FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 1, 1996 is:
Common stock, par value $.01 per share 22,734,434
(Class) (Outstanding)
<PAGE>
INDEX
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995.
Consolidated Statements of Income - Three months
ended September 30, 1996 and 1995; nine months
ended September 30, 1996 and 1995.
Consolidated Statements of Changes in
Shareholders' Equity - Nine months ended
September 30, 1996 and 1995.
Consolidated Statements of Cash Flows - Nine
months ended September 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>
<TABLE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 211,162 $ 190,436
Federal funds sold 41,000 100,255
Securities available for sale,
at market value 758,920 766,648
Loans held for sale, market value
$91,450 and $71,872, respectively 89,747 70,979
Loans and leases:
Residential real estate mortgages 1,030,897 798,076
Commercial real estate mortgages 813,559 797,686
Commercial business loans and leases 430,794 408,592
Consumer loans and leases 904,006 774,229
3,179,256 2,778,583
Less: Allowance for loan and
lease losses 61,663 60,975
Net loans and leases 3,117,593 2,717,608
Bank premises and equipment 57,302 56,021
Goodwill and other intangibles 37,822 22,792
Mortgage servicing rights 26,710 20,309
Other real estate and repossessed
assets owned 11,246 14,232
Deferred income taxes 32,194 32,972
Interest and dividends receivable 29,799 30,726
Other assets 42,749 35,148
$4,456,244 $4,058,126
Liabilities and Shareholders' Equity
Deposits:
Regular savings $ 595,353 $ 557,896
Money market access accounts 503,681 490,575
Certificates of deposit (including
certificates of $100 or more of
$173,646 and $116,472, respectively) 1,441,327 1,363,095
NOW accounts 357,435 351,481
Demand deposits 487,409 434,091
Total deposits 3,385,205 3,197,138
Federal funds purchased 16,814 1,500
Securities sold under repurchase
agreements 182,114 180,957
Borrowings from Federal Home Loan
Bank of Boston 413,938 252,446
Other borrowings 19,838 22,029
Deferred income taxes 11,222 12,577
Other liabilities 50,102 36,554
Total liabilities 4,079,233 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, 25,596,550
shares issued) 256 256
Paid-in capital 224,267 224,267
Retained earnings 159,100 134,444
Net unrealized gain (loss) on securities
available for sale (704) 3,763
Treasury stock at cost (396,655 shares and
524,062 shares, respectively) (5,908) (7,805)
Total shareholders' equity 377,011 354,925
$4,456,244 $4,058,126
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and
leases (1) $72,715 $65,548 $211,937 $187,165
Interest on mortgage-backed
investments 4,706 3,262 12,213 9,420
Interest on other investments 7,606 10,103 24,804 27,609
Dividends on equity
securities 479 485 1,391 1,474
Total interest and
dividend income 85,506 79,398 250,345 225,668
Interest expense:
Interest on deposits 29,477 28,949 88,833 78,514
Interest on borrowed funds 8,085 6,395 21,598 20,526
Total interest expense 37,562 35,344 110,431 99,040
Net interest income 47,944 44,054 139,914 126,628
Provision for loan losses -0- 1,080 900 3,150
Net interest income after
provision for loan
losses 47,944 42,974 139,014 123,478
Noninterest income:
Customer services 3,986 3,174 10,902 8,851
Mortgage banking services 3,315 3,113 9,850 7,959
Trust and investment
advisory services 1,930 1,474 5,454 4,279
Loan related services 549 590 1,455 1,442
Net securities gains
(losses) (1) 42 503 (107)
Other noninterest income 25 33 305 662
9,804 8,426 28,469 23,086
Noninterest expenses:
Salaries and employee
benefits 18,388 17,721 54,019 49,998
Occupancy 2,923 2,552 9,322 7,855
Data processing 3,126 2,242 8,895 6,379
Equipment 2,204 1,786 6,195 4,899
Advertising and marketing 901 1,091 2,900 3,440
Deposit and other assessments 2,270 165 2,939 3,876
Collection and carrying costs
of nonperforming assets 502 757 1,384 1,981
Merger expenses -0- 658 5,105 1,258
Other noninterest expenses 5,942 4,938 19,665 15,373
36,256 31,910 110,424 95,059
Income before income tax 21,492 19,490 57,059 51,505
Income tax expense 7,300 6,701 20,118 17,445
Net income $14,192 $12,789 $ 36,941 $ 34,060
Weighted average shares
outstanding 25,191,163 25,009,519 25,163,246 24,573,433
Earnings per share $ 0.56 $ 0.51 $ 1.47 $ 1.39
(1) Interest on loans and leases includes interest on loans held for sale.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
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)
