FORM 10-Q
UNITED STATES
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, 1997
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, 1997 is:
Common stock, par value $.01 per share 27,500,841
(Class) (Outstanding)
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INDEX
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996.
Consolidated Statements of Income - Three months
ended September 30, 1997 and 1996; nine months
ended September 30, 1997 and 1996.
Consolidated Statements of Changes in
Shareholders' Equity - Nine months ended
September 30, 1997 and 1996.
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1997 and 1996.
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.
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<TABLE>
<CAPTION>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
September 30, December 31,
1997 1996
<S> <C> <C>
Assets
Cash and due from banks $ 421,489 $ 276,995
Federal funds sold 137,000 83,000
Securities available for sale,
at market value 1,174,210 1,045,069
Loans held for sale, market value
$160,878 and $103,790, respectively 154,352 103,270
Loans and leases:
Residential real estate mortgages 1,184,853 1,176,874
Commercial real estate mortgages 1,000,693 962,375
Commercial business loans and leases 515,925 477,402
Consumer loans and leases 1,216,978 1,037,949
3,918,449 3,654,600
Less: Allowance for loan and
lease losses 62,961 67,488
Net loans and leases 3,855,488 3,587,112
Bank premises and equipment 70,324 73,956
Goodwill and other intangibles 66,052 71,649
Mortgage servicing rights 36,976 33,314
Other assets 140,192 124,033
$6,056,083 $5,398,398
Liabilities and Shareholders' Equity
Deposits:
Regular savings $ 732,449 $ 760,340
NOW and money market accounts 1,023,926 1,023,448
Certificates of deposit (including
certificates of $100 or more of
$275,472 and $232,880, respectively) 1,844,157 1,796,521
Demand deposits 668,023 604,980
Total deposits 4,268,555 4,185,289
Federal funds purchased 96,014 -0-
Securities sold under repurchase
agreements 257,868 197,005
Borrowings from Federal Home Loan
Bank of Boston 802,279 470,080
Other borrowings 15,680 23,884
Other liabilities 64,616 85,130
Total liabilities 5,505,012 4,961,388
Company obligated, mandatorily redeemable
securities of subsidiary trust holding
solely parent company junior
subordinated debentures 100,000 -0-
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 authorized, 28,576,885
shares issued) 286 286
Paid-in capital 271,790 271,790
Retained earnings 208,260 170,855
Net unrealized gain (loss) on securities
available for sale 4,030 (582)
Treasury stock at cost (1,102,356 shares
and 355,385 shares, respectively) (33,295) (5,339)
Total shareholders' equity 451,071 437,010
$6,056,083 $5,398,398
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Number of Shares and Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and
leases (1) $ 91,467 $72,715 $261,571 $211,937
Interest on mortgage-backed
investments 11,772 4,706 33,947 12,213
Interest on other investments 6,470 7,606 20,371 24,804
Dividends on equity
securities 659 479 1,862 1,391
Total interest and
dividend income 110,368 85,506 317,751 250,345
Interest expense:
Interest on deposits 36,449 29,477 107,409 88,833
Interest on borrowed funds 11,956 8,085 30,741 21,598
Total interest expense 48,405 37,562 138,150 110,431
Net interest income 61,963 47,944 179,601 139,914
Provision for loan losses -0- -0- -0- 900
Net interest income after
provision for loan
losses 61,963 47,944 179,601 139,014
Noninterest income:
Customer services 5,839 3,986 16,941 10,902
Mortgage banking services 4,988 3,315 12,761 9,850
Trust and investment
advisory services 2,354 1,930 6,517 5,454
Net securities gains
(losses) 48 (1) 51 503
Other noninterest income 1,011 574 2,676 1,760
14,240 9,804 38,946 28,469
Noninterest expenses:
Salaries and employee
benefits 23,332 18,388 66,605 54,019
Data processing 3,847 3,126 11,015 8,895
Occupancy 3,432 2,923 10,315 9,322
Equipment 2,824 2,204 8,582 6,195
Distributions on securities
of subsidiary trust 2,297 -0- 6,072 -0-
Amortization of goodwill and
deposit premiums 1,889 1,249 5,661 3,224
Advertising and marketing 2,290 901 5,378 2,900
Merger expenses -0- -0- -0- 5,105
Other noninterest expenses 7,301 7,465 21,423 20,764
47,212 36,256 135,051 110,424
Income before income tax 28,991 21,492 83,496 57,059
Applicable income tax 10,385 7,300 30,092 20,118
Net income $ 18,606 $14,192 $ 53,404 $ 36,941
Weighted average shares
outstanding 27,447,614 25,191,163 27,859,413 25,163,246
Earnings per share $ 0.68 $ 0.56 $ 1.92 $ 1.47
(1) Interest on loans and leases includes interest on loans held for sale.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
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)
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, 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
Balances at December 31, 1996 $286 $271,790 $170,855 $ (582) $ (5,339) $437,010
Treasury stock issued for employee
benefit plans (364,829 shares at
an average price of $18.67) -- -- (783) -- 7,593 6,810
Treasury stock purchased
(1,111,800 shares at an average
price of $31.97) (35,549) (35,549)
Change in unrealized gains (losses)
on securities available for sale,
net of tax -- -- -- 4,612 -- 4,612
Net income -- -- 53,404 -- -- 53,404
Cash dividends $0.55 -- -- (15,216) -- -- (15,216)
Balances at September 30, 1997 $286 $271,790 $208,260 $ 4,030 $(33,295) $451,071
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 53,404 $ 36,941
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses --- 900
Provision for depreciation 5,572 5,442
Amortization of goodwill and other intangibles 5,597 3,200
Net (increase) decrease in net deferred tax assets 3,905 1,816
Net (gains) losses realized from sales of other
real estate owned (515) 243
Net (gains) losses realized from sales of securities (51) (503)
Net (gains) losses realized from sales of loans held for
sale (a component of mortgage banking services) (6,926) (5,150)
Net decrease (increase) in mortgage servicing rights (3,662) (6,401)
Proceeds from sales of loans held for sale 1,518,254 740,748
Residential loans originated and purchased for sale (1,562,409) (754,366)
Net decrease (increase) in interest and dividends
receivable and other assets (18,930) (6,674)
Net increase (decrease) in other liabilities (27,563) 13,548
Net cash (used) provided by operating activities $ (33,324) $ 29,744
Cash flows from investing activities:
Proceeds from sales of securities available for sale $ 58,361 31,385
Proceeds from maturities and principal repayments of
securities available for sale 313,885 356,961
Purchases of securities available for sale (494,081) (386,975)
Net (increase) decrease in loans and leases (266,027) (401,724)
Premiums paid on deposits purchased --- (18,230)
Net additions to premises and equipment (1,940) (6,723)
Proceeds from sales of other real estate owned 2,357 3,670
Net (increase) decrease in repossessed assets owned 733 (88)
Net cash (used) provided by investing activities $ (386,712) $ (421,724)
Cash flows from financing activities:
Net increase (decrease) in deposits $ 83,266 $ 188,067
Net increase (decrease) in securities sold under
repurchase agreements 60,863 1,157
Proceeds from Federal Home Loan Bank of Boston borrowings 618,911 401,998
Payments on Federal Home Loan Bank of Boston borrowings (286,712) (240,506)
Net increase (decrease) in other borrowings (8,204) (2,191)
Proceeds from issuance of securities of subsidiary trust 98,347 ---
Purchase of treasury stock (35,549) ---
Sale of treasury stock 6,810 1,711
Cash dividends paid to shareholders (15,216) (12,099)
Net cash provided (used) by financing activities $ 522,516 $ 338,137
Increase (decrease) in cash and cash equivalents $ 102,480 $ (53,843)
Cash and cash equivalents at beginning of period 359,995 289,191
Cash and cash equivalents at end of period $ 462,475 $ 235,348
Supplemental disclosures of information:
Interest paid on deposits and borrowings $ 139,783 $ 108,623
Income taxes paid 30,014 16,334
Income tax refunds 1,913 580
Noncash investing transactions:
Loans transferred to other real estate owned 3,497 2,599
Loans originated to finance the sales of other real estate owned 5,846 1,720
Increases (decreases) resulting from the adoption of SFAS No. 115:
Securities available for sale 7,255 6,860
Deferred income taxes - liabilities 2,643 2,393
Net unrealized gain (loss) on securities available for sale 4,612 4,467
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles and predominant practices within the
banking industry. The Company has not changed its
accounting and reporting policies from those disclosed in
its 1996 Annual Report on Form 10-K.
