securities available for sale (4,588) 8,346
Deferred income taxes - liabilities (1,632) 3,033
Net unrealized gain (loss) on
securities available for sale (2,956) 5,313
</TABLE>
5
<PAGE> 7
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
Note 1 - Basis of Presentation
The accompanying unaudited supplemental 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 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 months ended March 31, 1996
are not necessarily indicative of results that may be expected for any other
interim period or the entire year ending December 31, 1996. Certain amounts in
prior periods have been reclassified to conform to the current presentation.
On April 2, 1996,the Company acquired Bank of New Hampshire Corporation. The
acquisition was accounted for as a pooling of interests and accordingly, the
financial information for all prior periods presented has been restated to
present the combined financial condition and results of operations as if the
combination had been in effect for all periods presented.
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisition of BNHC on April 2, 1996.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
the Company after financial statements covering the date of consummation of the
business combination are issued.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-Lived Assets to be Disposed of." The implementation of this
Statement did not have a material effect on the Company's results of operations
or financial condition.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The company has elected to continue to follow the
accounting under Accounting Principal Board ("APB") Opinion No. 25. SFAS No. 123
requires companies which elect to continue to follow APB Opinion No. 25 to
disclose in the notes to their financial statements the pro forma net income and
earnings per share as if the value based method established under SFAS 123 had
been applied.
6
<PAGE> 8
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
BALANCE SHEET DATA: 1996 1995
---------- ------------
<S> <C> <C>
Total assets $4,257,912 $4,058,126
Securities available for sale 767,539 766,648
Total loans, net(1) 2,956,910 2,717,608
Goodwill and other intangibles 40,100 22,792
Deposits 3,347,427 3,197,138
Borrowings 497,720 456,932
Shareholders' equity 362,155 354,925
Nonperforming assets(2) 53,922 56,752
Allowance for loan losses 65,533 60,975
Book value per share 14.40 14.16
Tangible book value per share 12.80 13.25
<CAPTION>
Three Months Ended
March 31,
-------------------------
OPERATIONS DATA: 1996 1995
------- --------
<S> <C> <C>
Interest and dividend income $80,754 $ 71,833
Interest expense 35,615 30,727
------- --------
Net interest income 45,139 41,106
Provision for loan losses 450 1,030
------- --------
Net interest income
after provision for loan
losses 44,689 40,076
------- --------
Net securities gains (losses) 504 (95)
Other noninterest income 8,965 7,192
Noninterest expense 34,582 32,143
------- --------
Income before income
tax expense 19,576 15,030
Income tax expense 6,970 4,969
------- --------
Net income $12,606 $ 10,061
======= ========
Net income per share $ 0.50 $ 0.41
Dividends per share $ 0.14 $ 0.09
<CAPTION>
Three Months Ended March 31,
-----------------------------
OTHER DATA(3): 1996 1995
------ ------
<S> <C> <C>
Return on average assets 1.24% 1.10%
Return on average equity(4) 14.20 13.04
Average equity to average
assets(4) 8.76 8.46
Interest rate spread(5) 4.19 4.35
Net interest margin(5) 4.79 4.87
Tier I leverage capital ratio
at end of period 7.95 7.86
Dividend payout ratio 27.38 21.90
Nonperforming loans as a percent
of total loans at end of period(2) 1.36 2.18
Nonperforming assets as a percent
of total assets at end of
period(2) 1.27 1.97
Allowance for loan losses as a
percent of nonperforming loans
at end of period 159.96 103.95
Full service banking offices 111 97
</TABLE>
7
<PAGE> 9
- ----------------
(1) Does not include loans held for sale.
(2) Nonperforming assets consist of nonperforming loans, other real estate
owned, in-substance foreclosures and repossessions, net of related reserves
where appropriate. Nonperforming loans consist of non-accrual loans, accruing
loans 90 days or more overdue and troubled debt restructurings.
(3) With the exception of end of period ratios, all ratios are based on average
daily balances during the indicated periods and are annualized where
appropriate.
