FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-16947
PEOPLES HERITAGE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Maine 01-0137770
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
One Portland Square, Portland, Maine 04112
(Address of principal executive offices) (Zip Code)
(207) 761-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the Registrant's
classes of common stock as of August 1, 1996 is:
Common stock, par value $.01 per share 25,190,748
(Class) (Outstanding)
<PAGE>
INDEX
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995.
Consolidated Statements of Income - Three months
ended June 30, 1996 and 1995; six months ended
June 30, 1996 and 1995.
Consolidated Statements of Changes in
Shareholders' Equity - Six months ended
June 30, 1996 and 1995.
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal proceedings.
Item 2. Changes in securities.
Item 3. Defaults upon senior securities.
Item 4. Submission of matters to a vote of security
holders.
Item 5. Other information.
Item 6. Exhibits and reports on Form 8-K.
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 234,481 $ 190,436
Federal funds sold 32,500 100,255
Securities available for sale,
at market value 757,453 766,648
Loans held for sale, market value
$66,190 and $71,872, respectively 65,957 70,979
Loans and leases:
Residential real estate mortgages 1,022,595 798,076
Commercial real estate mortgages 820,871 797,686
Commercial business loans and leases 432,446 408,592
Consumer loans and leases 839,177 774,229
3,115,089 2,778,583
Less: Allowance for loan and
lease losses 63,654 60,975
Net loans and leases 3,051,435 2,717,608
Bank premises and equipment 57,357 56,021
Goodwill and other intangibles 38,849 22,792
Mortgage servicing rights 26,326 20,309
Other real estate and repossessed
assets owned 11,349 14,232
Deferred income taxes 32,194 32,972
Interest and dividends receivable 29,635 30,726
Other assets 34,173 35,148
$4,371,709 $4,058,126
Liabilities and Shareholders' Equity
Deposits:
Regular savings $ 598,386 $ 557,896
Money market access accounts 508,919 490,575
Certificates of deposit (including
certificates of $100 or more of
$158,657 and $116,472, respectively) 1,443,205 1,363,095
NOW accounts 366,664 351,481
Demand deposits 465,909 434,091
Total deposits 3,383,083 3,197,138
Federal funds purchased -0- 1,500
Securities sold under repurchase
agreements 149,417 180,957
Borrowings from Federal Home Loan
Bank of Boston 401,442 252,446
Other borrowings 20,465 22,029
Deferred income taxes 10,934 12,577
Other liabilities 40,108 36,554
Total liabilities 4,005,449 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,
100,000,000 shares and 30,000,000 shares
authorized, respectively, 25,596,220
shares issued) 256 256
Paid-in capital 224,268 224,268
Retained earnings 149,175 134,443
Net unrealized gain (loss) on securities
available for sale (1,159) 3,763
Treasury stock at cost (421,666 shares and
524,062 shares, respectively) (6,280) (7,805)
Total shareholders' equity 366,260 354,925
$4,371,709 $4,058,126
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and
leases (1) $71,292 $61,580 $139,222 $121,617
Interest on mortgage-backed
investments 4,011 3,060 7,507 6,158
Interest on other investments 8,294 9,364 17,198 17,506
Dividends on equity
securities 488 433 912 989
Total interest and
dividend income 84,085 74,437 164,839 146,270
Interest expense:
Interest on deposits 29,788 25,977 59,356 49,565
Interest on borrowed funds 7,466 6,992 13,513 14,131
Total interest expense 37,254 32,969 72,869 63,696
Net interest income 46,831 41,468 91,970 82,574
Provision for loan losses 450 1,040 900 2,070
Net interest income after
provision for loan
losses 46,381 40,428 91,070 80,504
Noninterest income:
Customer services 3,647 2,960 6,916 5,677
Mortgage banking services 3,171 2,628 6,535 4,846
Trust and investment
advisory services 1,880 1,456 3,524 2,805
Loan related services 464 469 906 852
Net securities gains
(losses) -0- (54) 504 (149)
Other noninterest income 34 104 280 629
9,196 7,563 18,665 14,660
Noninterest expenses:
Salaries and employee
benefits 17,393 15,858 35,631 32,277
Occupancy 3,102 2,646 6,399 5,303
Data processing 2,971 2,093 5,769 4,137
Equipment 1,983 1,635 3,991 3,113
Advertising and marketing 1,005 1,173 1,999 2,349
Deposit and other assessments 324 1,832 669 3,711
Collection and carrying costs
of nonperforming assets 378 410 882 1,224
Merger expenses 4,652 300 5,105 600
Other noninterest expenses 7,778 5,059 13,723 10,435
39,586 31,006 74,168 63,149
Income before income tax 15,991 16,985 35,567 32,015
Applicable income tax 5,848 5,775 12,818 10,744
Net income $10,143 $11,210 $ 22,749 $ 21,271
Weighted average shares
outstanding 25,169,568 24,220,365 25,149,123 24,348,783
Earnings per share $ 0.40 $ 0.46 $ 0.90 $ 0.87
(1) Interest on loans and leases includes interest on loans held for sale.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <c:
Net
Par Paid in Retained Unrealized Treasury
Value Capital Earnings Gain (loss) Stock Total
Balances at December 31, 1995 $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 (53,830 shares at
an average price of $9.21) -- -- (188) -- 743 555
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- 9,783 -- 9,783
Net income -- -- 21,271 -- -- 21,271
Cash dividends $0.09 -- -- (5,125) -- -- (5,125)
Balances at June 30, 1996 $256 $224,267 $115,913 $ 704 $(18,518) $322,622
Balances at December 31, 1995 $256 $224,268 $134,443 $ 3,763 $ (7,805) $354,925
Treasury stock issued for employee
benefit plans (102,396 shares at
an average price of $8.86) -- -- (242) -- 1,525 1,283
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- (4,922) -- (4,922)
Net income -- -- 22,749 -- -- 22,749
Cash dividends $0.31 -- -- (7,775) -- -- (7,775)
Balances at June 30, 1996 $256 $224,268 $149,175 $ (1,159) $ (6,280) $366,260
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,749 $ 21,271
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 900 2,070
Provision for depreciation 3,466 3,153
Provision for losses and writedowns
(credits) of other real estate owned -0- (983)
Amortization of goodwill and other
intangibles 2,174 1,014
Amortization of servicing rights 1,928 1,383
Net decrease in net deferred tax
assets 1,426 3,746
Net losses realized from sales
of other real estate owned 60 706
Net (gains) losses realized from sales
of securities and consumer loans (505) 149