<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 (105,227 shares at
an average price of $10.66) -- -- (387) -- 1,508 1,121
Reissuance of treasury stock
pursuant to acquisition
(751,600 shares at $15.00) -- -- 1,710 -- 9,564 11,274
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- 9,844 -- 9,844
Net income -- -- 34,060 -- -- 34,060
Cash dividends $0.37 -- -- (8,034) -- -- (8,034)
Balances at September 30, 1995 $256 $224,267 $127,304 $ 765 $ (8,189) $344,403
Balances at December 31, 1995 $256 $224,267 $134,444 $ 3,763 $ (7,805) $354,925
Treasury stock issued for employee
benefit plans (127,407 shares at
an average price of $13.43) -- -- (186) -- 1,897 1,711
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- (4,467) -- (4,467)
Net income -- -- 36,941 -- -- 36,941
Cash dividends $0.48 -- -- (12,099) -- -- (12,099)
Balances at September 30, 1996 $256 $224,267 $159,100 $ (704) $ (5,908) $377,011
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 36,941 $ 34,060
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 900 3,150
Provision for depreciation 5,442 4,712
Provision for losses and writedowns
(credits) of other real estate owned -0- (983)
Amortization of goodwill and other
intangibles 3,200 1,614
Amortization of servicing rights 3,001 2,802
Net decrease in net deferred tax
assets 1,816 3,481
Net losses realized from sales
of other real estate owned 243 838
Net (gains) realized from sales
of securities and consumer loans (503) (98)
Net (gains) realized from sales of
loans held for sale (a component
of mortgage banking services) (5,150) (3,052)
Proceeds from sales of loans held
for sale 740,748 353,569
Residential loans originated and
purchased for sale (754,366) (403,575)
Net increase in interest and
dividends receivable and
other assets (6,674) (3,121)
Net increase (decrease) in other
liabilities 13,548 (3,060)
Net cash provided (used) by
operating activities $ 39,146 $ (9,663)
Cash flows from investing activities:
Maturities of investment securities $ -0- $ 124,266
Purchases of investment securities -0- (113,368)
Proceeds from sales of securities
available for sale 31,385 11,066
Proceeds from maturities and principal
repayments of securities available
for sale 356,961 75,640
Purchases of securities available
for sale (386,975) (150,752)
Net increase in loans and leases (401,724) (124,422)
Purchase of mortgage servicing rights (11,984) (5,097)
Sale of mortgage servicing rights 2,582 -0-
Premiums paid on deposits purchased (18,230) (4,290)
Net additions to premises and equipment (6,723) (10,684)
Proceeds from sales of other real
estate owned 3,670 10,826
Net increase decrease in repossessed
assets owned (88) 167
Net cash used by investing activities $ (431,126) $ (186,648)
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(In Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 188,067 $ 278,477
Net increase in securities sold
under repurchase agreements 1,157 19,526
Advances from Federal Home Loan Bank
of Boston borrowings 401,998 274,498
Payments on Federal Home Loan Bank of
Boston borrowings (240,506) (361,000)
Net increase (decrease) in other
borrowings (2,191) 13,809
Sale of treasury stock 1,711 1,121
Purchase of treasury stock -0- (8,301)
Issuance of treasury stock for
acquisition -0- 11,274
Cash dividends paid to shareholders (12,099) (8,034)
Net cash provided by financing
activities $ 338,137 $ 221,370
Increase (decrease) in cash and cash
equivalents $ (53,843) $ 25,059
Cash and cash equivalents at beginning
of period 289,191 220,103
Cash and cash equivalents at end of
period $ 235,348 $ 245,162
Supplemental disclosures of information:
Interest paid on deposits and borrowings $ 108,623 $ 97,136
Income taxes paid 16,334 9,855
Income tax refunds 580 2,900
Noncash investing transactions:
Loans transferred to other real estate
owned 2,599 9,761
Loans originated to finance the sales of
other real estate owned 1,720 4,801
Increases (decreases) resulting from
SFAS No. 115:
Securities available for sale 6,860 15,449
Deferred income taxes - liabilities 2,393 5,605
Net unrealized gain on securities
available for sale 4,467 9,844
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
nine months ended September 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 Bank (the "Bank") and
Bank of New Hampshire Corporation ("BNHC"), which wholly
owns 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 September 30, 1996, the Bank had
total assets of $2.7 billion and total shareholder's equity
of $174.4 million.
