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 June 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 August 1, 1997 is:
Common stock, par value $.01 per share 27,457,107
(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 - June 30, 1997
and December 31, 1996.
Consolidated Statements of Income - Three months
ended June 30, 1997 and 1996; six months ended
June 30, 1997 and 1996.
Consolidated Statements of Changes in
Shareholders' Equity - Six months ended
June 30, 1997 and 1996.
Consolidated Statements of Cash Flows -
Six months ended June 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)
June 30, December 31,
1997 1996
<S> <C> <C>
Assets
Cash and due from banks $ 295,610 $ 276,995
Federal funds sold --- 83,000
Securities available for sale,
at market value 1,169,169 1,045,069
Loans held for sale, market value
$140,801 and $103,790 respectively 137,466 103,270
Loans and leases:
Residential real estate mortgages 1,140,017 1,176,874
Commercial real estate mortgages 984,179 962,375
Commercial business loans and leases 536,108 477,402
Consumer loans and leases 1,094,507 1,037,949
3,754,811 3,654,600
Less: Allowance for loan and
lease losses 64,783 67,488
Net loans and leases 3,690,028 3,587,112
Premises and equipment 71,296 73,956
Goodwill and other intangibles 67,895 71,649
Mortgage servicing rights 34,426 33,314
Other assets 125,290 124,033
$5,591,180 $5,398,398
Liabilities and Shareholders' Equity
Deposits:
Regular savings $ 746,584 $ 760,340
NOW and money market accounts 1,019,645 1,023,448
Certificates of deposit (including
certificates of $100 or more of
$243,128 and $232,880, respectively) 1,796,653 1,796,521
Demand deposits 651,074 604,980
Total deposits 4,213,956 4,185,289
Federal funds purchased 56,105 ---
Securities sold under repurchase
agreements 231,713 197,005
Borrowings from the Federal Home Loan
Bank of Boston 482,779 470,080
Other borrowings 17,762 23,884
Other liabilities 57,143 85,130
Total liabilities 5,059,458 4,961,388
Company obligated, mandatorily
redeemable securities of subsidiary
trust holding solely parent Company
junior subordinated debentures 100,000 ---
Shareholders' Equity:
Preferred stock (par value $0.01 per share,
5,000,000 shares authorized, none issued) --- ---
Common stock (par value $0.01 per share,
100,000,000 shares authorized,
28,576,885 shares issued) 286 286
Paid-in capital 271,790 271,790
Retained earnings 196,293 170,855
Net unrealized gain (loss) on securities
available for sale 354 (582)
Treasury stock at cost (1,206,208 shares
and 355,385 shares, respectively) (37,001) (5,339)
Total shareholders' equity 431,722 437,010
$5,591,180 $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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and
leases $86,363 $71,292 $170,105 $139,222
Interest on mortgage-backed
investments 11,751 4,011 22,175 7,507
Interest on other investments 6,782 8,294 13,900 17,198
Dividends on equity
securities 564 488 1,203 912
Total interest and
dividend income 105,460 84,085 207,383 164,839
Interest expense:
Interest on deposits 35,602 29,788 70,960 59,356
Interest on borrowed funds 9,933 7,466 18,785 13,513
Total interest expense 45,535 37,254 89,745 72,869
Net interest income 59,925 46,831 117,638 91,970
Provision for loan and lease
losses --- 450 --- 900
Net interest income after
provision for loan and
lease losses 59,925 46,381 117,638 91,070
Noninterest income:
Customer services 5,763 3,647 11,102 6,916
Mortgage banking services 3,542 3,171 7,773 6,535
Trust and investment
advisory services 2,276 1,880 4,163 3,524
Net securities gains --- --- 3 504
Other noninterest income 791 498 1,665 1,186
12,372 9,196 24,706 18,665
Noninterest expenses:
Salaries and employee
benefits 22,090 17,393 43,273 35,631
Data processing 3,510 2,971 7,167 5,769
Occupancy 3,073 3,102 6,883 6,399
Equipment 2,831 1,983 5,758 3,991
Distributions on securities
of subsidiary trust 2,265 --- 3,775 ---
Amortization of goodwill and
deposit premiums 1,886 1,251 3,772 2,174
Advertising and marketing 1,568 1,005 3,088 1,999
Merger expenses --- 4,652 --- 5,105
Other noninterest expenses 7,382 7,229 14,123 13,100
44,605 39,586 87,839 74,168
Income before income tax
expense 27,692 15,991 54,505 35,567
Applicable income tax
expense 9,904 5,848 19,707 12,818