Net (gains) realized from sales of
loans held for sale (a component
of mortgage banking services) (3,082) (1,714)
Proceeds from sales of loans held
for sale 496,517 193,629
Residential loans originated and
purchased for sale (488,413) (182,464)
Net decrease (increase) in interest
and dividends receivable and
other assets 2,065 (56)
Net increase (decrease) in other
liabilities 3,554 (4,652)
Net cash provided by operating activities $ 42,839 $ 37,252
Cash flows from investing activities:
Maturities of investment securities $ -0- $ 84,915
Purchases of investment securities -0- (84,441)
Proceeds from sales of securities
available for sale 31,144 11,703
Proceeds from maturities and principal
repayments of securities available
for sale 265,360 55,538
Purchases of securities available
for sale (294,017) (90,284)
Net increase in loans and leases (335,410) (27,873)
Purchase of mortgage servicing rights (7,945) (2,115)
Premiums paid on deposits purchased (18,231) (838)
Net additions to premises and equipment (4,802) (5,162)
Proceeds from sales of other real
estate owned 2,938 3,700
Net decrease in repossessed assets
owned 569 2,796
Net cash used by investing activities $ (360,394) $ (52,061)
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 185,945 $ 122,823
Net increase (decrease) in securities
sold under repurchase agreements (31,540) 18,422
Advances from Federal Home Loan Bank
of Boston borrowings 258,998 101,000
Payments on Federal Home Loan Bank of
Boston borrowings (110,002) (188,000)
Net increase (decrease) in other
borrowings (1,564) 6,454
Sale of treasury stock 1,283 555
Purchase of treasury stock -0- (8,301)
Cash dividends paid to shareholders (7,775) (5,125)
Net cash provided by financing
activities $ 295,345 $ 47,828
Increase (decrease) in cash and cash
equivalents $ (22,210) $ 33,019
Cash and cash equivalents at beginning
of period 289,191 220,103
Cash and cash equivalents at end of
period $ 266,981 $ 253,122
Supplemental disclosures of information:
Interest paid on deposits and borrowings $ 70,962 $ 62,844
Income taxes paid 9,692 7,839
Income tax refunds 1,108 18
Noncash investing transactions:
Loans transferred to other real estate
owned 1,728 7,716
Loans originated to finance the sales of
other real estate owned 1,044 4,414
Increases (decreases) resulting from
SFAS No. 115:
Securities available for sale (7,213) 15,369
Deferred income taxes - liabilities (2,291) 5,586
Net unrealized gain (loss) on
securities available for sale (4,922) 9,783
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all
of the information and notes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation
of the consolidated financial statements have been included.
The results of operations and other data for the three and
six months ended June 30, 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, Peoples Heritage Financial Group, Inc.
(the "Company") acquired Bank of New Hampshire Corporation
("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.
Subsequent to the acquisition of BNHC, the Company merged
its other New Hampshire-based banking subsidiary - The
First National Bank of Portsmouth ("Portsmouth") - into
Bank of New Hampshire ("BNH") under the pooling-of-interests
method of accounting.
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.
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND
SUBSIDIARIES
PART I - ITEM 2
Management's discussion and analysis of financial condition
and results of operations.
General
Peoples Heritage Financial Group, Inc. (the "Company") is a
multi-bank holding company which is incorporated under the
laws of the State of Maine and headquartered in Portland,
Maine. The Company's direct subsidiaries, both of which are
wholly-owned, are Peoples Heritage Savings Bank (the "Bank")
and Bank of New Hampshire Corporation ("BNHC"), which wholly
the Bank of New Hampshire ("BNH").
The Bank conducts business from its headquarters in
Portland, Maine and 61 additional offices located throughout
the State of Maine. At June 30, 1996, the Bank had total
assets of $2.6 billion and total shareholder's equity of
$189.1 million.
BNH conducts business from its headquarters in Manchester,
New Hampshire and 44 additional offices located throughout
the State of New Hampshire. At June 30, 1996, BNH had total
assets of $1.8 billion and total shareholder's equity of
$143.8 million.
On February 16, 1996, five branch offices and $160.9 million
in related deposits located in New Hampshire were acquired
by Portsmouth from Fleet Bank NH (the "Branch Acquisition").
In addition to various assets related to the acquired
branches, approximately $216.4 million of loans were
purchased in connection with this transaction, which
consisted primarily of $178.6 million of single-family
residential loans. A deposit premium of $18.2 million was
paid which is being amortized over seven years.
On July 1, 1995, Bankcore, Inc. ("Bankcore"), the New
Hampshire-based holding company for North Conway Bank, was
acquired and North Conway Bank was merged into Portsmouth.
At the time of acquisition, Bankcore had $132.8 million in
total assets and shareholders' equity of $17.8 million. The
Bankcore acquisition was treated as a purchase for
accounting purposes and, accordingly, the Company's
financial statements reflect the acquisition from the time
of purchase only. As a result of the transaction, $3.4
million of goodwill was created, which 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.
Results of Operations
The Company reported net income of $10.1 million and $22.7
million for the three and six months ended June 30, 1996,
respectively, compared with $11.2 million and $21.3 million
for the comparable periods in 1995. The results for both
the three and six month periods in 1996 have been impacted
by $4.7 and $5.1 million, respectively, of merger related
expenses associated with BNHC. Excluding merger related
expenses, the Company would have reported net income of
$13.6 million and $26.7 million, respectively, for the three
and six months ended June 30, 1996. The improved results in
1996 (exclusive of the BNHC merger related expenses) were
primarily attributable to the improvement in net interest
income as a result of an increase in earning assets and
increased noninterest income, which were offset in part by
higher noninterest expenses.
<PAGE>
</TABLE>
<TABLE>
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.