BNH conducts business from its headquarters in Manchester,
New Hampshire and 43 additional offices located throughout
the State of New Hampshire. At September 30, 1996, BNH had
total assets of $1.8 billion and total shareholder's equity
of $133.8 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.
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.
<PAGE>
Results of Operations
The Company reported net income of $14.2 million and $36.9
million for the three and nine months ended September 30,
1996, respectively, compared with $12.8 million and $34.1
million for the comparable period in 1995. The results for
the three and nine month periods in 1996 were impacted by a
one-time after-tax Savings Association Insurance Fund
("SAIF") assessment of $1.2 million. The results for the
nine month period ended September 30, 1996 were also
impacted by after-tax merger related expenses associated
with BNHC of $3.9 million. Excluding both SAIF assessment
expenses and the BNHC merger related expenses, the Company
would have reported net income of $15.4 million and $42.1
million for the three and nine months ended September 30,
1996, respectively. The improved results in 1996 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.
Net Interest Income
The following tables set 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. For
purposes of the tables 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. Information is based on
average daily balances during the indicated periods.
<PAGE>
<TABLE>
<CAPTION> Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
Average Yield/(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $1,117,953 $22,105 7.91% $ 880,267 $17,941 8.15%
Commercial real estate mortgages 820,851 20,127 9.75 769,090 19,643 10.13
Commercial loans and leases 428,292 10,236 9.51 393,401 9,954 10.04
Consumer loans and leases 867,533 20,422 9.36 756,285 18,200 9.55
Total loans and leases 3,234,629 72,890 8.96 2,799,043 65,738 9.32
Investment securities (3) 799,857 12,668 6.30 813,607 12,671 6.18
Federal funds sold 16,129 186 4.59 88,397 1,300 5.83
Total earning assets 4,050,615 85,744 8.42 3,701,047 79,709 8.54
Nonearning assets 343,924 251,927
Total assets $4,394,539 $3,952,974
Interest-bearing deposits:
Regular savings 599,793 4,089 2.71 586,688 4,195 2.84
NOW accounts 357,741 1,086 1.21 339,118 1,201 1.41
Money market access accounts 502,154 4,521 3.58 442,830 4,285 3.84
Certificates of deposit 1,403,091 19,781 5.50 1,351,530 19,268 5.66
Total interest-bearing deposits 2,889,779 29,477 4.06 2,720,166 28,949 4.22
Borrowed funds 602,873 8,085 5.34 446,055 6,397 5.69
Total interest bearing liabilities 3,492,652 37,562 4.28 3,166,221 35,346 4.43
Demand deposits 463,251 400,987
Other liabilities (3) 65,805 50,847
Shareholders' equity (3) 372,831 334,919
Total liabilities and shareholders'
equity $4,394,539 $3,952,974
Net earning assets $ 557,963 $ 534,826
Net interest income (fully-taxable
equivalent) 48,182 44,363
Less: fully-taxable equivalent adjustments (238) (309)
Net interest income $47,944 44,054
Net interest rate spread (fully-taxable
equivalent) 4.14% 4.11%
Net interest margin (fully-taxable equivalent) 4.73% 4.76%
(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>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
Average Yield/(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $1,067,562 $ 63,836 7.97% $ 838,858 $ 51,418 8.17%
Commercial real estate mortgages 819,274 60,058 9.79 753,468 55,854 9.91
Commercial loans and leases 419,256 30,333 9.66 363,017 27,393 10.09
Consumer loans and leases 826,286 58,179 9.41 742,871 53,022 9.54
Total loans and leases 3,132,378 212,406 9.06 2,698,214 187,687 9.30
Investment securities (3) 776,392 36,707 6.32 763,157 35,204 6.17
Federal funds sold 50,019 1,872 5.00 80,869 3,608 5.97
Total earning assets 3,958,789 250,985 8.47 3,542,240 226,499 8.55
Nonearning assets 281,821 254,297
Total assets $4,240,610 $3,796,537
Interest-bearing deposits:
Regular savings 590,270 12,082 2.73 596,117 12,706 2.85
NOW accounts 352,814 3,263 1.24 322,742 3,486 1.44
Money market access accounts 503,374 13,621 3.61 390,736 10,642 3.64
Certificates of deposit 1,433,043 59,867 5.58 1,279,669 51,680 5.40
Total interest-bearing deposits 2,879,501 88,833 4.12 2,589,264 78,514 4.05