Net income $17,788 $10,143 $ 34,798 $ 22,749
Weighted average shares
outstanding 27,785,362 25,169,568 28,067,162 25,149,123
Earnings per share $ 0.64 $ 0.40 $ 1.24 $ 0.90
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 $224,268 $134,443 $ 3,763 $ (7,805) $354,925
Treasury stock issued for employee
benefit plans (102,396 shares at
an average price of $8.86) -- -- (242) -- 1,525 1,283
Change in unrealized gains (losses)
on securities available for
sale, net of tax -- -- -- (4,922) -- (4,922)
Net income -- -- 22,749 -- -- 22,749
Cash dividends $0.31 -- -- (7,775) -- -- (7,775)
Balances at June 30, 1996 $256 $224,268 $149,175 $ (1,159) $ (6,280) $366,260
Balances at December 31, 1996 $286 $271,790 $170,855 $ (582) $ (5,339) $437,010
Treasury stock issued for employee
benefit plans (260,970 shares at
an average price of $11.53) -- -- 667 -- 3,887 4,554
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 -- -- -- 936 -- 936
Net income -- -- 34,798 -- -- 34,798
Cash dividends $0.36 -- -- (10,027) -- -- (10,027)
Balances at June 30, 1997 $286 $271,790 $196,293 $ 354 $(37,001) $431,722
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
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 34,798 $ 22,749
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan and lease losses --- 900
Provision for depreciation 5,072 3,466
Amortization of goodwill and other
intangibles 3,754 2,174
Net decrease (increase) in mortgage
servicing rights (1,112) (6,017)
Net decrease in net deferred tax
assets 3,894 1,426
Net (gains) losses realized from
sales of other real estate owned (493) 60
Net (gains) losses realized from sales
of securities and consumer loans (3) (505)
Net (gains) realized from sales of
loans held for sale (a component
of mortgage banking services) (3,983) (3,082)
Proceeds from sales of loans held
for sale 769,040 496,517
Residential loans originated and
purchased for sale (799,253) (488,413)
Net decrease (increase) in interest
and dividends receivable and
other assets (2,692) 2,065
Net increase (decrease) in other
liabilities (32,918) 3,554
Net cash provided (used) by
operating activities $ (23,896) $ 34,894
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 58,312 31,144
Proceeds from maturities and principal
repayments of securities available
for sale 216,250 265,360
Purchases of securities available
for sale (397,186) (294,017)
Net increase in loans and leases (100,624) (335,410)
Premiums paid on deposits purchased --- (18,231)
Net additions to premises and equipment (2,412) (4,802)
Proceeds from sales of other real
estate owned 1,618 2,938
Net decrease in repossessed assets
owned 185 569
Net cash used by investing activities $ (223,857) $ (352,449)
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 - continued
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 28,667 $ 185,945
Net increase (decrease) in securities
sold under repurchase agreements 34,708 (31,540)
Advances from Federal Home Loan Bank
of Boston borrowings 205,911 258,998
Payments on Federal Home Loan Bank of
Boston borrowings (193,212) (110,002)
Net increase (decrease) in other
borrowings (6,122) (1,564)
Proceeds from issuance of subsidiary
trust 98,333 ---
Sale of treasury stock 4,554 1,283
Purchase of treasury stock (35,549) ---
Cash dividends paid to shareholders (10,027) (7,775)
Net cash provided by financing
activities 127,263 295,345
Increase (decrease) in cash and cash
equivalents $ (120,490) $ (22,210)
Cash and cash equivalents at beginning
of period 359,995 289,191
Cash and cash equivalents at end of
period $ 239,505 $ 266,981
Supplemental disclosures of information:
Interest paid on deposits and borrowings $ 83,468 $ 70,962
Income taxes paid 19,483 9,692
Income tax refunds 859 1,108
Noncash investing transactions:
Loans transferred to other real estate
owned 3,076 1,728
Loans originated to finance the sales of
other real estate owned 5,368 1,044
Increases (decreases) resulting from
SFAS No. 115:
Securities available for sale 400 (7,213)
Deferred income taxes - liabilities 46 (2,291)
Net unrealized gain (loss) on
securities available for sale 354 (4,922
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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
six months ended June 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.