<CAPTION>
Three Months Ended June 30, Three Months Ended June 30,
1996 1995
<S> <C> <C> <C> <C> <C> <C>
Average Yield/(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
Loans and leases (2):
Residential real estate mortgages $1,128,536 $22,272 7.89% $ 815,552 $16,682 8.18%
Commercial real estate mortgages 828,358 19,876 9.65 741,533 18,322 9.91
Commercial loans and leases 423,868 10,137 9.62 357,242 9,158 10.28
Consumer loans and leases 821,400 19,152 9.38 730,371 17,593 9.66
Total loans and leases 3,202,162 71,437 8.97 2,644,698 61,755 9.37
Investment securities (3) 794,510 12,418 6.29 762,229 11,697 6.16
Federal funds sold 39,622 452 4.59 85,292 1,294 6.09
Total earning assets 4,036,294 84,307 8.40 3,492,219 74,746 8.58
Nonearning assets 354,128 244,580
Total assets $4,390,422 $3,736,799
Interest-bearing deposits:
Regular savings 595,325 4,014 2.71 578,189 4,100 2.84
NOW accounts 357,015 1,071 1.21 316,251 1,126 1.43
Money market access accounts 507,782 4,461 3.53 384,710 3,601 3.75
Certificates of deposit 1,462,168 20,242 5.57 1,259,158 17,150 5.46
Total interest-bearing deposits 2,922,290 29,788 4.10 2,538,308 25,977 4.10
Borrowed funds 584,974 7,466 5.13 490,981 6,992 5.71
Total interest bearing liabilities 3,507,264 37,254 4.27 3,029,289 32,969 4.37
Demand deposits 423,588 345,981
Other liabilities (3) 94,342 43,725
Shareholders' equity (3) 365,228 317,804
Total liabilities and shareholders'
equity $4,390,422 $3,736,799
Net earning assets $ 529,030 $ 462,930
Net interest income (fully-taxable
equivalent) 47,053 41,777
Less: fully-taxable equivalent adjustments (222) (309)
Net interest income $46,831 41,468
Net interest rate spread (fully-taxable
equivalent) 4.13% 4.22%
Net interest margin (fully-taxable equivalent) 4.69% 4.80%
(1) Annualized.
(2) Loans and leases includes loans available for sale.
(3) Excludes effect of unrealized gains or losses on investment securities.
</TABLE>
<PAGE>
<TABLE>
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.
<CAPTION>
Six Months Ended June 30, Six Months Ended June 30,
1996 1995
<S> <C> <C> <C> <C> <C> <C>
Average Yield/ Average Yield/(1)
Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
Loans and leases (2):
Residential real estate mortgages $1,042,090 $41,730 8.01% $ 817,811 $33,480 8.19%
Commercial real estate mortgages 818,477 39,931 9.81 744,527 36,211 9.81
Commercial loans and leases 414,689 20,084 9.74 349,590 17,453 10.07
Consumer loans and leases 805,434 37,756 9.43 736,052 34,820 9.54
Total loans and leases 3,080,690 139,501 9.11 2,647,980 121,964 9.29
Investment securities (3) 764,530 24,050 6.33 741,839 22,525 6.12
Federal funds sold 67,630 1,686 5.01 77,641 2,309 6.00
Total earning assets 3,912,850 165,237 8.49 3,467,460 146,798 8.54
Nonearning assets 324,308 249,243
Total assets $4,237,158 $3,716,703
Interest-bearing deposits:
Regular savings 585,500 7,993 2.75 600,916 8,511 2.86
NOW accounts 350,323 2,177 1.25 314,418 2,286 1.47
Money market access accounts 506,072 9,100 3.62 364,257 6,356 3.52
Certificates of deposit 1,434,536 40,086 5.62 1,243,143 32,412 5.26
Total interest-bearing deposits 2,876,431 59,356 4.15 2,522,734 49,565 3.96
Borrowed funds 519,066 13,513 5.24 496,125 14,131 5.74
Total interest bearing liabilities 3,395,497 72,869 4.32 3,018,859 63,696 4.25
Demand deposits 409,363 337,875
Other liabilities (3) 71,380 44,307
Shareholders' equity (3) 360,918 315,662
Total liabilities and shareholders'
equity $4,237,158 $3,716,703
Net earning assets $ 517,353 $ 448,601
Net interest income (fully-taxable
equivalent) 92,368 83,102
Less: fully-taxable equivalent adjustments (398) (528)
Net interest income $91,970 82,574
Net interest rate spread (fully-taxable
equivalent) 4.18% 4.28%
Net interest margin (fully-taxable equivalent) 4.75% 4.83%
(1) Annualized.
(2) Loans and leases includes loans available for sale.
(3) Excludes effect of unrealized gains or losses on investment securities.
</TABLE>
<PAGE>
Net interest income on a fully-taxable equivalent basis
increased by $5.4 million and $9.4 million for the three and
six months ended June 30, 1996, respectively, compared with
the same periods in 1995. The increase was attributable to
an increase in the level of interest-earning assets, which
was offset somewhat by a decrease in the Company's net
interest rate spread.
Interest income earned on loans and leases increased by $9.7
million and $17.5 million, or 15.7% and 14.4%, for the three
and six months ended June 30, 1996, respectively, as
compared with the same respective periods in 1995. These
increases in interest income on loans were attributable to
loan growth from purchases and acquisitions as well as
internal loan growth, which were offset somewhat by a
decrease in the weighted average yield on loans. The
weighted average yield on loans decreased in 1996 due to an
increase in the percentage of lower yielding residential
mortgage loans relative to other loan portfolios, as well as
increased competition for both consumer and commercial
loans.
Interest expense on deposits increased by $3.8 million and
$9.8 million, or 14.7% and 19.8%, for the three and six
months ended June 30, 1996, respectively, as compared with
the same respective periods in 1995. These increases in
interest expense paid on deposits were primarily
attributable to deposit growth from purchases and
acquisitions during the second half of 1995 and the first
quarter of 1996. Total average interest-bearing deposits
increased by $384.0 million and $353.7 million, or 15.1% and
14.0%, for the three and six months ended June 30, 1996,
respectively, as compared with the same respective periods
in 1995. The weighted average rate paid on interest-bearing
deposits was 4.10% for both three month periods ended June
30, 1996 and 1995. The weighted average rate paid on
interest-bearing deposits increased from 3.96% for the six
months ended June 30, 1995 to 4.15% for the six months ended
June 30, 1996.
Interest expense on borrowed funds increased $474 thousand,
or 6.8%, for the three months ended June 30, 1996, as
compared with the same period in 1995. The increase was
primarily attributable to an increase in the average
outstanding balances of borrowed funds, which was offset in
part by a decrease in the weighted average rate paid. The
outstanding average balances on borrowed funds increased
$94.0 million, or 19.1%, for the three months ended June 30,
1996, as compared with the same period in 1995. The
weighted average rate paid decreased from 5.71% for the
three months ended June 30, 1995 to 5.13% for the three
months ended June 30, 1996.
In contrast, interest expense on borrowed funds decreased
$618 thousand, or 4.4%, for the six months ended June 30,
1996, as compared with the same period in 1995. The
decrease was attributable to a decrease in the weighted
average rate paid from 5.74% for the six months ended June
30, 1995 to 5.24% for the six months ended June 30, 1996,
which was offset somewhat by a $22.9 million, or 4.6%,
increase in the average outstanding balances of borrowed
funds during the same periods.