Borrowed funds 546,887 21,598 5.28 478,781 20,526 5.73
Total interest bearing liabilities 3,426,388 110,431 4.31 3,068,045 99,040 4.32
Demand deposits 427,250 358,441
Other liabilities (3) 21,897 47,496
Shareholders' equity (3) 365,075 322,555
Total liabilities and shareholders'
equity $4,240,610 $3,796,537
Net earning assets $ 532,401 $ 474,195
Net interest income (fully-taxable
equivalent) 140,554 127,459
Less: fully-taxable equivalent adjustments (640) (528)
Net interest income $139,914 $126,628
Net interest rate spread (fully-taxable
equivalent) 4.16% 4.23%
Net interest margin (fully-taxable equivalent) 4.74% 4.81%
(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 $3.8 million and $13.1 million for the three
and nine months ended September 30, 1996, respectively,
compared with the same periods in 1995. The increase was
attributable to an increase in the level of net earning
assets, which was offset somewhat by a decrease in the
Company's net interest margin.
Interest income earned on loans and leases increased by $7.1
million and $24.7 million, or 10.9% and 13.2%, for the three
and nine months ended September 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 $528 thousand and
$10.3 million, or 1.8% and 13.1%, for the three and nine
months ended September 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 $169.6 million and $290.2 million, or 6.2% and
11.2%, for the three and nine months ended September 30,
1996, respectively, as compared with the same respective
periods in 1995. The weighted average rate paid on
interest-bearing deposits decreased from 4.22% for the three
months ended September 30, 1995 to 4.06% for the three
months ended September 30, 1996. The weighted average rate
paid on interest-bearing deposits increased from 4.05% for
the nine months ended September 30, 1995 to 4.12% for the
nine months ended September 30, 1996.
Interest expense on borrowed funds increased by $1.7 million
and $1.1 million, or 26.4% and 5.2%, for the three and nine
months ended September 30, 1996, respectively, as compared
with the same respective periods in 1995. The increases
were 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 by
$156.8 million and $68.1 million, or 35.2% and 14.2%,
respectively, as compared with the same respective periods
in 1995. The weighted average rate paid decreased from
5.69% and 5.73% for the three and nine months ended
September 30, 1995, respectively, to 5.34% and 5.28% for the
same respective periods in 1996.
The Company's net interest rate spread increased from 4.11%
for the three months ended September 30, 1995 to 4.14% for
the three months ended September 30, 1996. The increase was
attributable to a decrease in the yield on interest-bearing
liabilities and an increase in the yield on investment
securities, which were offset in part by a decrease in the
yield on loans and leases.
<PAGE>
For the nine months ended September 30, 1996, the Company's
net interest rate spread decreased to 4.16% as compared with
4.23% for the nine months ended September 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 4.76% for the three
months ended September 30, 1995 to 4.73% for the three
months ended September 30, 1996. This decrease was
primarily attributable to an increase in the percentage of
interest-bearing liabilities as a percentage of earning
assets, which was offset in part by an increase in the net
interest rate spread.
The net interest margin decreased from 4.81% for the nine
months ended September 30, 1995 to 4.74% for the nine months
ended September 30, 1996. This decrease was primarily
attributable to the decreased net interest rate spread.
Provision for Loan Losses
The provision for loan losses of $-0- and $900 thousand for
the three and nine months ended September 30, 1996 decreased
$1.1 million and $2.3 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 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 $1.4 million, or 16.4%, for the
three months ended September 30, 1996 compared with the same
period in 1995, and increased $5.4 million, or 23.3%, for
the nine months ended September 30, 1996 compared with the
same period in 1995. The more significant changes to the
components of noninterest income are more fully described
below.