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, 1997 are not necessarily
indicative of results that may be expected for any other
interim period or the entire year ending December 31, 1997.
Certain amounts in prior periods have been reclassified to
conform to the current presentation.
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND
SUBSIDIARIES
PART I - ITEM 2
Management's Discussion and Analysis
The results of Family Bank ("Family"), which was accounted
for as a purchase, have been included from the date of
acquisition, December 6, 1996.
On January 31, 1997, Peoples Heritage Financial Group, Inc.
(the "Company") issued, through a subsidiary trust, $100
million of 9.06% of Company obligated mandatorily redeemable
securities (the "Trust Capital Securities"). See Capital
for further details.
SUMMARY
The Company reported net income of $18.6 million, or $.68
per share, for the third quarter of 1997. This compares
with $14.2 million, or $.56 per share, for the third quarter
of 1996 and $17.8 million, or $.64 per share, for the second
quarter of 1997. Third quarter return on equity was 16.70%,
which compared to 15.21% in the third quarter of 1996 and
16.35% in the second quarter of 1997. The third quarter
return on assets was 1.30%, unchanged from the second
quarter, which compared to 1.29% for the same period in
1996.
Net earnings for the quarter, when compared to the same
period last year, increased 31% due to increased net
interest income of 29% and noninterest income of 45%. These
increases were generated both internally and through
acquisitions. Related expenses rose commensurate with
revenues. The Company's efficiency ratio, which measures
overhead as a percent of revenue, improved slightly from
59.58% in the third quarter of 1996 to 58.94% in the third
quarter of 1997. Cash earnings per share, which is
calculated using earnings before the amortization of
goodwill and core deposit premiums, improved slightly from
$.61 per share in 1996 to $.75 per share in 1997. (See
Table 1.)
Compared to the second quarter, earnings increased 5%,
primarily due to an increase in average loans outstanding
during the quarter. Return on equity increased due to an
increase in net income as well as the repurchase of 1.1
million shares of common stock during the second quarter.
The Company earned net income of $53.4 million during the
nine months ended September 30, 1997, as compared to $36.9
million during the same period in 1996, which represented
$1.92 and $1.47 per share, respectively. Return on equity
and return on assets were 16.20% and 1.30% during the nine
months ended September 30, 1997, as compared to 13.52% and
1.16% for the nine months ended September 30, 1996,
respectively. Cash earnings per share was $2.12 and $1.60
for the nine months ended September 30, 1997 and 1996,
respectively.
Selected quarterly data is provided in Table 1.
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 - Selected Quarterly Data
1997 1996
(Dollars in Thousands) Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 61,963 $ 59,925 $ 57,713 $ 50,659 $ 47,944 $ 46,831 $ 45,139
Provision for loan losses --- --- --- --- --- 450 450
Net interest income after
loan loss provision 61,963 59,925 57,713 50,659 47,944 46,381 44,689
Noninterest income
(excluding securities
transactions) 14,192 12,372 12,331 9,975 9,805 9,196 8,965
Securities gains 48 --- 3 4 (1) --- 504
Noninterest expenses
(excluding SAIF assessment
and merger charges) 47,212 44,605 43,234 37,649 34,404 34,934 34,129
SAIF assessment and merger
charges --- --- --- --- 1,852 4,652 453
Income before income taxes 28,991 27,692 26,813 22,989 21,492 15,991 19,576
Income tax expense 10,385 9,904 9,803 7,450 7,300 5,848 6,970
Net income $ 18,606 $ 17,788 $ 17,010 $ 15,539 $ 14,192 $ 10,143 $ 12,606
Earnings per share $ 0.68 $ 0.64 $ 0.60 $ 0.63 $ 0.56 $ 0.40 $ 0.50
Cash earnings per share $ 0.75 $ 0.71 $ 0.67 $ 0.69 $ 0.61 $ 0.45 $ 0.54
Return on average assets (1) 1.30% 1.30% 1.28% 1.32% 1.29% 0.93% 1.24%
Return on average equity (1) 16.70% 16.35% 15.55% 16.83% 15.21% 11.20% 14.06%
Efficiency ratio (2) 58.94% 58.56% 59.57% 62.09% 59.58% 62.85% 63.08%
(1) Annualized.
(2) Excludes securities transactions, a one-time assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"), merger charges and expenses related to Company-
obligated, mandatorily redeemable securities of subsidiary trust holding solely parent
Company junior subordinated debentures.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 2 - Average Balances, Yields and Rates
1997
Third
Average Yield/(1)
Balance Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $1,396,461 $ 27,455 7.86%
Commercial real estate mortgages 992,632 24,078 9.62
Commercial loans and leases 531,187 12,700 9.64
Consumer loans and leases 1,146,586 27,384 9.48
Total loans and leases 4,066,866 91,617 8.96
Securities available for sale (3) 1,171,323 18,833 6.41
Federal funds sold 11,249 194 6.90
Total earning assets 5,249,438 110,644 8.39
Nonearning assets 428,694
Total assets $5,678,132
Interest-bearing deposits:
Regular savings $ 743,465 5,020 2.68
NOW and money market accounts 1,013,670 6,502 2.54
Certificates of deposit 1,818,595 24,927 5.44
Total interest-bearing deposits 3,575,730 36,449 4.04
Borrowed funds 882,057 11,956 5.38
Total interest-bearing liabilities 4,457,787 48,405 4.31
Demand deposits 619,933
Other liabilities (3) 60,400
Securities of subsidiary trust 100,000
Shareholders' equity (3) 440,012
Total liabilities and shareholders'
equity $5,678,132
Net earning assets $ 791,651
Net interest income (fully-taxable
equivalent) 62,239
Less: fully-taxable equivalent adjustments (276)
Net interest income $ 61,963
Net interest rate spread (fully-taxable
equivalent) 4.08%
Net interest margin (fully-taxable equivalent) 4.73%
(1) Annualized.