(4) Average equity excludes the effect of unrealized gains or losses on
securities available for sale.
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities (which do not include non-interest bearing demand
accounts), and net interest margin represents net interest income as a percent
of average interest-earning assets, in each case calculated on a fully-taxable
equivalent basis.
8
<PAGE> 10
Average Balance Analysis. 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. For purposes of the table, (i) income
from interest-earning assets and net interest income is presented on a
fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) 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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------
1996 1995
---------------------------- -----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance(1) Interest Rate(1)
---------- -------- ------ ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases(2) $2,959,218 $68,068 9.25% $2,651,299 $60,211 9.21%
Investment securities(3) 752,285 11,646 6.23 722,676 10,848 6.09
Federal funds sold 93,232 1,235 5.33 69,905 1,014 5.88
---------- ------- ---------- -------
Total earning assets 3,804,735 80,949 8.56 3,443,880 72,073 8.49
Nonearning assets 272,408 ------- 253,423 -------
---------- ----------
Total assets $4,077,143 $3,697,303
========== ==========
Interest-bearing deposits:
Regular savings $ 575,680 3,979 2.78 $ 623,919 4,411 2.87
NOW accounts 343,631 1,106 1.29 312,565 1,160 1.51
Money market access accounts 504,353 4,639 3.70 343,577 2,757 3.25
Certificates of deposit 1,406,904 19,843 5.67 1,226,949 15,260 5.04
---------- ------- ---------- -------
Total interest-bearing deposits 2,830,568 29,567 4.20 2,507,010 23,588 3.82
Borrowed funds 450,311 6,048 5.40 501,456 7,139 5.77
---------- ------- ---------- -------
Total interest-bearing liabilities 3,280,879 35,615 4.37 3,008,466 30,727 4.14
---------- ------- ---------- -------
Demand deposit accounts 395,453 330,393
Other liabilities 43,838 45,550
Shareholders' equity(3) 356,973 312,894
---------- ----------
Total liabilities and shareholders' equity $4,077,143 $3,697,303
========== ==========
Net earning assets $ 523,856 $ 435,414
========== ==========
Net interest income (fully-taxable
equivalent) 45,334 41,346
Less: fully-taxable equivalent
adjustments (195) (240)
------- -------
Net interest income $45,139 $41,106
======= =======
Net interest rate spread (fully-taxable
equivalent) 4.19 4.35
Net interest margin (fully-taxable
equivalent) 4.79 4.87
</TABLE>
- --------------------
(1)Annualized.
(2)Loans and leases include portfolio loans and leases, loans held for sale
and nonperforming loans.
(3)Excludes effect of unrealized gains or losses on securities available for
sale.
9
<PAGE> 11
Rate/Volume Analysis. The following table presents certain information on
a fully-taxable equivalent basis regarding changes in interest income and
interest expense of the Company for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided with respect to changes attributable to (1) changes in rate (change in
rate multiplied by old volume), (2) changes in volume (change in volume
multiplied by old rate) and (3) changes in rate/volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996 vs.