<PAGE>
The following table sets forth certain information relating
to mortgage banking services income for the periods
indicated:
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Residential mortgages
serviced for
investors at end
of period $2,953,213 $2,476,389 $2,953,213 $2,476,389
Residential mortgage
sales income $ 2,068 $ 1,477 $ 5,151 $ 3,027
Residential mortgage
servicing income 1,247 1,636 4,699 4,932
Total $ 3,315 $ 3,113 $ 9,850 $ 7,959
</TABLE>
The Company's portfolio of residential mortgages serviced
for investors increased by $476.8 million, net of
amortization and prepayments, or 19.3%, from September 30,
1995 to September 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.
Residential mortgage sales income increased $589 thousand,
or 39.9%, and $2.1 million, or 70.2%, for the three and nine
months ended September 30, 1996, respectively, as compared
with the same periods in 1995. The increase in residential
sales income reflects the lower interest rate environment
that existed during most of the nine month period ended
September 30, 1996 as compared with the same period in 1995,
which resulted in an increase in direct originations by the
subsidiary banks of the Company as well as an increase in
the volume of loans originated indirectly through the Bank's
correspondent network. Residential real estate mortgage
originations from correspondent lenders increased $31.1
million, or 22.6%, and $199.0 million, or 85.4%, for the
three and nine months ended September 30, 1996,
respectively, compared with the same periods in 1995.
Residential mortgage servicing income decreased $389
thousand and $233 thousand, or 23.8% and 4.7% for the three
and nine months ended September 30, 1996, respectively, as
compared with the same periods in 1995. During the three
months ended September 30, 1996 the Company reclassified the
amortization expense of the CMT floors (discussed below) to
residential mortgage servicing income from other non-
interest expenses, which resulted in a $356 thousand
decrease in mortgage servicing income in the three and nine
months ended September 30, 1996 as compared with the same
respective periods in 1995. In addition, the Company
accelerated the amortization of the carrying value of the
CMT floors by $200 thousand during the three months ended
<PAGE>
September 30, 1996 to reflect the underlying market value of
the CMT floors. Excluding the CMT floor amortization
expense recorded in 1996 as an offset to mortgage servicing
income, mortgage servicing income would have been $1.8
million and $5.3 million for the three and nine months ended
September 30, 1996, respectively, or $167 thousand and $323
thousand greater than the same respective periods in 1995.
The core 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 Statement of Financial
Accounting Standards ("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 September 30, 1996
at amortized cost of $406 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Securities losses $ (1) $ 42 $ (10) $(188)
Securities gains -0- -0- 513 81
(1) 42 $ 503 $(107)
</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
will not be significant inter-period variations in the
results from such activities.
<PAGE>
Customer services income increased $812 thousand, or 25.6%,
and $2.1 million, or 23.2%, for the three and nine months
ended September 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 Branch Acquisition, the purchase of
Bankcore and the purchase of all of the branches of Fleet
Bank of Maine located in Aroostook County.
Trust and investment advisory services income increased $456
thousand, or 30.9%, and $1.2 million, or 27.5%, for the
three and nine months ended September 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 $4.3 million, or 13.6%,
and $15.4 million, or 16.2%, for the three and nine months
ended September 30, 1996, respectively, as compared with the
same periods in 1995. Excluding merger expenses and the
one-time assessment of all SAIF-insured deposits to
recapitalize the SAIF, total noninterest expenses increased
$3.2 million, or 9.2%, and $9.7 million, or 10.3%, for the
three and nine months ended September 30, 1996,
respectively, as compared with the same periods in 1995.
Salaries and employee benefits increased $667 thousand, or
3.8%, and $4.0 million, or 8.0%, for the three and nine
months ended September 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 $371 thousand, or 14.5%, and
$1.5 million, or 18.7%, for the three and nine months ended
September 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 $884 thousand, or 39.4%,
and $2.5 million, or 39.4%, for the three and nine months
ended September 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
<PAGE>
the increase in data processing costs in 1996 as compared
with 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 $418 thousand, or 23.4%, and
$1.3 million, or 26.5%, for the three and nine months ended
September 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 of $2.3 million and
$2.9 million for the three and nine months ended September
30, 1996, respectively, include a Congressionally mandated
one-time SAIF assessment of all SAIF-insured deposits, which
amounted to $1.9 million in the case of the Company.