(2) Loans and leases includes loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 2 - (Cont'd)
1997 1997
Second First
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 $1,309,724 $ 25,910 7.91% $1,327,467 $ 25,954 7.82%
Commercial real estate mortgages 974,276 23,266 9.58 966,083 22,870 9.60
Commercial loans and leases 510,203 12,213 9.60 479,822 11,467 9.69
Consumer loans and leases 1,067,538 25,111 9.43 1,026,128 23,553 9.31
Total loans and leases 3,861,741 86,500 8.98 3,799,500 83,844 8.91
Securities available for sale (3) 1,190,142 19,058 6.42 1,091,909 17,795 6.56
Federal funds sold 8,544 127 5.96 25,340 430 6.88
Total earning assets 5,060,427 105,685 8.37 4,916,749 102,069 8.38
Nonearning assets 413,966 471,757
Total assets $5,474,393 $5,388,506
Interest-bearing deposits:
Regular savings $ 754,428 5,042 2.68 $ 760,705 5,013 2.67
NOW and money market accounts 1,011,486 6,292 2.49 980,957 6,166 2.55
Certificates of deposit 1,791,015 24,268 5.44 1,808,264 24,179 5.42
Total interest-bearing deposits 3,556,929 35,602 4.01 3,549,926 35,358 4.04
Borrowed funds 730,820 9,933 5.45 689,014 8,853 5.21
Total interest-bearing liabilities 4,287,749 45,535 4.26 4,238,940 44,211 4.23
Demand deposits 585,412 549,552
Other liabilities (3) 61,674 105,182
Securities of subsidiary trust 100,000 50,806
Shareholders' equity (3) 439,558 444,026
Total liabilities and shareholders'
equity $5,474,393 $5,388,506
Net earning assets $ 772,678 $ 677,809
Net interest income (fully-taxable
equivalent) 60,150 57,858
Less: fully-taxable equivalent adjustments (225) (145)
Net interest income $ 59,925 $ 57,713
Net interest rate spread (fully-taxable
equivalent) 4.11% 4.15%
Net interest margin (fully-taxable equivalent) 4.76% 4.73%
(1) Annualized.
(2) Loans and leases includes loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 2 - (Cont'd)
1996 1996
Fourth Third
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 $1,180,109 $ 23,521 7.97% $1,117,953 $ 22,105 7.91%
Commercial real estate mortgages 858,009 20,767 9.63 820,851 20,127 9.75
Commercial loans and leases 445,582 10,581 9.45 428,292 10,236 9.51
Consumer loans and leases 955,172 22,343 9.31 867,533 20,422 9.36
Total loans and leases 3,438,872 77,212 8.93 3,234,629 72,890 8.96
Securities available for sale (3) 845,828 13,373 6.29 799,857 12,668 6.30
Federal funds sold 29,859 467 6.22 16,129 186 4.59
Total earning assets 4,314,559 91,052 8.40 4,050,615 85,744 8.42
Nonearning assets 368,153 343,924
Total assets $4,682,712 $4,394,539
Interest-bearing deposits:
Regular savings $ 642,188 4,351 2.70 $ 599,793 4,089 2.71
NOW and money market accounts 902,006 5,899 2.60 859,895 5,607 2.59
Certificates of deposit 1,548,624 21,360 5.49 1,430,091 19,781 5.50
Total interest-bearing deposits 3,092,818 31,610 4.07 2,889,779 29,477 4.06
Borrowed funds 634,938 8,557 5.36 602,873 8,085 5.34
Total interest-bearing liabilities 3,727,756 40,167 4.29 3,492,652 37,562 4.28
Demand deposits 509,547 463,251
Other liabilities (3) 79,146 65,805
Securities of subsidiary trust --- ---
Shareholders' equity (3) 366,263 372,831
Total liabilities and shareholders'
equity $4,682,712 $4,394,539
Net earning assets $ 586,803 $ 557,963
Net interest income (fully-taxable
equivalent) 50,885 48,182
Less: fully-taxable equivalent adjustments (226) (238)
Net interest income $ 50,659 $ 47,944
Net interest rate spread (fully-taxable
equivalent) 4.11% 4.14%
Net interest margin (fully-taxable equivalent) 4.69% 4.73%
(1) Annualized.
(2) Loans and leases includes loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
</TABLE>
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<TABLE>
<CAPTION>
TABLE 2 (Cont'd)
1996 1996
Second First
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 $1,128,536 $ 22,272 7.89% $ 955,643 $ 19,459 8.14%
Commercial real estate mortgages 828,358 19,876 9.65 821,072 20,360 9.97
Commercial loans and leases 423,868 10,137 9.62 402,900 9,887 9.87
Consumer loans and leases 821,400 19,152 9.38 779,603 18,362 9.47
Total loans and leases 3,202,162 71,437 8.97 2,959,218 68,068 9.25
Securities available for sale (3) 794,510 12,418 6.29 752,285 11,646 6.23
Federal funds sold 39,622 452 4.59 93,232 1,235 5.33
Total earning assets 4,036,294 84,307 8.40 3,804,735 80,949 8.56
Nonearning assets 354,128 272,408
Total assets $4,390,422 $4,077,143
Interest-bearing deposits:
Regular savings $ 595,325 4,014 2.71 $ 575,680 3,979 2.78
NOW and money market accounts 864,797 5,532 2.57 847,984 5,745 2.72
Certificates of deposit 1,462,168 20,242 5.57 1,406,904 19,843 5.67
Total interest-bearing deposits 2,922,290 29,788 4.10 2,830,568 29,567 4.20
Borrowed funds 584,974 7,466 5.13 450,311 6,048 5.40
Total interest-bearing liabilities 3,507,264 37,254 4.27 3,280,879 35,615 4.37
Demand deposits 423,588 395,453
Other liabilities (3) 94,342 43,838
Securities of subsidiary trust --- ---
Shareholders' equity (3) 365,228 356,973
Total liabilities and shareholders'
equity $4,390,422 $4,077,143
Net earning assets $ 529,030 $ 523,856
Net interest income (fully-taxable
equivalent) 47,053 45,334
Less: fully-taxable equivalent adjustments (222) (195)
Net interest income $ 46,831 $ 45,139
Net interest rate spread (fully-taxable
equivalent) 4.13% 4.19%
Net interest margin (fully-taxable equivalent) 4.69% 4.79%
(1) Annualized.