<PAGE>
The Company's net interest rate spread decreased from 4.22%
for the three months ended June 30, 1995 to 4.13% for the
three months ended June 30, 1996. This decrease was
attributable to a decreased yield on loans and leases, which
was offset in part by a decrease in rates paid on interest-
bearing liabilities and an increase in the yield on
investment securities.
For the six months ended June 30, 1996, the Company's net
interest rate spread decreased to 4.18% as compared with
4.28% for the six months ended June 30, 1995. This decrease
was attributable to increased rates on interest-bearing
deposits and a decreased rate on loans and leases, which
were offset in part by higher yields on investment
securities and lower rates on borrowed funds.
The net interest margin decreased from 4.80% for the three
months ended June 30, 1995 to 4.69% for the three months
ended June 30, 1996 and decreased from 4.83% for the six
months ended June 30, 1995 to 4.75% for the six months ended
June 30, 1996. These decreases were attributable to the
decreased net interest rate spread, which was offset in part
by the higher level of net earning assets during the three
and six month periods ended June 30, 1996, as compared with
the same periods in 1995.
Provision for Loan Losses. The provision for loan losses of
$450 thousand and $900 thousand for the three and six months
ended June 30, 1996 decreased $590 thousand and $1.2 million
compared to the same respective periods in 1995. The lower
provisions resulted from management's ongoing evaluation of
the adequacy of the allowance for loan losses after taking
into account recent trends in nonperforming loans,
delinquent loans and net loan chargeoffs, as well as other
asset quality factors. See "Financial Condition -
Nonperforming Assets" below.
Although management utilizes its best judgment in providing
for possible losses, there can be no assurance that the
Company will not have to increase its provisions for loan
and lease losses in the future as a result of changing
markets for real estate and economic conditions in the
Company's primary market area, future changes in
nonperforming assets or for other reasons, which would
affect the Company's results of operations. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Company's
allowance for loan and lease losses. Such agencies may
require the Company to recognize changes to the allowance
for loan and lease losses based on their judgments about
information available to them at the time of the
examination.
Noninterest Income
Noninterest income increased $1.6 million, or 21.6%, for the
three months ended June 30, 1996 compared with the same
period in 1995, and increased $4.0 million, or 27.3%, for
the six months ended June 30, 1996 compared with the same
period in 1995. The more significant changes to the
components of noninterest income are more fully described
below.
The following table sets forth certain information relating
to mortgage banking services income for the periods
indicated:
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Residential mortgages
serviced for
investors at end
of period $2,819,545 $2,414,091 $2,819,545 $2,414,091
Residential mortgage
sales income $ 1,550 $ 1,108 $ 3,082 $ 1,550
Residential mortgage
servicing income 1,621 1,520 3,453 3,296
Total $ 3,171 $ 2,628 $ 6,535 $ 4,846
</TABLE>
The Company's portfolio of residential mortgages serviced
for investors increased by $405.5 million, net of
amortization and prepayments, or 16.8%, from June 30, 1995
to June 30, 1996. The Company's portfolio of mortgages
serviced for others continues to increase as a result of its
strategy to originate and sell primarily fixed rate
residential mortgages to the secondary market while
retaining the rights to service these loans for the
investors purchasing them. In addition, the outstanding
amount of residential mortgages serviced for investors is
impacted, from time to time, by the purchase and sale of
mortgage servicing rights for portfolios of residential
mortgage loans.
In May 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights," which changes the method of accounting for certain
mortgage banking activities. The Company elected early
adoption of SFAS No. 122 in the second quarter of 1995 and
consequently the impact of the adoption is not included in
the results of operations of the Company which were reported
for the three months ended March 31, 1995. A total of $273
thousand in originated mortgage servicing rights were
attributable to mortgage banking sales activities for the
three months ended March 31, 1995 but were reported in the
results of operations for the three months ended June 30,
1995.
Residential mortgage sales income increased $442 thousand,
or 39.9%, and $1.5 million, or 98.8%, for the three and six
months ended June 30, 1996, respectively, as compared with
the same periods in 1995. Excluding the $273 thousand of
originated mortgage servicing rights attributable to
mortgage sales activities during the three months ended
March 31, 1995, the comparable increase in mortgage sales
income during the three months ended June 30, 1996 was $715
thousand, or 85.6%. The increase in residential mortgage
sales income reflects the lower interest rate environment
during the three and six months ended June 30, 1996, as
compared with the same period in 1995, which increased the
level of both refinancing and purchase mortgages as well as
an increase in the volume of loans originated directly by
<PAGE>
the Bank and indirectly through the Bank's correspondent
network. Residential real estate mortgage originations from
correspondent lenders increased $115.5 million, or 158.8%,
and $276.2 million, or 292.3%, for the three and six months
ended June 30, 1996, respectively, compared with the same
periods in 1995.
Residential mortgage servicing income increased $101
thousand, or 6.6%, and $157 thousand, or 4.8%, for the three
and six months ended June 30, 1996, respectively, as
compared with the same periods in 1995. The increases in
mortgage servicing income relate to the increase in the size
of the portfolio of residential mortgages serviced for
others. Residential mortgage servicing income has lagged
increases in the portfolio of mortgages serviced for
investors as a result of the impact of the Company's
adoption of SFAS No. 122 in 1995, which effectively
accelerates mortgage servicing income into the current
period as a component 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 order to mitigate the prepayment risk associated with
mortgage servicing rights and protect economic value, the
Company has purchased constant maturity treasury floors
("CMT"). The value of a CMT is inversely related to
movements in interest rates. As interest rates decline, the
value of a CMT floor 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 on mortgage loan prepayment
speeds. The value of mortgage servicing rights generally
increases as market interest rates increase and decreases as
market interest rates decrease. While not accorded hedge
accounting treatment due to the uncertainty of strict
correlation, in the event that interest rates fall, any
resulting increase in the value of the CMTs are intended to
offset, in part, the prospective impairment to mortgage
servicing rights. The CMT floors are included in other
assets on the Company's balance sheet at June 30, 1996 at
amortized cost of $736 thousand.
The following table shows the composition of net gains
(losses ) on the sales of securities for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Securities losses $ -0- $ (54) $ (9) $(188)
Securities gains -0- -0- 513 39
-0- (54) $ 504 $(149)
</TABLE>
The generation of mortgage sales income and the recognition
of net gains on the sales of securities 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
<PAGE>
will not be significant inter-period variations in the
results from such activities.