Excluding the one-time SAIF assessment, deposit and other
assessment expenses increased $253 thousand for the three
months ended September 30, 1996 as compared with the same
period in 1995 and decreased by $2.8 million for the nine
months ended September 30, 1996 as compared with the same
period in 1995. Included in the three month period ended
September 30, 1995 was a refund of pre-paid deposit premiums
due to a retroactive adjustment of the Bank Insurance Fund
("BIF") deposit premium rate. The decrease in deposit
premium expense for the nine month period ended September
30, 1996 (excluding the one-time SAIF assessment) was
directly attributable to the reduction in deposit insurance
premiums paid by the Bank and BNH to the BIF from $0.23 per
$100.00 of deposits to $0.04 per $100.00 of deposits in
June, 1995 and then to the minimum annual amount of $2,000
starting January, 1996. During this period the Company
continued to pay $0.23 per $100.00 of deposits for the
approximately 11% of its deposits that are insured by the
SAIF.
Merger expenses of $5.1 million for the nine month period in
1996 related 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 nine 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
$597 thousand for the nine months ended September 30, 1996,
as compared to the same period in 1995, and advertising and
marketing expenses, which decreased $540 thousand for the
nine months ended September 30, 1996, as compared with the
same period in 1995.
Other noninterest expenses increased $1.0 million, or 20.3%,
and $4.3 million, or 27.9%, for the three and nine months
ended September 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Telephone $ 921 $ 601 $ 2,436 $ 1,702
Office supplies 755 666 2,109 1,900
Amortization of
deposit premiums 742 93 1,900 198
Postage and freight 625 605 2,113 1,863
Amortization of
goodwill 508 507 1,524 1,416
Other 2,391 2,466 9,583 8,294
$ 5,942 $ 4,938 $19,665 $15,373
</TABLE>
The increase in amortization of deposit premiums was
attributable to the Branch Acquisition.
Income Tax Expense
Income tax expense was $7.3 million and $6.7 million for the
three months ended September 30, 1996 and 1995,
respectively, which amounted to effective income tax rates
of 34.0% and 34.4%, respectively. Income tax expense was
$20.1 million and $17.4 million for the nine months ended
September 30, 1996 and 1995, respectively, which amounted to
effective income tax rates of 35.3% and 33.9%, respectively.
Financial Condition
Set forth below is a discussion of the material changes in
the Company's financial condition from December 31, 1995 to
September 30, 1996.
Securities Available for Sale
Securities available for sale decreased $7.7 million, or
1.0%. 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 September 30, 1996, $704 thousand 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>
September 30, December 31,
1996 1995
(In Thousands)
<S> <C> <C>
U.S. Government obligations and
obligations of U.S. Government
agencies and corporations $408,514 $526,576
Other bonds and notes 29,953 16,531
Mortgage-backed securities 288,925 195,823
Total debt securities 727,392 738,930
Equity securities 31,528 27,718
Total securities
available for sale $758,920 $766,648
</TABLE>
<PAGE>
Loans Held for Sale
Loans held for sale, all of which were residential mortgage
loans, increased $18.8 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 September 30,
1996 was primarily attributable to timing and delivery of
loan sales.
Loans and Leases
Total loans and leases held for investment increased $400.7
million, or 14.4%, for the nine months ended September 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 and residential
loan portfolios.
Residential real estate mortgages increased $232.8 million,
or 29.2%, for the nine months ended September 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 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 in the secondary market, the Company
will, from time to time, retain a portion of originated
fixed rate residential mortgages in its loan portfolio.