(2) Loans and leases includes loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
</TABLE>
<PAGE>
EARNING ASSETS
The discussion and analysis that follows is based upon
information set forth in Table 2 regarding average balances,
yields and rates.
Loans
Third quarter average loans and leases of $4.1 billion rose
$832.2 million from a year earlier and $205.1 million from
the second quarter. The acquisition of Family during the
fourth quarter of 1996 added $469.8 million of loans.
Internal growth has been concentrated in the commercial loan
and consumer loan portfolios. Average loans as a percentage
of average earning assets fell from 79.9% during the third
quarter of 1996 to 77.5% during the third quarter of 1997
due primarily to the 54.4% loans to earning assets ratio of
Family at the time of acquisition. The Company is gradually
increasing the percentage of average loans to average
earning assets as the Family acquisition is assimilated.
The ratio increased from 76.3% as of June 30, 1997 to 77.5%
at September 30, 1997.
Average residential real estate loans (which includes loans
held for sale) of $1.4 billion grew 6.6% from the second
quarter of 1997 and 24.9% from the third quarter of 1996.
The Company originates residential real estate loans for
sale to investors in the secondary mortgage market and for
its own portfolio. During the third quarter, originations
were $856.5 million, of which $714.3 million represented
correspondent production. This compares to $295.0 million
and $205.4 million, respectively, in the third quarter of
1996 and $437.6 million and $324.0 million, respectively, in
the second quarter. Mortgage originations, particularly
refinancings, are highly dependent upon interest rates. At
September 30, 1997, 38% of portfolio loans were fixed rate
and 62% were variable rate. Portfolio adjustable rate loans
are generally indexed 3.50% above the 1-year constant
maturity treasury (CMT), after an initial below market rate.
Average commercial loans of $531.2 million grew 24.0% from
the third quarter of 1996 and 4.1% from the second quarter
of 1997. Excluding $49.1 million of Family loans added
during the fourth quarter, average outstanding commercial
loans increased 12.6% from the third quarter of 1996. The
growth in commercial loans is consistent with the Company's
focus on lending to small and medium size business customers
within its geographic markets. The average yield on
commercial loans during the third quarter of 1997 of 9.64%
was slightly higher than the third quarter 1996 yield of
9.51%.
Average commercial real estate loans of $992.6 million grew
21% from last year and 1.9% from the second quarter.
Excluding $151.2 million of Family loans added during the
fourth quarter, average outstanding commercial real estate
loans increased 2.5% from the third quarter of 1996. The
average yield on commercial real estate loans declined
slightly from 9.75% during the third quarter of 1996 to
9.62% during the third quarter of 1997 reflecting increased
competition.
<PAGE>
Average consumer loans of $1.1 billion grew 32.2% from the
third quarter of 1996 and 7.4% from the second quarter of
1997. Excluding $79.1 million of Family loans added during
the fourth quarter, average outstanding consumer loans
increased 23.1% from the third quarter of 1996. The growth
in consumer loans resulted primarily from an increase in
home equity and indirect auto loans. Mobile home loan
balances continue to decline as the Company has de-
emphasized this product. The average yield on consumer
loans increased slightly from 9.36% during the third quarter
of 1996 to 9.48% during the third quarter of 1997.
Securities Available for Sale and Other Earning Assets
The Company's $1.2 billion securities portfolio at September
30, 1997 consisted primarily of U. S. Treasury securities
and AAA or equivalent rated mortgage-backed securities.
Average securities increased 46.4% from last year and
decreased 1.6% from the second quarter. Excluding $356.2
million of Family securities added during the fourth
quarter, average outstanding securities increased 1.9%. The
average securities yield was 6.41% for the third quarter of
1997, as compared to 6.30% for the third quarter of 1996 and
6.42% for the second quarter. The increased yield, on a
year-to-year comparison basis, was due primarily to
reinvesting maturing U.S. Treasury securities into higher-
yielding mortgage-backed securities, higher market interest
rates and the addition of higher yielding securities at
Family.
At September 30, 1997, the available-for-sale portfolio had
a $6.2 million gross unrealized gain, compared to a gross
unrealized loss of $1.2 million at September 30, 1996 and a
$400 thousand gross unrealized gain at June 30, 1997. The
increase in market value was due to a decrease in market
interest rates and improved market conditions in the third
quarter.
DEPOSITS AND OTHER FUNDING SOURCES
Deposits
Average deposits of $4.2 billion increased 25.1% from the
third quarter of last year and 1.3% from the second quarter.
Excluding $774.6 million of Family deposits added during the
fourth quarter, average deposits increased 2% from the third
quarter of 1996. At September 30, 1997, the ratio of loans
to deposits was 92%, up from 89% at June 30, 1997 and 87% at
December 31, 1996. This was primarily the result of the
utilization of excess liquidity at Family, which had a loan
to deposit ratio of 60.6% at the time of acquisition on
December 6, 1996.
Average transaction accounts (demand deposit, NOW and money
market accounts) of $1.6 billion were up 23.5% from last
year and 2.3% from the second quarter. Excluding $250.5
million of Family transaction deposits added during the
fourth quarter, average outstanding transaction deposits
increased 4.5% from the third quarter of 1996. The
increases in transaction deposits is consistent with the
Company's increased marketing of these lower cost accounts.
The average rate paid on NOW and money market accounts
<PAGE>
declined from 2.59% during the third quarter of 1996 to
2.54% during the third quarter of 1997 due to an increase in
lower yielding NOW accounts.
Average savings and time deposit balances of $2.6 billion
increased 26.2% from last year and increased 1% from the
second quarter. Excluding $523.9 million of Family deposits
added during the fourth quarter, average savings and time
deposits increased less than 1%. The average rate paid on
savings and time deposits has remained relatively flat on a
year-to-year basis.
Other Funding Sources
The Company's primary source of funding, other than deposits
and securities sold under repurchase agreements, is the
Federal Home Loan Bank ("FHLB"). Average FHLB borrowings
for the third quarter were $595.4 million, compared with
$399.9 million for the third quarter of last year and $491.9
million for the second quarter. FHLB borrowings increased
because growth in earning assets, particularly mortgage
loans held for sale, exceeded growth in deposits. FHLB
borrowings are secured by a blanket lien on qualified
collateral consisting primarily of loans with first
mortgages secured by 1-4 family properties, certain
unencumbered securities and other qualified assets. At
September 30, 1997, FHLB borrowings amounted to $802.3
million. The Company's estimated additional borrowing
capacity with the FHLB at September 30, 1997 was $342
million.
ASSET-LIABILITY MANAGEMENT
Net interest income, the Company's primary source of
revenue, is affected by changes in interest rates as well as
fluctuations in the level and duration of assets and
liabilities contained on the Company's balance sheet. The
impact of changes in interest rates on the Company's net
interest income represents its level of interest rate risk.
The Company analyzes the estimated future impact on net
interest income of changing interest rates based on
projections, including anticipated business activity,
anticipated changes in interest rates and other variables,
which are adjusted periodically. The results of this
analysis indicates that the Company is relatively rate
neutral within a twelve-month period. Management estimates
that an instantaneous 2% change in interest rates would have
less than a 3% impact on net interest income over a twelve
month period. This assessment is 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 deposits. 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.