On April 16, 1997, the Company's Board of Directors approved
the repurchase of up to $100 million of its Common Stock on
the open market. See Capital for further details.
SUMMARY
The Company reported net income of $17.8 million, or $.64 per
share, for the second quarter of 1997. This compares with
$10.1 million, or $.40 per share, for the second quarter of
1996 and $17.0 million, or $.60 per share, for the first
quarter of 1997. Second quarter return on equity was 16.35%,
which compared to 11.20% in the second quarter of 1996 and
15.55% in the first quarter of 1997. The second quarter
return on assets was 1.30%, which compared to 0.93% for the
same period in 1996 and 1.28% in the first quarter of 1997.
Earnings, when compared with the same period last year,
increased due to 26% revenue growth, which was generated both
internally and through acquisitions, as well as a reduction in
merger related costs. Related expenses, exclusive of merger
expenses in 1996 and distributions on securities of subsidiary
trust in 1997, increased only 21%, as the Company improved
efficiency. During the period, the Company's efficiency
ratio, which measures overhead as a percent of revenue,
improved from 62.35% in 1996 to 58.56% in 1997 (see Table 1).
Compared to the first 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.
On a year-to-date basis, the Company earned net income of
$34.8 million and $22.7 million, which represents $1.24 and
$.90 per share, for the six months ended June 30, 1997 and
1996, respectively. Return on equity and return on assets
were 15.99% and 1.29% during the six months ended June 30,
1997, respectively, as compared to 12.65% and 1.08% for the
six months ended June 30, 1996, respectively. Cash earnings
per share, which is calculated using earnings before the
amortization of goodwill and core deposit premiums, was $1.37
and $.99 for the six months ended June 30, 1997 and 1996,
respectively.
Selected quarterly data is provided in Table 1.
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<TABLE>
<CAPTION>
TABLE 1 - Selected Quarterly Data
1997 1996
(Dollars in Thousands) Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 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 59,925 57,713 50,659 47,944 46,381 44,689
Noninterest income
(excluding securities
transactions) 12,372 12,331 9,975 9,805 9,196 8,965
Securities gains --- 3 4 (1) --- 504
Noninterest expenses
(excluding SAIF assessment
and merger charges) 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 27,692 26,813 22,989 21,492 15,991 19,576
Income tax expense 9,904 9,803 7,450 7,300 5,848 6,970
Net income $ 17,788 $ 17,010 $ 15,539 $ 14,192 $ 10,143 $ 12,606
Earnings per share $ 0.64 $ 0.60 $ 0.63 $ 0.56 $ 0.40 $ 0.50
Return on average assets 1.30% 1.28% 1.32% 1.29% 0.93% 1.24%
Return on average equity 16.35% 15.55% 16.83% 15.21% 11.20% 14.06%
Efficiency ratio (1) 58.56% 59.57% 62.09% 59.58% 62.35% 63.08%
(1) Excludes securities transactions, SAIF assessment, 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 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>
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EARNING ASSETS
The discussion and analysis that follows is based upon
information set forth in Table 2 regarding average balances,
yields and rates.
Loans
Average loans and leases of $3.9 billion rose $659.6 million
from a year earlier and $62.2 million from the first
quarter. The acquisition of Family during the fourth
quarter of 1996 added $469.8 million of loans. Excluding
the Family loans, internal growth during the past year and
quarter 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 76.3% during the second quarter of 1997
due primarily to the 54.4% loans to earning assets ratio of
Family at the time of acquisition. The Company expects to
increase the percentage of average loans to average earning
assets in the future as the Family acquisition is
assimilated.