Customer services income increased $687 thousand, or 23.2%,
and $1.2 million, or 21.8%, for the three and six months
ended June 30, 1996, respectively, as compared with the same
periods in 1995. The increase in customer services income
reflects the Company's focus on increasing the number and
volume of transaction accounts, the increased use of and
fees generated by ATM machines and the increased volume
associated with the expansion of the retail branch franchise
from 100 branches at June 30, 1995 to 107 at June 30, 1996.
Trust and investment advisory services income increased $424
thousand, or 29.1%, and $719 thousand, or 25.6%, for the
three and six months ended June 30, 1996, respectively, as
compared with the same periods in 1995. The increase in
trust and investment advisory income in 1996 as compared
with 1995 reflects primarily the growth of the trust
department at the Bank, which was started during the first
quarter of 1995, as well as increased fee based income from
the sale of mutual fund and annuity products.
Noninterest Expenses. Total noninterest expenses increased
$8.6 million, or 27.7%, and $11.0 million, or 17.4%, for the
three and six months ended June 30, 1996, respectively, as
compared with the same periods in 1995. Excluding merger
expenses, total noninterest expenses increased $4.2 million,
or 13.7%, and $6.5 million, or 10.4%, for the three and six
months ended June 30, 1996, respectively, as compared with
the same periods in 1995.
Salaries and employee benefits increased $1.5 million, or
9.7%, and $3.4 million, or 10.4%, for the three and six
months ended June 30, 1996, respectively, as compared with
the same periods in 1995. These increases were principally
the result of the employment of additional employees in
connection with the expansion of the retail franchise,
increased mortgage banking activities and trust services, as
well as normal salary and wage increases.
Occupancy expenses increased $456 thousand, or 17.2%, and
$1.1 million, or 20.7%, for the three and six months ended
June 30, 1996, respectively, compared with the same periods
in 1995. These increases were primarily attributable to the
expansion of the Company's branch network, which resulted in
higher rent, depreciation, utilities and maintenance
expenses.
Data processing expenses increased $878 thousand, or 41.9%,
and $1.6 million, or 39.5%, for the three and six months
ended June 30, 1996, respectively, as compared with the same
periods in 1995. The increases in data processing expenses
were primarily attributable to BNH, which in 1995 processed
checks in-house as opposed to outsourcing check processing
in 1996. Consequently, the cost to outsource check
processing is included in data processing in 1996, with no
equivalent charge in 1995. In addition to the above, the
increase in transaction accounts, a larger retail delivery
system, the expanded mortgage banking operation and expanded
operational capabilities to support new product offerings
and services are the other factors accounting for the
increase in data processing costs in 1996 as compared with
<PAGE>
1995. Effective July 1, 1996, the computer systems and
other back office functions of BNH were merged with those of
the Bank.
Equipment expenses increased $348 thousand, or 21.3%, and
$878 thousand, or 28.2%, for the three and six months ended
June 30, 1996, respectively, as compared with the same
periods in 1995. The increases in equipment expenses were
primarily attributable to increased investment in
alternative delivery systems, office automation equipment
and a larger branch network.
Deposit and other assessment expenses decreased $1.5
million, or 82.3%, and $3.0 million, or 82.0%, for the three
and six months ended June 30, 1996, respectively, as
compared with the same periods in 1995. The decrease is
directly attributable to the reduction in deposit insurance
premiums paid by the Bank and BNH to the Bank Insurance Fund
("BIF") from $0.23 per $100.00 of deposits to $0.04 per $100
of deposits in June, 1995 and then to the minimum annual
amount of $2,000 starting January, 1996. Approximately 89%
of the Company's deposits are insured by BIF. The Company
continues to pay $0.23 per $100 of deposits for the
approximately 11% of its deposits that are insured by the
Savings Association Insurance Fund ("SAIF").
Merger expenses of $4.7 million and $5.1 million for the
three and six month periods in 1996, respectively, relate to
the acquisition of BNHC by the Company. Significant BNHC
related merger expenses included employee severance costs,
professional fees, branch consolidation costs and
operational consolidation costs. Merger expenses during the
three and six month periods in 1995 related to the
acquisition of Bankcore by the Company.
Other categories of noninterest expenses include collection
and carrying costs of nonperforming assets, which decreased
$342 thousand for the six months ended June 30, 1996, as
compared to the same period in 1995, and advertising and
marketing expenses, which decreased $350 thousand for the
six months ended June 30, 1996 as compared with the same
period in 1995.
Other noninterest expenses increased $2.7 million, or 53.7%,
and $3.3 million, or 31.5%, for the three and six months
ended June 30, 1996, respectively, compared with the same
respective periods in 1995.
<PAGE>
The following table sets forth information relating to other
noninterest expenses during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Telephone $ 838 $ 588 $ 1,515 $ 1,101
Amortization of
deposit premiums 743 52 1,158 105
Office supplies 677 668 1,354 1,234
Postage and freight 673 589 1,488 1,258
Amortization of
goodwill 508 451 1,016 909
Other 4,339 2,711 7,192 5,828
$ 7,778 $ 5,059 $13,723 $10,435
</TABLE>
The increase in amortization of deposit premiums was
attributable to the Branch Acquisition noted above.
Income Tax Expenses
Income tax expense was $5.8 million and $5.8 million for the
three months ended June 30, 1996 and 1995, respectively,
which amounted to effective income tax rates of 36.6% and
34.0%, respectively. Income tax expense was $12.8 million
and $10.7 million for the six months ended June 30, 1996 and
1995, respectively, which amounted to effective income tax
rates of 36.0% and 33.6%, respectively.
Financial Condition
Set forth below is a discussion of the material changes in
the Company's financial condition from December 31, 1995 to
June 30, 1996.
Securities Available for Sale
Securities available for sale decreased $9.2 million, or
1.2%. Securities available for sale are reported at fair
value, with unrealized gains and losses reported as a
separate component of shareholders' equity (net of related
taxes). At June 30, 1996, $1.2 million of net unrealized
loss (net of related taxes) was included in shareholders'
equity. A summary of the carrying values of securities
available for sale follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(In Thousands)
<S> <C> <C>
U.S. Government obligations and
obligations of U.S. Government
agencies and corporations $451,827 $526,576
Other bonds and notes 30,041 16,531
Mortgage-backed securities 245,121 195,823
Total debt securities 726,989 738,930
Equity securities 30,464 27,718
Total securities
available for sale $757,453 $766,648
</TABLE>
Loans Held for Sale
<PAGE>
Loans held for sale, all of which were residential mortgage
loans, decreased $5.0 million. The outstanding dollar
amount of loans held for sale can vary greatly from period
to period as a result of mortgage origination levels, timing
and delivery of loan sales, changes in market interest rates
and asset/liability management strategies. The change in
loans held for sale from December 31, 1995 to June 30, 1996
was primarily attributable to timing and delivery of loan
sales.