The primary objective of the Company's asset-liability
management is to maximize net interest income while
<PAGE>
maintaining acceptable levels of interest-rate sensitivity.
The Liquidity and Funds Management Committee sets specific
rate-sensitivity limits for the Company. The Committee
monitors and adjusts the Company's exposure to changes in
interest rates to achieve predetermined risk targets that it
believes are consistent with current and expected market
conditions. Management strives to minimize the negative
impact on net interest income caused by changes in interest
rates. At this time, management believes the Company's
asset-liability mix is sufficiently balanced within a broad
range of interest rate scenarios to minimize the impact of
significant rate movements within a twelve-month period.
The Company controls its interest rate risk by managing the
level and duration of certain on-balance-sheet assets and
liabilities. The Company does not currently use off-balance-
sheet instruments (derivatives) to manage its interest rate
sensitivity position.
The Company has, however, purchased interest rate floors
tied to the CMT index to mitigate the prepayment risk
associated with mortgage servicing rights (see " Non-
Interest Income" for further details). The value of the CMT
floors is inversely related to movements in interest rates,
while the value of the servicing rights is positively
related to movements in interest rates. When rates decline,
people are more likely to refinance their mortgages, which
reduces the value of the servicing rights to the Company.
When rates increase, the opposite is true. While not
accorded hedge accounting treatment due to the uncertainty
of strict correlation, in the event that interest rates
fall, any resulting increase in the value of the CMT floors
are intended to offset, in part, the prospective impairment
of the servicing rights. The CMT floors are carried at
amortized value of $25 thousand and are included in other
assets. Amortization of the CMT floors reduced mortgage
banking income by $41 thousand, $330 thousand, and $46
thousand in the third quarter of 1997, the third quarter of
1996, and the second quarter of 1997, respectively.
NET INTEREST INCOME
The Company's taxable-equivalent net interest income, which
represented 81% of net interest income and noninterest
income, was $62.2 million in the third quarter, up 29% from
the third quarter of 1996 and 3% from the second quarter.
The increases primarily reflect higher earning assets as a
result of the Family acquisition during the fourth quarter
as well as internal loan growth. Table 3 shows the changes
from the third quarter of 1996 to the third quarter of 1997
in tax equivalent net interest income by category due to
rate and volume.
The third quarter of 1997 net interest margin was 4.73%
compared to 4.73% in the third quarter of 1996 and 4.76% in
the second quarter of 1997.
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 - Rate Volume Analysis
Three Months Ended September 30, 1997 vs. Three Months Ended
September 30, 1996
Quarterly
change from previous year due to:
Total
Volume Rate (1) Change
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income:
Loans and leases $18,805 $ (78) $18,727
Investment securities 5,899 266 6,165
Federal funds sold (56) 64 8
Total interest income 24,648 252 24,900
Interest expense:
Deposits
Regular savings 982 (51) 931
NOW and money market
accounts 1,005 (110) 895
Certificates of deposit 5,389 (243) 5,146
Total deposits 7,376 (404) 6,972
Borrowed funds 3,754 118 3,872
Total interest
expense 11,130 (286) 10,844
Net interest income (fully
taxable equivalent) $13,518 $ 538 $14,056
(1) Includes changes in interest income and expense not due
solely to volume or rate changes.
</TABLE>
<PAGE>
NONINTEREST INCOME
Third quarter noninterest income of $14.2 million increased
45% from the third quarter of 1996 and 15% when compared
with the second quarter of 1997. The annual increase was
attributable to both the Family acquisition during the
fourth quarter of 1996 and internal initiatives to increase
noninterest income. The increase in noninterest income from
the last quarter was largely due to a $1.5 million increase
in mortgage banking income.
Customer services income of $5.8 million increased 46% from
the third quarter of last year and 1.3% from the second
quarter of 1997. Excluding Family, customer services
revenue increased 10% from the third quarter of last year.
The increases in customer services income were attributable
to growth in the number of transaction accounts and related
fees and increases in ATM charges.
Mortgage banking services income of $5.0 million increased
50% from last year and increased 41% from the second quarter
due to an $802 thousand gain on the sale of mortgage
servicing rights and a $524 thousand increase in mortgage
sales income.
The Company expects to continue to sell servicing rights
periodically in the future in order to manage the size of
its servicing asset. Mortgage servicing rights amounted to
$37.0 million at September 30, 1997, which was 38% higher
than a year earlier and 7% higher than on June 30, 1997.
The Company has generally sold servicing rights related to
correspondent production and retained servicing rights
related to retail production. See Table 4 for details.
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 - Mortgage Banking
At or for the Three Months Ended
September 30, June 30, March 31, December 31, September 30, June 30, March 31,
1997 1997 1997 1996 1996 1996 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages
serviced for
investors at end
of period $3,388,310 $2,905,274 $3,346,804 $3,227,659 $2,953,213 $2,819,545 $2,701,552
Residential mortgage
sales income $ 2,141 $ 1,617 $ 1,113 $ 1,722 $ 1,419 $ 1,550 $ 1,332
Residential mortgage
servicing income, net 2,045 1,925 1,865 1,132 1,247 1,621 1,832
Gain on sale of
mortgage servicing 802 --- 1,253 236 649 --- 200
Total $ 4,988 $ 3,542 $ 4,231 $ 3,090 $ 3,315 $ 3,171 $ 3,364
</TABLE>
<PAGE>
Trust and investment advisory services income of $2.4
million increased 22% from the third quarter of 1996 and
3.4% from the second quarter of 1997 due primarily to
increases in assets under management. Assets under
management amounted to $1.8 billion, $1.3 billion and $1.2
billion at September 30, 1997, June 30, 1997, and December
31, 1996, respectively.
The Company recorded a $48 thousand gain on sales of
securities available for sale in the third quarter of 1997
as compared to $1 thousand loss in the third quarter of
1996.
NONINTEREST EXPENSE
Noninterest expense of $47.2 million increased 30% from the
third quarter of 1996 and 5.8% from the second quarter of
1997. The year-to-year increase was primarily attributable
to the Family acquisition during the fourth quarter of 1996
and the issuance of the Trust Capital Securities during the
first quarter of 1997. While the overall total of non-
interest expenses has increased, the Company's efficiency
ratio, which excludes distributions on the Trust Capital
Securities among other things (see Table 1), has decreased
to 58.94% during the third quarter of 1997 from 59.58%
during the third quarter of 1996 as compared with 58.56%
during the second quarter of 1997. The lower efficiency
ratio from 1996, although up slightly from the second
quarter, reflects efficiencies created by the acquisition
and assimilation of both Bank of New Hampshire and Family.
Salaries and benefits expense of $23.3 million increased 27%
from last year and 6% from the second quarter. In addition
to Family, the increases were attributable to increased
performance-based compensation. Third quarter full-time
equivalent employees were 2,381, compared to 1,980 for the
same period last year and 2,400 for the second quarter.