Average residential real estate loans (which includes loans
held for sale) of $1.3 billion grew 16.1% from the second
quarter of 1996 and decreased 1.3% from the first quarter of
1997. Excluding $189.6 million of Family loans added during
the fourth quarter, average outstanding residential real
estate loans decreased 0.75% from the second quarter of
1996. The decrease in the average outstanding balance of
residential loans is consistent with the strategy of the
Company to replace lower yielding residential loans with
higher yielding commercial business and consumer loans.
The Company continues to originate residential real estate
loans primarily for sale to investors in the secondary
mortgage market. During the second quarter, originations
were $437.6 million, of which $324.0 million represented
correspondent production. This compares to $352.9 million
and $188.2 million, respectively, in the second quarter of
1996 and $428.1 million and $339.1 million, respectively, in
the first quarter. Mortgage originations, particularly
refinancings, are highly dependent upon interest rates. At
June 30, 1997, 50% of portfolio loans were fixed rate and
50% 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 $510.2 million grew 20.4% from
the second quarter of 1996 and 6.3% from the first quarter
of 1997. Excluding $49.1 million of Family loans added
during the fourth quarter, average outstanding commercial
loans increased 8.8% from the second quarter of 1996. The
growth in commercial loans is consistent with the Company's
focus on lending to sound, small and medium size business
customers within its geographic markets. The average yield
on commercial loans of 9.6% was equal to the second quarter
of 1996.
Average commercial real estate loans of $974.3 million grew
17.6% from last year and 0.9% from the first quarter.
Excluding $151.2 million of Family loans added during the
fourth quarter, average outstanding commercial real estate
<PAGE>
loans decreased 0.6% from the second quarter of 1996. The
decrease in commercial real estate loans is consistent with
management's strategy to reduce commercial real estate as a
percent of total loans. The average yield on commercial
real estate loans declined slightly from 9.65% during the
second quarter of 1996 to 9.58% during the second quarter of
1997 reflecting increased competition.
Average consumer loans of $1.1 billion grew 30.0% from the
second quarter of 1996 and 4.0% from the first quarter of
1997. Excluding $79.1 million of Family loans added during
the fourth quarter, average outstanding consumer loans
increased 20.3% from the second 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 9.38% during the second
quarter of 1996 to 9.43% during the second quarter of 1997
reflecting a change in the mix of consumer loans.
Securities Available for Sale and Other Earning Assets
The Company's $1.2 billion securities portfolio at June 30,
1997 consisted primarily of U. S. Treasury Securities and
AAA or equivalent rated mortgage backed securities. Average
securities increased 49.8% from last year and 9.0% from the
first quarter. Excluding $356.2 million of Family
securities added during the fourth quarter, average
outstanding securities increased 5.0%. The average
securities yield was 6.42% for the second quarter of 1997,
as compared to 6.29% for the second quarter of 1996 and
6.56% for the first 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 June 30, 1997, the available-for-sale portfolio had a
$400 thousand net unrealized gain, compared to a net
unrealized loss of $1.9 million at both June 30, 1996 and
March 31, 1997. The increase in market value was due to a
decrease in market interest rates in the second quarter.
DEPOSITS AND OTHER FUNDING SOURCES
Deposits
Average deposits of $4.1 billion increased 24% from the
second quarter of last year and 1% from the first quarter.
Excluding $774.6 million of Family deposits added during the
fourth quarter, average deposits increased 1% from the
second quarter of 1996. At June 30, 1997, the ratio of
loans to deposits stood at 89%, down from 92% at June 30,
1996 but up from 87% at December 31, 1996. This was
primarily the result of the acquisition of 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 24% from last year
<PAGE>
and 4% from the first quarter. Excluding $233.2 million of
Family transaction deposits added during the fourth quarter,
average outstanding transaction deposits increased 6% from
the second 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 declined from 2.57%
during the second quarter of 1996 to 2.49% during the second
quarter of 1997 due to an increase in lower yielding NOW
accounts.