Loans and Leases
Total loans and leases held for investment increased $336.5
million, or 12.1%, for the six months ended June 30, 1996.
The increase was primarily attributable to $216.4 million of
loans acquired through the Branch Acquisition, as well as
internal loan growth in the consumer, residential and
commercial loan portfolios.
Residential real estate mortgages increased $224.5 million,
or 28.1%, for the six months ended June 30, 1996. This
increase was primarily attributable to $177.6 million of
residential mortgage loans that were acquired in conjunction
with the Branch Acquisition. In addition, the increase
reflects significant refinancing activity due to a favorable
interest rate environment and a decision by the Company to
retain a portfolio of 15 year fixed rate residential
mortgages and certain adjustable rate residential mortgages.
While the Company generally originates fixed rate
residential mortgages for sale on the secondary market, the
Company will, from time to time, retain a portion of
originated residential mortgages in its loan portfolio.
Commercial real estate mortgages increased $23.2 million, or
2.9%, for the six months ended June 30, 1996. This increase
is primarily attributable to $23.0 million of commercial
mortgage loans that were acquired in conjunction with the
Branch Acquisition. The Company's business plan is to
continue to lend within its geographic markets to sound
commercial businesses which collateralize their borrowings
with commercial real estate properties.
Commercial business loans and leases increased $23.9
million, or 5.8%, for the six months ended June 30, 1996.
This increase was consistent with the Company's strategy to
focus on lending to sound small and medium-sized business
customers within its geographic market. The Company
acquired $5.9 million in commercial business loans in
conjunction with the Branch Acquisition.
Consumer loans increased $64.9 million, or 8.4%, for the six
months ended June 30, 1996. The growth in consumer loans
was concentrated in home equity loans and automobile loans.
The Company acquired $11.6 million in consumer loans in
conjunction with the Branch Acquisition.
<PAGE>
<TABLE>
Nonperforming Assets
The following table sets forth information regarding nonperforming assets at the dates indicated:
<CAPTION>
June 30, March 31, December 31, September 30,
1996 1996 1995 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 5,032 $ 6,089 $ 5,713 $ 5,856
Accruing loans which are 90 days overdue 2,238 3,800 3,728 3,988
Total 7,270 9,889 9,441 9,844
Commercial real estate mortgages:
Nonaccrual loans 15,628 16,917 17,029 20,552
Accruing loans which are 90 days overdue -0- 128 -0- 356
Troubled debt restructurings 1,878 1,793 3,186 4,540
Total 17,506 18,838 20,215 25,448
Commercial business loans and leases:
Nonaccrual loans 7,567 5,631 6,735 6,305
Accruing loans which are 90 days overdue -0- 111 25 35
Troubled debt restructurings 1,114 1,349 1,859 1,953
Total 8,681 7,091 8,619 8,293
Consumer loans and leases:
Nonaccrual loans 4,368 4,099 3,586 4,237
Accruing loans which are 90 days overdue 602 1,051 659 395
Total 4,970 5,150 4,245 4,632
Total nonperforming loans:
Nonaccrual loans 32,595 32,736 33,063 36,950
Accruing loans which are 90 days overdue 2,840 5,090 4,412 4,774
Troubled debt restructurings 2,992 3,142 5,045 6,493
Total 38,427 40,968 42,520 48,217
Other nonperforming assets:
Other real estate owned, net of related
reserves 10,033 11,089 12,679 14,548
Repossessions, net of related reserves 1,316 1,865 1,553 1,638
Total other nonperforming assets 11,349 12,954 14,232 16,186
Total nonperforming assets $49,776 $53,922 $56,752 $64,403
Total nonperforming loans as a percentage
of total loans (1) 1.23% 1.36% 1.53% 1.75%
Total nonperforming assets as a percentage
of total assets 1.14% 1.27% 1.40% 1.61%
Total nonperforming assets as a percentage
of total loans (1) and total other
nonperforming assets 1.59% 1.67% 2.03% 2.33%
(1) Exclusive of loans held for sale.
</TABLE>
<PAGE>
It is the policy of the Company to place all commercial real
estate loans and commercial business loans which are 90 days
or more past due, unless secured by sufficient cash or other
assets immediately convertible to cash, on nonaccrual
status. All such loans 90 days or more past due, whether on
nonaccrual status or not, are considered as nonperforming
loans. Residential real estate loans and consumer loans are
placed on nonaccrual and nonperforming status generally when
they are 90 days or more past due or when in management's
judgment the collectibility of interest and/or principal is
doubtful.
It is also the policy of the Company to place on nonaccrual
and nonperforming status loans currently performing in
accordance with their terms but which in management's
judgment are likely to present future principal and/or
interest repayment problems and thus ultimately could be
classified as nonperforming. At June 30, 1996, $9.9
million of commercial real estate and commercial business
loans and leases, or 37.9%, of total nonperforming
commercial real estate and commercial business loans, were
on nonaccrual status and thus disclosed as nonperforming
loans even though they were less than 90 days past due.
Effective January 1, 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." These statements
require changes in both the disclosure and impairment
measurement of nonperforming loans. Certain loans which had
previously been reported as nonperforming and certain in-
substance foreclosures are currently required to be
disclosed as impaired loans. At adoption, the Company
reclassified $2.2 million of in-substance foreclosures and
related reserves of $96 thousand to loans and the allowance
for loan losses, respectively. Prior year balances were not
reclassified, as management deemed the amounts to be
immaterial.
Restructured accruing loans entered into subsequent to the
adoption of these statements are reported as impaired loans.
In the year subsequent to restructure, these loans may be
removed from impaired loan status provided that the loan
bears a market rate of interest at the time of restructure
and is performing under the restructured terms.
Restructured, accruing loans entered into prior to the
adoption of these statements are not required to be reported
as impaired loans unless such loans are not performing in
accordance with the restructured terms.
Commercial business and commercial real estate loans are
considered impaired when it is probable that the Company
will not be able to collect all amounts due according to the
original contractual terms of the loan agreement. The
amount of impairment for impaired loans is determined by the
difference between the present value of the expected cash
flows related to the loan, using the original contractual
interest rate, and its recorded value, or, in the case of
collateralized loans, the difference between the fair value
of the collateral and the recorded amount of the loan. When
foreclosure is probable, impairment is measured based on the
fair value of the collateral. The Company recognizes income
on impaired loans also classified as nonperforming on a cash
<PAGE>
basis when the ability to collect the principal balance is
not in doubt.