Data processing expense increased 23% from the third quarter
of last year and 10% from the second quarter. The increase
in expenses was attributable to the implementation of system
upgrades to accommodate increased volumes.
Occupancy expense increased 17% from the third quarter of
last year and 12% from the second quarter of 1997. Included
as a reduction to occupancy expense during the second
quarter is a net gain on the sale of the former operations
center of Bank of New Hampshire of $503 thousand. Excluding
the net gain in the second quarter, occupancy expense
decreased 4%. The year-to-year increase was primarily
related to Family but also reflects the cost associated with
new supermarket branches.
Equipment expense increased 28% from the third quarter of
last year and was the same as the second quarter of 1997.
The year-to-year increase was related to Family as well as
the expansion of the Company's branch and ATM networks and
continued investments in computer-related technology.
Amortization of goodwill and deposit premiums during the
third quarter of 1997 increased 51% from the third quarter
of 1996 and was flat when compared with the second quarter.
The year-to-year increase was directly related to the
purchase of Family during the fourth quarter of 1996.
Advertising and marketing expenses increased 154% from the
third quarter of 1996 and was 46% higher than the second
quarter. The increases were related to the addition of
Family, the timing of certain promotional campaigns and the
Company's efforts to promote its products and services in an
increasingly competitive market for financial services. The
breakdown of other noninterest expenses is included in Table
5, which follows.
<PAGE>
<TABLE>
<CAPTION>
TABLE 5 - Other Noninterest Expenses
1997 1997 1997 1996 1996 1996 1996
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Miscellaneous loan costs $ 945 $1,231 $ 912 $1,078 $ 778 $ 978 $ 394
Telephone 1,015 1,018 1,005 1,215 921 838 677
Postage and freight 925 1,004 1,070 765 625 673 815
Office supplies 843 876 824 1,009 755 677 677
Deposits and other assessments 398 378 372 111 2,270 (1) 324 345
Collection and carrying costs
of non-performing assets 275 9 213 189 502 378 504
Other 2,900 2,860 2,350 2,206 1,814 3,361 2,458
$7,301 $7,376 $6,746 $6,573 $7,665 $7,229 $5,870
(1) Third quarter 1996 includes a $1.9 million SAIF assessment.
</TABLE>
<PAGE>
TAXES
The third quarter effective tax rate of 36% compares to 34%
in the third quarter of 1996 and 36% in the second quarter.
The increase from 1996 was primarily due to non-deductible
goodwill from the Family purchase.
ASSET QUALITY
As shown in Table 6, nonperforming assets were $45.7 million
at September 30, 1997, which represented 0.75% of total
assets. This compares to $45.9 million or 1.03% at
September 30, 1996 and $46.2 million or 0.83% at June 30,
1997. Year to year, declines in nonperforming assets have
resulted from sales of other real estate owned ("OREO"),
which were offset in part by an increase in nonaccrual loans
and repossessions.
<PAGE>
<TABLE>
<CAPTION>
TABLE 6 -- Nonperforming Assets
Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31,
1997 1997 1997 1996 1996 1996 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 6,474 $ 5,406 $ 5,053 $ 3,867 $ 3,901 $ 5,032 $ 6,089
Commercial real estate loans:
Nonaccrual loans 16,147 16,785 15,854 15,270 16,233 15,628 16,917
Troubled debt restructurings 1,121 1,356 1,473 1,581 1,691 1,878 1,793
Total 17,268 18,141 17,327 16,851 17,924 17,506 18,710
Commercial business loans and leases:
Nonaccrual loans 8,390 7,732 6,875 8,016 7,688 7,567 5,631
Troubled debt restructurings 118 193 199 579 614 1,114 1,349
Total 8,508 7,925 7,074 8,595 8,302 8,681 6,980
Consumer loans and leases;
Nonaccrual loans 6,548 6,564 6,439 5,097 4,505 4,368 4,099
Total nonperforming loans:
Nonaccrual loans 37,559 36,487 34,221 32,250 32,327 32,595 32,736
Troubled debt restructurings 1,239 1,549 1,672 2,160 2,305 2,992 3,142
Total 38,798 38,036 35,893 34,410 34,632 35,587 35,878
Other nonperforming assets:
Other real estate owned, net of
related reserves 5,057 5,652 7,390 10,000 9,674 10,033 11,089
Repossessions, net of related reserves 1,837 2,564 1,964 1,818 1,572 1,316 1,865
Total other nonperforming assets 6,894 8,216 9,354 11,818 11,246 11,349 12,954
Total nonperforming assets $45,692 $46,252 $45,247 $46,228 $45,878 $46,936 $48,832
Accruing loans which are 90 days overdue $ 6,324 $ 4,894 $ 5,820 $ 8,038 $ 5,123 $ 2,840 $ 5,090
Total nonperforming loans as a percentage
of total loans (1) 0.99% 1.01% 0.98% 0.94% 1.09% 1.14% 1.19%
Total nonperforming assets as a percentage
of total assets 0.75% 0.83% 0.83% 0.86% 1.03% 1.07% 1.15%
Total nonperforming assets as a percentage
of total loans (1) and total other
nonperforming assets 1.16% 1.23% 1.24% 1.26% 1.44% 1.50% 1.61%
Note: The Company has changed its definition of non-performing assets to exclude loans 90 days past due still accruing
interest. Prior periods have been restated accordingly.
(1) Exclusive of loans held for sale.
</TABLE>
<PAGE>
The Company's residential loan portfolio accounted for 30%
of the total loan portfolio at September 30, 1997 as
compared with 32% at September 30 and December 31, 1996.
The reductions are consistent with the strategy of the
Company to reduce lower yielding residential loans as a
percentage of the overall loan portfolio. The Company's
residential loans are generally secured by 1-4 family homes,
conform to federal agency underwriting standards and have a
maximum loan to value ratio of 80%, unless they are
protected by mortgage insurance. At September 30, 1997,
0.55% of the Company's residential loans were non-
performing, as compared with 0.38% at September 30, 1996 and
.33% at December 31, 1996.
The Company's commercial real estate loan portfolio
accounted for 26% of the total loan portfolio at September
30, 1997 and 1996 and at December 31, 1996. It is the
intention of the Company to maintain commercial real estate
loans as a percentage of the overall loan portfolio at the
same or lower levels in the future. At September 30, 1997,
1.73% of the Company's commercial real estate loans were
non-performing, as compared with 2.20% at September 30, 1996
and 1.75% at December 31, 1996.
The Company's commercial business loan portfolio accounted
for 13% of the total loan portfolio at September 30, 1997 as
compared with 14% at September 30, 1996 and 13% at December
31, 1996. It is the intention of the Company to increase
commercial business loans as a percentage of the overall
loan portfolio. Commercial business loans are not
concentrated in any particular industry, but reflect the
broad-based economies of Maine, New Hampshire and
northeastern Massachusetts. The Company's commercial
business loans are generally to small and medium size
businesses located within its geographic market area. At
September 30, 1997, 1.65% of the Company's commercial
business loans were non-performing, as compared with 1.93%
at September 30, 1996 and 1.80% at December 31, 1996.