Average savings and time deposit balances of $2.5 billion
increased 24% from last year and decreased 1% from the first
quarter. Excluding $523.9 million of Family deposits added
during the fourth quarter, average savings and time deposits
decreased 2%. The decrease is consistent with the Company's
current strategy to reduce its dependence on higher cost
time deposits. The average rate paid on savings accounts
has remained relatively flat, while the rate paid on time
deposits has declined on a year-to-year basis, reflecting
the Company's pricing strategy and a change in the mix of
time deposits.
Other Funding Sources
The Company's primary source of funding, other than
deposits, is the Federal Home Loan Bank ("FHLB"). Average
FHLB borrowings for the second quarter were $491.9 million,
compared with $389.5 million for the first quarter of last
year and $464.1 million for the first quarter. FHLB
borrowings increased because growth in earning assets
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 June 30, 1997, FHLB borrowings
amounted to $482.8 million. The Company's estimated
additional borrowing capacity with the FHLB at June 30, 1997
was $663.9 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
<PAGE>
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
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.
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 and Treasury options 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 $60 thousand and
are included in other assets. Amortization of the CMT
floors reduced mortgage banking income by $46 thousand, $132
thousand, and $66 thousand in the second quarter of 1997,
the second quarter of 1996, and the first quarter of 1997,
respectively.
NET INTEREST INCOME
The Company's taxable-equivalent net interest income, which
represented 83% of revenues, was $60.2 million in the second
quarter, up 28% from the second quarter of 1996 and 4% from
the first 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 second quarter of 1996 to the
second quarter of 1997 in tax equivalent net interest income
by category due to rate and volume.
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 - Rate Volume Analysis
Three Months Ended June 30, 1997 vs. Three Months Ended June
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 $14,755 $ 308 $15,063
Investment securities 6,201 439 6,640
Federal funds sold (356) 31 (325)
Total interest income 20,600 778 21,378
Interest expense:
Deposits
Regular savings 1,076 (48) 1,028
NOW and money market
accounts 893 (133) 760
Certificates of deposit 4,565 (538) 4,027
Total deposits 6,534 (719) 5,815
Borrowed funds 1,867 599 2,466
Total interest
expense 8,401 (120) 8,281
Net interest income (fully
taxable equivalent) $12,199 $ 898 $13,097
(1) Includes changes in interest income and expense not due
solely to volume or rate changes.
</TABLE>
<PAGE>
The second quarter of 1997 net interest margin was 4.76%
compared to 4.69% in the second quarter of 1996 and 4.73% in
the first quarter of 1997. The seven basis point annual
improvement resulted from both an increase in net earning
assets as well as the issuance of $100.0 million of Trust
Capital Securities on January 31, 1997, which was offset in
part by the acquisition of Family Bank in the fourth quarter
of 1996, which had lower net interest margin than the
Company. The three basis point quarter to quarter
improvement resulted from the full quarter beneficial impact
of the Trust Capital Securities, an increase in net earning
assets and the conversion of Family investment securities
into higher yielding loans, offset in part by slightly
higher rates on interest-bearing liabilities and slightly
lower yields on earning assets.
NONINTEREST INCOME
Second quarter noninterest income of $12.4 million increased
35% from the second quarter of 1996 and was flat when
compared with the first quarter of 1997. The annual
increase was attributable to both the Family acquisition
during the fourth quarter of 1997 and internal initiatives
to increase noninterest income. Noninterest income was flat
when compared with the first quarter of 1997 due largely to
a $1.3 million gain from sale of mortgage servicing rights
during the first quarter and no comparable sale during the
second quarter. Excluding the first quarter gain on the
sale of servicing, noninterest income increased 12% from the
first quarter of 1997.
Customer services income of $5.8 million increased 58% from
the second quarter of last year and 8% from the first
quarter of 1997. Excluding Family, customer services
revenue increased 18% from the second 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 $3.5 million increased
12% from last year and decreased 16% from the first quarter.
The first quarter of 1997 included a $1.3 million gain from
the sale of servicing rights, compared to no servicing
rights sales in either the second quarter of 1997 or the
second quarter of 1996. The gain in the first quarter of
1997 resulted from the sale of $11.3 million of mortgage
servicing rights related to $766.5 million of residential
mortgages serviced for investors. 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 $34.4 million at June
30, 1997, which was 31% higher than a year earlier and 27%
higher than on March 31, 1997. See Table 4 for details.