Commercial real estate mortgages increased $15.9 million, or
2.0%, for the nine months ended September 30, 1996. This
increase was 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 $22.2
million, or 5.4%, for the nine months ended September 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 $129.8 million, or 16.8%, for the
nine months ended September 30, 1996. The growth in
consumer loans was concentrated in home equity loans,
automobile loans and educational 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>
September 30, June 30, March 31, December 31,
1996 1996 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 3,901 $ 5,032 $ 6,089 $ 5,713
Accruing loans which are 90 days overdue 3,528 2,238 3,800 3,728
Total 7,429 7,270 9,889 9,441
Commercial real estate mortgages:
Nonaccrual loans 16,233 15,628 16,917 17,029
Accruing loans which are 90 days overdue -0- -0- 128 -0-
Troubled debt restructurings 1,691 1,878 1,793 3,186
Total 17,924 17,506 18,838 20,215
Commercial business loans and leases:
Nonaccrual loans 7,688 7,567 5,631 6,735
Accruing loans which are 90 days overdue -0- -0- 111 25
Troubled debt restructurings 614 1,114 1,349 1,859
Total 8,302 8,681 7,091 8,619
Consumer loans and leases:
Nonaccrual loans 4,505 4,368 4,099 3,586
Accruing loans which are 90 days overdue 1,595 602 1,051 659
Total 6,100 4,970 5,150 4,245
Total nonperforming loans:
Nonaccrual loans 32,327 32,595 32,736 33,063
Accruing loans which are 90 days overdue 5,123 2,840 5,090 4,412
Troubled debt restructurings 2,305 2,992 3,142 5,045
Total 39,755 38,427 40,968 42,520
Other nonperforming assets:
Other real estate owned, net of related
reserves 9,674 10,033 11,089 12,679
Repossessions, net of related reserves 1,572 1,316 1,865 1,553
Total other nonperforming assets 11,246 11,349 12,954 14,232
Total nonperforming assets $51,001 $49,776 $53,922 $56,752
Total nonperforming loans as a percentage
of total loans (1) 1.25% 1.23% 1.36% 1.53%
Total nonperforming assets as a percentage
of total assets 1.14% 1.14% 1.27% 1.40%
Total nonperforming assets as a percentage
of total loans (1) and total other
nonperforming assets 1.60% 1.59% 1.67% 2.03%
(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 September 30, 1996, $8.1
million of commercial real estate and commercial business
loans and leases, or 30.7%, 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 September 30, 1996, total impaired loans were $27.9
million, of which $20.9 million had related allowances of
$5.2 million. During the three months ended September 30,
1996, the income recognized related to impaired loans was
$381 thousand and the average balance of outstanding
impaired loans was $27.6 million. During the nine months
ended September 30, 1996, the income recognized related to
impaired loans was $1.1 million and the average balance of
outstanding impaired loans was $28.4 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 September 30, 1996 included $9.7
million of other real estate owned and $1.6 million of
repossessed assets, in each case net of related reserves.
Potential Nonperforming Assets
At September 30, 1996, the Company had classified a total of
$78.9 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 $52.7 million of commercial real estate loans and
commercial business loans and leases classified as
substandard or lower at September 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 nine months ended September 30, 1996 and 1995, as well as certain related
ratios:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average loans and leases outstanding
during the period $3,234,629 $2,799,043 $3,132,378 $2,698,214
Allowance at beginning of period $ 63,654 $ 58,383 $ 60,975 $ 63,675
Chargeoffs:
Residential real estate loans 495 924 2,230 2,927
Commercial real estate loans 1,658 1,355 3,705 7,905
Commercial business loans and leases 249 383 1,782 1,619
Consumer loans and leases 722 722 2,417 1,961
Total loans and leases charged off 3,124 3,384 10,134 14,412
Recoveries:
Residential real estate loans 93 155 410 330
Commercial real estate loans 591 1,705 3,820 3,583
Commercial business loans and leases 245 527 756 1,755
Consumer loans and leases 204 127 626 512
Total loans and leases recovered 1,133 2,514 5,612 6,180
Net chargeoffs 1,991 870 4,522 8,232
Additions charged to operating expenses -0- 1,080 900 3,150
Additions due to purchase acquisition -0- 2,314 4,310 2,314
Allowance at end of period $ 61,663 $ 60,907 $ 61,663 $ 60,907
Ratio of net chargeoffs to average
loans and leases outstanding during
the period - annualized (1) .25% 0.12% 0.19% 0.41%
Ratio of allowance to total loans
and leases at end of period (2) 1.94% 2.21% 1.94% 2.21%
Ratio of allowance to nonperforming
loans and leases at end of period 155.1% 126.3% 155.1% 126.3%
(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>
<CAPTION>
September 30, 1996 December 31, 1995
Allowance as Allowance as
% of Total % of Total
Loans by Loans by
Amount Category Amount Category
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real
estate loans $ 7,407 0.72% $10,118 1.27%
Commercial real
estate loans 33,566 4.13 31,673 3.97
Commercial business
loans and leases 11,427 2.65 9,491 2.32
Consumer loans
and leases 9,263 1.02 9,693 1.25
$61,663 1.94 $60,975 2.19
</TABLE>
Deposits and Borrowings
Total deposits increased by $188.1 million, or 5.9%, during
the nine months ended September 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 $78.2 million, or 5.7%, an
increase in regular savings of $37.5 million, or 6.7%, an
increase in money market accounts of $13.1 million, or 2.7%,
and a combined increase in NOW and demand deposits of $59.3
million, or 7.5%. The changes in deposit balances
principally reflect the impact of the Branch Acquisition
completed during February, 1996, as well as the Company's
current strategy to emphasize relationship banking, cash
management services and core deposits.