The Company's consumer loan portfolio accounted for 31% of
the total loan portfolio at September 30, 1997, as compared
with 28% at September 30, 1996 and December 31, 1996. It is
the intention of the Company to increase consumer loans as a
percentage of the overall loan portfolio. The Company has a
diversified consumer loan portfolio comprised of 34% home
equity loans, 24% automobile loans, 16% mobile home loans,
9% student loans and 17% of other loan types, including
approximately 1% of credit card loans. At September 30,
1997, 0.54% of the Company's consumer loans were non-
performing, as compared with 0.50% at September 30, 1996 and
0.49% at December 31, 1996.
Net Charge-offs
As shown in Table 7, third quarter net charge-offs were $1.8
million or 18 basis points of average loans and leases
outstanding. This compares to $2.0 million or 25 basis
points for the third quarter of 1996 and $1.8 million or 19
basis points for the second quarter of 1997.
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 - Allowance for Loan and Lease Losses
1997 1997 1997 1996 1996 1996 1996
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Average loans and leases
outstanding during
the period (1) $4,066,866 $3,861,741 $3,799,500 $3,438,872 $3,234,629 $3,202,162 $2,959,218
Allowance at beginning
of period $ 64,783 $ 66,601 $ 67,488 $ 61,663 $ 63,654 $ 65,533 $ 60,975
Additions due to acquisitions
and purchases --- --- --- 7,055 --- --- 4,310
Charge-offs:
Residential real estate
mortgages 247 425 516 582 495 1,163 434
Commercial real estate
mortgages 188 214 261 5,064 1,658 1,158 888
Commercial business loans
and leases 1,452 1,021 323 1,211 249 679 855
Consumer loans and leases 2,684 1,522 1,568 1,182 722 1,092 741
Total loans charged off 4,571 3,182 2,668 8,039 3,124 4,092 2,918
Recoveries:
Residential real estate
mortgages 78 113 90 97 93 248 62
Commercial real estate
mortgages 1,296 448 890 5,721 591 1,169 2,060
Commercial business loans
and leases 982 563 574 780 245 92 420
Consumer loans and leases 393 240 227 211 204 254 174
Total loans recovered 2,749 1,364 1,781 6,809 1,133 1,763 2,716
Net charge-offs 1,822 1,818 887 1,230 1,991 2,329 202
Additions charged to operating
expenses --- --- --- --- --- 450 450
Allowance at end of period $ 62,961 $ 64,783 $ 66,601 $ 67,488 $ 61,663 $ 63,654 $ 65,533
Ratio of net charge-offs to average
loans and leases outstanding
during the period-annualized(1) 0.18% 0.19% 0.09% 0.14% 0.25% 0.29% 0.03%
Ratio of allowance to total loans
and leases at end of period(2) 1.61% 1.73% 1.82% 1.85% 1.94% 2.04% 2.17%
Ratio of allowance to non-
performing loans at end
of period 162% 170% 186% 196% 178% 179% 183%
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Excludes loans held for sale.
</TABLE>
<PAGE>
Provision/Allowance for Loan Losses
The Company did not record a provision for loan losses in
1997. There was also no provision for the third quarter of
1996.
At September 30, 1997, the allowance for loan and lease
losses amounted to $63.0 million or 1.61% of loans, as
compared to 1.94% at September 30, 1996 and 1.85% at
December 31, 1996. The ratio of the allowance for loan and
lease losses to nonperforming loans was 162% at September
30, 1997, as compared to 178% at September 30, 1996 and 196%
at December 31, 1996. Management considers the allowance
appropriate and adequate to cover potential losses inherent
in the loan portfolio based on the current economic
environment.
Provisions for loan losses are attributable to management's
ongoing evaluation of the adequacy of the allowance for loan
and lease losses, which includes, among other procedures,
consideration of the character and size of the loan
portfolio, monitoring trends in nonperforming loans,
delinquent loans and net charge-offs, as well as new loan
originations and other asset quality factors.
Although management utilizes its best judgment in providing
for possible losses, there can be no assurance that the
Company will not have to change its provisions for loan
losses in subsequent periods. Changing economic and
business conditions in northern New England, fluctuations in
local markets for real estate, future changes in
nonperforming asset trends, large upward movements in
market-based interest rates or other reasons could affect
the Company's future provisions for loan losses. Based on
anticipated growth in assets, it is likely that the Company
will resume recording a provision for loan losses in 1998.
LIQUIDITY
For banks, liquidity represents the ability to meet both
loan commitments and deposit withdrawals. Funds to meet
these needs generally can be obtained by converting liquid
assets to cash or by attracting new deposits or other
sources of funding. Many factors affect a bank's ability to
meet liquidity needs, including variations in the markets
served, its asset-liability mix, its reputation and credit
standing in the market and general economic conditions.
In addition to traditional in-market deposit sources, the
Company has many other sources of liquidity, including
proceeds from maturing securities and loans, the sale of
securities, asset securitizations and other non-relationship
funding sources, such as FHLB borrowings, senior or
subordinated debt, commercial paper and wholesale purchased
funds.
Management believes that the high proportion of residential
and installment consumer loans in the Company's loan
portfolio provides it with an additional amount of
contingent liquidity through the conventional securitization
programs that exist today. Management believes that the
level of liquidity is sufficient to meet current and future
funding requirements.
CAPITAL
At September 30, 1997, shareholders' equity totaled $451
million. In addition, in January 1997, a subsidiary trust
of the Company issued $100 million of Trust Capital
Securities which mature in 2027 and which qualify as Tier 1
Capital. The Company declared and paid a $.19 per share
dividend during the third quarter, representing a 28%
dividend payout ratio. See attached Table 8 for
information regarding the Company's rate of internal capital
generation. During the nine months ended September 30,
1997, the Company had repurchased $35.5 million of its
common stock, representing 1,111,800 shares. Effective
October 28, 1997, the Company's board of directors rescinded
its stock repurchase authorization.
The Company is subject to risk-based capital guidelines that
measure capital relative to risk-weighted assets. Capital
guidelines issued by the Federal Reserve Board require the
Company to maintain certain ratios, set forth in Table 9.
As indicated in such table, the Company's regulatory capital
currently substantially exceeds all applicable requirements.
The Company's banking subsidiaries also are subject to
federal, and in certain cases state, regulatory capital
requirements. At September 30, 1997, each of the Company's
banking subsidiaries was deemed to be "well capitalized"
under the regulations of the applicable federal banking
agency.