At June 30, 1996, total impaired loans were $27.8 million,
of which $22.1 million had related allowances of $4.8
million. During the three months ended June 30, 1996, the
income recognized related to impaired loans was $423
thousand and the average balance of outstanding impaired
loans was $28.0 million. During the six months ended June
30, 1996, the income recognized related to impaired loans
was $756 thousand and the average balance of outstanding
impaired loans was $28.6 million.
Real estate acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure generally is
classified as other real estate owned until it is sold.
When property is acquired, it is recorded at the lower of
carrying or fair value less estimated selling costs at the
date of acquisition or classification and any writedown
resulting therefrom is charged to the allowance for loan
losses. Interest accrual ceases on the date of acquisition
and all costs incurred from that date in maintaining the
property and subsequent reductions in value are expensed.
Nonperforming assets at June 30, 1996 included $10.0 million
of other real estate owned and $1.3 million of repossessed
assets, in each case net of related reserves.
Potential Nonperforming Assets
At June 30, 1996, the Company had classified a total of
$86.5 million of commercial real estate loans and commercial
business loans and leases as substandard or lower on its
risk rating system, as compared to $91.1 million at December
31, 1995. Included in this amount was the Company's $26.2
million of nonperforming commercial business and commercial
real estate loans. In the opinion of management, the
remaining $60.3 million of commercial real estate loans and
commercial business loans and leases classified as
substandard or lower at June 30, 1996 evidence one or more
weaknesses or potential weaknesses and, depending on the
regional economy and other factors, may become nonperforming
assets in future periods. These loans are net of any
previously established specific reserves which have resulted
in chargeoffs, but not general reserves which have been
established based on the Company's internal rating of such
loans and evaluation of the adequacy of its allowance for
loan losses.
<PAGE>
<TABLE>
Allowance for Loan Losses
The following table sets forth information regarding activity in the allowance for loan losses
for the three and six months ended June 30, 1996 and 1995, as well as certain related ratios:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average loans and leases outstanding
during the period $3,202,162 $2,644,698 $3,080,690 $2,647,980
Allowance at beginning of period $ 65,533 $ 59,462 $ 60,975 $ 63,675
Chargeoffs:
Residential real estate 1,163 1,184 1,597 2,003
Commercial real estate 1,158 1,959 2,046 6,550
Commercial business loans and leases 679 904 1,534 1,236
Consumer 1,092 626 1,833 1,239
Total loans charged off 4,092 4,673 7,010 11,028
Recoveries:
Residential real estate 248 106 310 175
Commercial real estate 1,169 1,510 3,229 1,878
Commercial business loans and leases 92 648 512 1,228
Consumer 254 290 428 385
Total loans recovered 1,763 2,554 4,479 3,666
Net chargeoffs 2,329 2,119 2,531 7,632
Additions charged to operating expenses 450 1,040 900 2,070
Additions due to purchase acquisition -0- -0- 4,310 -0-
Allowance at end of period $ 63,654 $ 58,383 $ 63,654 $ 58,383
Ratio of net chargeoffs to average
loans and leases outstanding during
the period - annualized (1) .29% 0.32% 0.16% 0.56%
Ratio of allowance to total loans
and leases at end of period (2) 2.04% 2.22% 2.04% 2.22%
Ratio of allowance to nonperforming
loans at end of period 165.6% 117.4% 165.6% 117.4%
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Excludes loans held for sale.
</TABLE>
<PAGE>
The following table sets forth the manner in which the
Company's total allowance for loan losses was allocated by
type of loan at the dates indicated:
<TABLE>
<caaption>
June 30, 1996 December 31, 1995
<S> <C> <C> <C> <C>
Allowance as Allowance as
% of Total % of Total
Loans by Loans by
Amount Category Amount Category
(Dollars in Thousands)
Residential real
estate loans $ 7,809 0.76% $10,118 1.27%
Commercial real
estate loans 37,634 4.58 31,673 3.97
Commercial business
loans and leases 8,831 2.04 9,491 2.32
Consumer loans 9,380 1.12 9,693 1.25
$63,654 2.04 $60,975 2.19
</TABLE>
Deposits and Borrowings
Total deposits increased by $185.9 million, or 5.8%, during
the six months ended June 30, 1996. This increase was
principally attributable to the $160.9 million of deposits
that were acquired in the Branch Acquisition, as described
above. The increase in deposits resulted from an increase
in certificates of deposit of $80.1 million, or 5.9%, an
increase in regular savings of $40.5 million, or 7.3%, an
increase in money market accounts of $18.3 million, or 3.7%,
and a combined increase in NOW and demand deposits of $47.0
million, or 6.0%. The changes in deposit balances
principally reflect the impact of the Branch Acquisition
completed during February, 1996 but also reflect the
Company's current strategy to emphasize relationship
banking, cash management services and core deposits.
Total borrowings increased by $114.4 million, or 25.0%, for
the six months ended June 30, 1996. The increase was
attributable to a $149.0 million increase in Federal Home
Loan Bank borrowings, which was offset in part by a $31.5
million decrease in securities sold under repurchase
agreements and a decrease in other borrowings of $3.1
million. The increase in Federal Home Loan Bank borrowings
was attributable to the Branch Acquisition and loan growth.
At June 30, 1996, the Company estimates its additional
available borrowing capacity from the Federal Home Loan Bank
to be approximately $506 million.
Shareholders' Equity
Total shareholders' equity increased by $11.3 million, or
3.2%, during the six months ended June 30, 1996. This
increase was the result of $22.7 million of net income and
$1.3 million of treasury stock sales related to various
employee benefit plans of the Company, the effects of which
were offset in part by cash dividends of $7.8 million and a
$4.9 million reduction in the net unrealized gain (net of
tax effect) in the market value of securities available for
sale.
<PAGE>
Regulatory Capital Requirements
At June 30, 1996, the Company and each of its banking
subsidiaries were in compliance with all applicable
regulatory capital requirements.
The following table sets forth the minimum regulatory
capital requirements and the actual capital ratios of the
Company and its banking subsidiaries at June 30, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Actual
Required The The
Minimums Bank BNH Company
Risk-based capital ratios:
Tier I 4% 11.08% 16.42% 11.82%
Total 8 12.35 17.68 13.08
Tier I leverage
capital ratios 3 (1) 7.54 8.52 7.66
</TABLE>
(1) The federal banking agencies have indicated that the
most highly-rated institutions which meet certain criteria
will be subject to a 3% requirement and all other
institutions will be required to maintain an additional 1%
to 2% of capital. The federal banking agencies have not
specified any requirements in this regard with respect to
the Company and its subsidiaries.