Three Months Ended March 31, 1995
--------------------------------------------
Increase (Decrease) Due to
------------------------------
Rate/
Rate Volume Volume Total
------- ------- ----- -------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-earnings assets:
Loans and leases:(1) $ 272 $ 7,051 $ 534 $ 7,857
Investment securities 249 448 101 798
Federal funds sold (96) 341 (24) 221
------- ------- ----- -------
Total 425 7,840 611 8,876
------- ------- ----- -------
Interest-bearing liabilities:
Deposits:
Regular savings (135) (344) 47 (432)
NOW accounts (164) 116 (7) (54)
Money market access accounts 380 1,301 201 1,882
Certificates of deposit 1,918 2,257 409 4,583
------- ------- ----- -------
Total deposits 1,999 3,330 650 5,979
Borrowed funds (464) (734) 107 (1,091)
------- ------- ----- -------
Total 1,535 2,596 757 4,888
------- ------- ----- -------
Net interest income (fully taxable equivalent) $(1,110) $ 5,244 $(146) $ 3,988
======= ======= ===== =======
</TABLE>
Mortgage Banking Services Income. The following table sets forth certain
information relating to the Company's mortgage banking activities during the
periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
Residential mortgages serviced for investors $2,701,552 $2,348,838
========== ==========
Residential mortgage sales income $ 1,532 $ 442
Residential mortgage service income 1,832 1,776
---------- ----------
Total mortgage banking services income $ 3,364 $ 2,218
========== ==========
</TABLE>
10
<PAGE> 12
Investment Securities. The following table sets forth the Company's
investment securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(In Thousands)
<S> <C> <C>
Bonds and other debt securities:
U.S. Government and federal agencies $489,203 $526,576
Tax-exempt bonds and notes 19,254 10,837
Other bonds and notes 7,873 5,694
Mortgage-backed securities 223,185 195,823
--------- ---------
Total debt securities 739,515 738,930
--------- ---------
Equities:
FHLB stock 23,962 23,793
Other securities 4,062 3,925
--------- ---------
Total equity securities 28,024 27,718
--------- ---------
Total investment securities $767,539 $766,648
========= =========
</TABLE>
Loan Portfolio Composition. The following table sets forth information
concerning the Company's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------------- ----------------------
% of % of
Amount Loans Amount Loans
---------- ------ ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $ 984,722 32.58% $ 798,076 28.72%
Commercial real estate loans 836,935 27.69 797,686 28.71
Commercial business loans and leases 410,476 13.58 408,592 14.71
Consumer loans and leases 790,310 26.15 774,229 27.86
---------- ------ ---------- ------
Total loans receivable 3,022,443 100.00% 2,778,583 100.00%
Allowance for loan losses 65,533 ====== 60,975 ======
---------- ----------
Net loans receivable $2,956,910 $2,717,608
========== ==========
</TABLE>
11
<PAGE> 13
Nonperforming Loans and Other Real Estate Owned. The following table sets
forth information regarding nonperforming loans and leases and other
nonperforming assets held by the Company at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(Dollars in Thousands)
<S> <C> <C>
Residential real estate loans:
Non-accrual loans $ 6,089 $ 5,713
Accruing loans 90 days overdue 3,800 3,728
------- -------
Total 9,889 9,441
------- -------
Commercial real estate loans:
Non-accrual loans 16,917 17,029
Accruing loans 90 days overdue 128 --
Troubled debt restructurings 1,793 3,186
------- -------
Total 18,838 20,215
------- -------
Commercial business loans and leases:
Non-accrual loans 5,631 6,735
Accruing loans 90 days overdue 111 25
Troubled debt restructurings 1,349 1,859
------- -------
Total 7,091 8,619
------- -------
Consumer loans:
Non-accrual loans 4,099 3,586
Accruing loans 90 days overdue 1,051 659
------- -------
Total 5,150 4,245
------- -------
Total nonperforming loans:
Non-accrual loans 32,736 33,063
Accruing loans 90 days overdue 5,090 4,412
Troubled debt restructurings 3,142 5,045
------- -------
Total 40,968 42,520
------- -------
Other nonperforming assets:
Other real estate owned, net of related
reserves 11,089 12,679
Repossessions, net of related reserves 1,865 1,553
------- -------
Total 12,954 14,232
------- -------
Total nonperforming assets $53,922 $56,752
======= =======
Total nonperforming loans as a
percentage of total loans 1.36% 1.53%
Total nonperforming assets as a
percentage of total assets 1.27 1.40
Total nonperforming assets as a
percentage of total loans and total
other nonperforming assets 1.78 2.03
</TABLE>
12
<PAGE> 14
Activity in the Allowance for Loan and Lease Losses. The following table
sets forth information concerning the activity in the Company's allowance for
loan and lease losses during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Average loans and leases outstanding $2,959,218 $2,651,299
========== ==========
Allowance at the beginning of period $ 60,975 $ 63,675
Additions due to acquisitions and
purchases 4,310 --
---------- ----------
Charges-offs:
Residential real estate mortgages 434 819
Commercial real estate mortgages 888 4,724
Commercial business loans and leases 855 401
Consumer loans and leases 741 613
---------- ----------
Total loans charged off 2,918 6,557
---------- ----------
Recoveries:
Residential real estate mortgages 62 69
Commercial real estate mortgages 2,060 501
Commercial business loans and leases 420 649
Consumer loans and leases 174 95
---------- ----------
Total loans recovered 2,716 1,314
---------- ----------
Net charge-offs 202 5,243
Additions charged to operating expenses 450 1,030
---------- ----------
Allowance at end of period $ 65,533 $ 59,462
========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.03% 0.79%
Ratio of allowance to end of period loans
and leases 2.17 2.26
Ratio of allowance to nonperforming 159.96 103.95
loans and leases at end of period
</TABLE>
Allocation of Allowance for Loan and Lease Losses. The following table
sets forth information concerning the allocation of the Company's allowance for
loan and lease losses by loan categories at the dates indicated. For information
about the percent of total loans in each category to total loans, see "Loan
Portfolio Composition."