<PAGE>
<TABLE>
<CAPTION>
TABLE 8 - Rate of Internal Capital Generation
1997 1996
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C>
Return on assets (1) 1.30% 1.30% 1.28% 1.32% 1.29% 0.93% 1.24%
Average equity to assets 7.75% 8.03% 8.24% 7.82% 8.48% 8.32% 8.76%
Return on average equity (1) 16.70% 16.35% 15.55% 16.83% 15.21% 11.20% 14.06%
Total dividend payout ratio (1) 28% 28% 30% 29% 30% 42% 33%
Earnings retention rate 72% 72% 70% 71% 70% 58% 67%
Internal capital generation rate 12.03% 11.75% 10.89% 12.02% 10.59% 6.44% 9.37%
Cash return on average tangible
equity (1) 21.68% 21.47% 20.54% 21.10% 18.42% 14.11% 16.48%
(1) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 9 - Regulatory Capital Requirements
For Capital
Actual Adequacy Purposes Excess
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total capital (to risk weighted
assets) $528,499 14.26% $296,542 8.00% $231,957 6.26%
Tier 1 capital (to risk
weighted assets) $481,959 13.00% $149,271 4.00% $333,688 9.00%
Tier 1 leverage capital ratio
(to average assets) $481,959 8.62% $223,726 4.00% $258,233 4.62%
As of December 31, 1996:
Total capital (to risk weighted
assets) $409,144 12.24% $267,428 8.00% $141,716 4.24%
Tier 1 capital (to risk
weighted assets) $367,041 10.98% $133,714 4.00% $233,327 6.98%
Tier 1 leverage capital ratio
(to average assets) $367,041 7.96% $184,445 4.00% $182,596 3.96%
</TABLE>
<PAGE>
Prospective Acquisitions
On October 1, 1997, the Company completed its purchase of
Atlantic Bancorp, the parent company of Atlantic Bank, N.A.,
for an aggregate purchase price of $70.8 million. The
acquisition, which was accounted for as a purchase, included
$462.9 million in assets.
On October 10, 1997, the Company acquired all of the
outstanding stock of MPN Holdings ("MPN"). MPN is the
holding company of Morse, Payson & Noyes Insurance. The
transaction, which was accounted for as a purchase, was
effected through an exchange of MPN stock for 222,839 shares
of the Company's common stock.
On October 27, 1997, the Company entered into an Agreement
and Plan of Merger (the "Agreement") with CFX Corporation.
The Agreement provides, among other things, (i) the merger
of CFX Corporation with and into the company (the "Merger")
and (ii) the conversion of common stock of CFX Corporation
outstanding immediately prior to the Merger (subject to
certain exceptions) into the right to receive .667 newly-
issued shares of the Company's common stock plus cash in
lieu of any fractional share interest, or approximately 16
million shares of newly issued Company stock. Consummation
of the Merger is subject to a number of conditions,
including, but not limited to, (i) the approval of the
Agreement and the Merger by the shareholders of both the
Company and CFX Corporation and (ii) the receipt of required
regulatory approvals. For additional information, reference
is made to the Current Reports on Form 8-K filed by the
Company on October 27 and November 3, 1997.
IMPACT OF NEW ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share." This Statement
requires disclosure of "basic" and "diluted" earnings per
share. The Statement is required to be implemented
retroactively in the fourth quarter of 1997. The Company's
current reported earnings per share is the same as "basic."
The Company estimates that diluted earnings per share will
be lower than 3% less than the basic earnings per share.
Also in February 1997, the FASB issued SFAS No. 129,
"Disclosure of Information about Capital Structure," which
will be effective for financial statements for periods
ending after December 15, 1997. The Company's disclosures
currently comply with the provisions of this statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for
reporting comprehensive income, which is defined as all
changes to equity except investments by and distributions to
shareholders. Net income is a component of comprehensive
income, with all other components referred to in the
aggregate as other comprehensive income. This statement
will be effective for 1998 financial statements.
Also in June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting
information about operating segments. An operating segment
is defined as a component of a business for which separate
financial information is available that is evaluated
regularly by the chief operating decision maker in deciding
how to allocate resources and evaluate performance. This
statement requires a company to disclose certain income
statement and balance sheet information by operating
segment, as well as provide a reconciliation of operating
segment information to the company's consolidated balances.
This statement will be effective for 1998 annual financial
statements. For the purpose of SFAS No. 131, the Company
has one operating segment.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on
historical facts and are "forward-looking statements" within
the meaning of section 21A of the Securities Exchange Act of
1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Company's
control), may be identified by reference to a future period
or periods, or by the use of forward-looking terminology,
such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on
those terms, or the negative of those terms. Actual results
could differ materially from those set forth in forward-
looking statements due to a variety of factors, including,
but not limited to, those related to the economic
environment, particularly in the market areas in which the
Company operates, competitive products and pricing, fiscal
and monetary policies of the U. S. Government, changes in
government regulations affecting financial institutions,
including regulatory fees and capital requirements, changes
in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities
markets and the availability of and costs associated with
sources of liquidity.
The Company does not undertake, and specifically disclaims
any obligation, to publicly release the result of any
revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such
statements.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings:
Like some of the larger financial institutions across the
country, Peoples Heritage Bank, the Company's Maine-based
banking subsidiary, has been served with a class action suit
challenging the validity of its mortgage escrow practices.
The plaintiff, James Greenwood, filed suit on August 29,
1997 in the United States District Court for the Northern
District of New York. The suit seeks an unspecified amount
of damages on behalf of the plaintiff and a purported class
of similarly situated persons. Management currently is
conducting a full assessment of the action and, based on its
review to date, believes that the action will not be
material to the financial condition of the Company.
Management currently believes the action to be without merit
and intends to vigorously defend the action.
Other than as set forth above, 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) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - not applicable.
<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, 1997 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
Date November 13, 1997 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, 1997 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
/s/ Peter J. Verrill
Date November 13, 1997 By:
Peter J. Verrill
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 421,489
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 137,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,174,210
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,918,449
<ALLOWANCE> 62,961
<TOTAL-ASSETS> 6,056,083
<DEPOSITS> 4,268,555
<SHORT-TERM> 1,171,841
<LIABILITIES-OTHER> 64,616
<LONG-TERM> 0
<COMMON> 286
100,000
0
<OTHER-SE> 450,785
<TOTAL-LIABILITIES-AND-EQUITY> 6,056,083
<INTEREST-LOAN> 261,571
<INTEREST-INVEST> 54,318
<INTEREST-OTHER> 1,862
<INTEREST-TOTAL> 317,751
<INTEREST-DEPOSIT> 107,409
<INTEREST-EXPENSE> 30,741
<INTEREST-INCOME-NET> 179,601
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 135,051
<INCOME-PRETAX> 83,496
<INCOME-PRE-EXTRAORDINARY> 83,496
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,404
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 4.74
<LOANS-NON> 37,559
<LOANS-PAST> 6,324
<LOANS-TROUBLED> 1,239
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,783
<CHARGE-OFFS> 4,571
<RECOVERIES> 2,749
<ALLOWANCE-CLOSE> 62,961
<ALLOWANCE-DOMESTIC> 62,961
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