Total borrowings increased by $175.8 million, or 38.5%, for
the nine months ended September 30, 1996. The increase was
primarily attributable to a $161.5 million increase in
Federal Home Loan Bank borrowings. The increase in Federal
Home Loan Bank borrowings was attributable to the Branch
Acquisition and loan growth. At September 30, 1996, the
Company estimates its additional available borrowing
capacity from the Federal Home Loan Bank to be approximately
$548 million.
Shareholders' Equity
Total shareholders' equity increased by $22.1 million, or
6.2%, during the nine months ended September 30, 1996. This
increase was the result of $36.9 million of net income and
$1.7 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 $12.1 million and a
$4.5 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 September 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 September 30, 1996:
<TABLE>
<CAPTION>
Actual
Required The The
Minimums Bank BNH Company
<S> <C> <C> <C> <C>
Risk-based capital ratios:
Tier I 4% 9.59% 10.88% 12.14%
Total 8 10.85 12.14 13.40
Tier I leverage
capital ratios 3 (1) 6.61 6.31 7.84
</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 nine months
ended September 30, 1996. Net cash, short term and
marketable assets amounted to $743.0 million, or 21.4% of
net deposits and short term liabilities at September 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 September 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
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 September 30, 1996, there were 4,309,709
shares of Family Common Stock outstanding. At September 30,
1996, Family had total assets of $917.8 million and
shareholders' equity of $72.9 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. All necessary regulatory and
shareholder approvals have been obtained and, as a result of
legislation enacted into law on September 30, 1996, the
Company will not become a savings and loan holding company
subject to regulation by the Office of Thrift Supervision as
a result of its acquisition of Family. The acquisition of
Family by the Company is expected to be completed by year
end 1996.
Issuer Tender Offer
The Company purchased, pursuant to the terms of an issuer
tender offer completed on October 7, 1996, 2,500,000 shares
of Common Stock at $24.00 per share. The 2,500,000 shares
represent approximately 9.9% of the Company's then
outstanding Common Stock. The tender offer was conducted by
the Company in connection with the proposed acquisition of
Family. See "Prospective Acquisition of Family Bancorp"
above.
<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.
Item 6. Exhibits and reports on Form 8-K.
(a) 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.
(b) August 23, 1996, the Company filed a report on Form 8-K
regarding the approval by shareholders of both the Company
and Family of the prospective acquisition of Family by the
Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date November 13, 1996 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
Date November 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 November 13, 1996 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
/s/ Peter J. Verrill
Date November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 211,162
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 41,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 758,920
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,179,256
<ALLOWANCE> 61,663
<TOTAL-ASSETS> 4,456,244
<DEPOSITS> 3,385,205
<SHORT-TERM> 632,704
<LIABILITIES-OTHER> 61,324
<LONG-TERM> 0
<COMMON> 256
0
0
<OTHER-SE> 376,755
<TOTAL-LIABILITIES-AND-EQUITY> 4,456,244
<INTEREST-LOAN> 211,937
<INTEREST-INVEST> 37,017
<INTEREST-OTHER> 1,391
<INTEREST-TOTAL> 250,345
<INTEREST-DEPOSIT> 88,833
<INTEREST-EXPENSE> 21,598
<INTEREST-INCOME-NET> 139,914
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 503
<EXPENSE-OTHER> 110,424
<INCOME-PRETAX> 57,059
<INCOME-PRE-EXTRAORDINARY> 57,059
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,941
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 4.74
<LOANS-NON> 32,327
<LOANS-PAST> 5,123
<LOANS-TROUBLED> 2,305
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 60,975
<CHARGE-OFFS> 10,134
<RECOVERIES> 5,612
<ALLOWANCE-CLOSE> 61,663
<ALLOWANCE-DOMESTIC> 61,663
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