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------------------- --------------------------
Allowance to Allowance to
Percent of Percent of Total
Total Loans Loans
Amount by Category Amount by Category
------- ------------ ------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $ 8,373 0.85% $10,118 1.27%
Commercial real estate loans 37,636 4.50 31,673 3.97
Commercial business
loans and leases 9,532 2.32 9,491 2.32
Consumer loans and leases 9,992 1.26 9,693 1.25
------- ---- ------- ----
$65,533 2.17 $60,975 2.19
======= ==== ======= ====
</TABLE>
13
<PAGE> 15
Deposits. The following table sets forth the distribution of the Company's
deposits by type of deposit at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------------------- ---------------------
% of % of
Amount Deposits Amount Deposits
---------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-brokered deposits:
Demand accounts $ 416,029 12.43% $ 434,091 13.58%
NOW accounts 357,891 10.69 351,481 10.99
Savings accounts 599,424 17.91 557,896 17.45
Money market access accounts 510,216 15.24 490,575 15.34
Certificates of deposit:
$100,000 or more 138,468 4.14 116,472 3.64
Other 1,325,399 39.59 1,246,623 39.00
---------- ------ ---------- ------
1,463,867 43.73 1,363,095 42.63
---------- ------ ---------- ------
Total deposits $3,347,427 100.00% $3,197,138 100.00%
========== ====== ========== ======
</TABLE>
At March 31, 1996, the Company had $138.5 million of certificates of
deposit in amounts of $100,000 or more outstanding maturing as follows: $44.1
million within three months, $20.2 million over three months through six months,
$22.5 million over six months through 12 months and $51.7 million thereafter.
Regulatory Capital Requirements. The following table sets forth the
regulatory capital ratios of the Company, Peoples Heritage Bank and Bank of New
Hampshire at March 31, 1996.
<TABLE>
<CAPTION>
March 31, 1996
------------------------
Required
Minimums Actual
-------- ------
<S> <C> <C>
THE COMPANY:
Risk-based capital ratios:
Tier I 4.00% 11.91%
Total 8.00 13.81
Tier I leverage capital ratio(1) 4.00 7.95
PEOPLES HERITAGE BANK:
Risk-based capital ratios:
Tier I 4.00 10.89
Total 8.00 12.16
Tier I leverage capital ratio(1) 4.00 7.58
BANK OF NEW HAMPSHIRE:
Risk-based capital ratios:
Tier I 4.00 12.14
Total 8.00 13.40
Tier I leverage capital ratio(1) 4.00 7.34
</TABLE>
- -----------------
(1) Bank holding companies and banks, including the Company and its banking
subsidiaries, may be required to maintain a Tier I leverage capital ratio of
4.0% to 5.0% or more. The regulatory agencies have not advised the Company or
its banking subsidiaries of a specific Tier I leverage capital ratio requirement
to date.
14