Liquidity and Capital Resources
The Company's liquidity decreased during the six months
ended June 30, 1996. Net cash, short term and marketable
assets amounted to $804.5 million, or 23.2% of net deposits
and short term liabilities at June 30, 1996. This compares
to a ratio of 26.5% at December 31, 1995. Liquidity is
considered adequate by the Company to meet anticipated cash
needs in the foreseeable future.
Asset and Liability Management
The Company analyzes the future impact on net interest
income as a result of changing interest rates based on
budget projections, including anticipated business activity,
anticipated changes in interest rates and other variables
which are adjusted periodically to reflect the interest rate
environment and other factors. Based on this analysis and
the information and assumptions in effect at June 30, 1996,
management of the Company estimates that a 100 to 200 basis
point gradual change in interest rates would not
significantly affect the Company's annualized net interest
income. This assessment is primarily based on management's
ability to exert some control with respect to the extent and
timing of the change in rates paid on the Company's
interest-bearing liabilities and, therefore, to manage the
effects somewhat of a negative or positive gap position on
net interest income.
The Company's methods for analyzing the effects of changes
in interest rates on its operations incorporate assumptions
concerning, among other things, the amortization and
prepayment of assets and liabilities. Management believes
that these assumptions approximate actual experience and
considers them reasonable, although the actual amortization
<PAGE>
and repayment of assets and liabilities may vary
substantially.
Prospective Acquisition of Family Bancorp
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. At June 30, 1996, there were 4,215,211 shares of
Family Common Stock outstanding. At June 30, 1996, Family
had total assets of $925.2 million and shareholders' equity
of $70.0 million. Consummation of the Family Merger is
subject to, among other things, the receipt of all necessary
regulatory and shareholder approvals and other customary
conditions.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings:
The Company is involved in routine legal proceedings
occurring in the ordinary course of business which in the
aggregate are believed by management to be immaterial to the
financial condition and results of operations of the
Company.
Item 2. Changes in securities - not applicable.
Item 3. Defaults upon senior securities - not applicable.
Item 4. Submission of matters to a vote of security
holders - none.
Item 5. Other Information.
In recent periods, the U.S. Senate and the U.S. House of
Representatives have considered various bills which would,
among other things, recapitalize the Savings Association
Insurance Fund ("SAIF") administered by the FDIC by a one-
time assessment on the deposits of all SAIF-insured
institutions and provide for an eventual merger of the SAIF
and the Bank Insurance Fund ("BIF") administered by the
FDIC. Under the proposals accepted by the U.S. Congress in
late 1995 but not signed into law, the deposit assessment
rate would be based on deposits as of March 31, 1995 and set
by the FDIC at a level which would be sufficient to
recapitalize the SAIF to the designated statutory reserve
ratio. It was estimated at the time the assessment rate
under this proposal would be approximately $.85 for every
$100 of assessable deposits as of March 31, 1995.
Most legislative proposals have contained provisions which
provide certain relief for institutions, such as the Bank
and BNH (as successor to Portsmouth), which are members of
the BIF but have acquired SAIF-insured deposits as a result
of acquisitions of savings institutions in the transactions
effected pursuant to Section 5(d)(3) of the Federal Deposit
Insurance Act ("FDIA"). Such institutions do not pay SAIF
assessments based on the actual amount of the SAIF deposits
acquired, but as adjusted to reflect increases or decreases
in such deposits subsequent to the FDIA. The Company
currently is unable to predict the likelihood of legislation
effecting the foregoing changes, although a consensus among
legislators, regulators and bankers appears to be developing
in this regard.
At March 31, 1995, the date the proposal adopted by the U.S.
Congress uses as the measurement date, the adjusted
attributable amount of SAIF deposits of the Company's
banking subsidiaries amounted to $352.4 million, or 12.3%,
of the Company's total deposits. If an assessment of $.85
per $100 of assessable deposits was effected on these
deposits (and assuming no downward adjustment on the
assessment rate for institutions such as the Bank and BNH),
the one-time assessment which would be payable by the
Company's banking subsidiaries would aggregate approximately
$3.0 million on a pre-tax basis. Management of the Company
currently is unable to predict whether there will be
legislation to recapitalize SAIF and, if so, whether and to
<PAGE>
what extend the Company's banking subsidiaries may be
assessed in order to recapitalize the SAIF.
Item 6. Exhibits and reports on Form 8-K.
(a) On June 5, 1996, the Company filed a report on form 8-K
announcing the execution of an agreement to acquire Family
Bancorp by the Company.
(b) On June 21, 1996, the Company filed a report on Form 8-
K reporting that an issuer tender offer likely would be the
means by which the Company would seek to acquire 2,600,000
shares of Common Stock of the Company in connection with the
pending acquisition of Family Bancorp.
(c) July 2, 1996, the Company filed a report on Form 8-K
regarding (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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date August 13, 1996 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
Date August 13, 1996 By:
Peter J. Verrill
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
/s/ William J. Ryan
Date August 13, 1996 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
/s/ Peter J. Verrill
Date August 13, 1996 By:
Peter J. Verrill
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 234,481
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 32,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 757,453
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,115,089
<ALLOWANCE> 63,654
<TOTAL-ASSETS> 4,371,709
<DEPOSITS> 3,383,083
<SHORT-TERM> 571,324
<LIABILITIES-OTHER> 51,042
<LONG-TERM> 0
<COMMON> 256
0
0
<OTHER-SE> 366,004
<TOTAL-LIABILITIES-AND-EQUITY> 4,371,709
<INTEREST-LOAN> 139,222
<INTEREST-INVEST> 24,705
<INTEREST-OTHER> 912
<INTEREST-TOTAL> 164,839
<INTEREST-DEPOSIT> 59,356
<INTEREST-EXPENSE> 13,513
<INTEREST-INCOME-NET> 91,970
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 504
<EXPENSE-OTHER> 74,168
<INCOME-PRETAX> 35,567
<INCOME-PRE-EXTRAORDINARY> 35,567
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,749
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<YIELD-ACTUAL> 4.75
<LOANS-NON> 32,595
<LOANS-PAST> 2,840
<LOANS-TROUBLED> 2,992
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 60,975
<CHARGE-OFFS> 7,010
<RECOVERIES> 4,479
<ALLOWANCE-CLOSE> 63,654
<ALLOWANCE-DOMESTIC> 63,654
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