<PAGE>
<TABLE>
<CAPTION>
TABLE 4 - Mortgage Banking
At or for the Three Months Ended
June 30, March 31, December 31, September 30, June 30, March 31,
1997 1997 1996 1996 1996 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages
serviced for
investors at end
of period $2,905,274 $3,346,804 $3,227,659 $2,953,213 $2,819,545 $2,701,552
Residential mortgage
sales income $ 1,617 $ 1,113 $ 1,722 $ 1,419 $ 1,550 $ 1,332
Residential mortgage
servicing income 1,925 1,865 1,132 1,247 1,621 1,832
Gain on sale of
mortgage servicing --- 1,253 236 649 --- 200
Total $ 3,542 $ 4,231 $ 3,090 $ 3,315 $ 3,171 $ 3,364
</TABLE>
<PAGE>
Trust and investment advisory services income of $2.3 million
increased 21% from the second quarter of 1996 and 21% from the
first quarter of 1997 due primarily to increases in assets under
management and, relative to the increase from the first quarter,
to annual tax preparation fees. Assets under management
amounted to $1.3 billion at June 30, 1997, an increase of $116.2
million from December 31, 1996.
The Company recorded no securities gains during either the
second quarter of 1997 or 1996 as compared to $3 thousand in the
first quarter of 1997.
NONINTEREST EXPENSE
Noninterest expense of $44.6 million increased 13% from the
second quarter of 1996 and 3% from the first quarter of 1997.
The year-to-year increase is 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 have increased, the Company's efficiency ratio, which
excludes distributions on the Trust Capital Securities, has
decreased to 58.56% during the second quarter of 1997 as
compared with 59.57% during the first quarter of 1997 and 62.35%
during the second quarter of 1996. The lower efficiency ratio
reflects efficiencies created by the acquisition and
assimilation of both Bank of New Hampshire and Family.
Salaries and benefits expense of $22.1 million increased 27%
from last year and 4% from the first quarter. In addition to
Family, the increases are attributable to expansion of the
retail franchise and additional staffing to support the
increased volume of deposit and loan transactions. Second
quarter full-time equivalent employees were 2,400, compared to
2,072 for the same period last year and 2,365 for the first
quarter.
Data processing expense increased 18% from the second quarter of
last year and was 4% lower than the first quarter. The decrease
from the first quarter is primarily attributable to higher costs
in the first quarter associated with computer system upgrades
related to the assimilation of Family.
Occupancy expense decreased 1% from the second quarter of last
year and 19% from the first quarter of 1997. Included as a
reduction to occupancy expense during the second quarter is a
net gain associated principally with the sale of the former
operations center of Bank of New Hampshire of $503 thousand.
Excluding the net gain, occupancy expense increased 12% from the
second quarter of last year and decreased 6% from the first
quarter of 1997. The year-to-year increase was primarily
related to Family but also reflects the cost associated with the
expansion of the branch network. The decrease in occupancy
expense from the first quarter relates primarily to seasonal
factors.
Equipment expense increased 43% from the second quarter of last
year and decreased 3% from the first 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
<PAGE>
investments in computer-related technology. The quarter-to-
quarter decrease was primarily related to lower equipment
maintenance expense.
Amortization of goodwill and deposit premiums during the second
quarter of 1997 increased 51% from the second quarter of 1996
and was flat when compared with the first 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 56% from the second
quarter of 1996 and was 3% higher than the first quarter. The
increases were related in large part to the addition of Family
but also reflected the Company's efforts to promote its products
and services in an increasingly competitive market for financial
services.
Merger expense in the second quarter of 1996 relates to the
acquisition of Bank of New Hampshire which was accounted for as
a pooling of interests.
The breakdown of other noninterest expenses is included in Table
5, which follows.
<PAGE>
<TABLE>
<CAPTION>
TABLE 5 - Other Non-Interest Expenses
1997 1997 1996 1996 1996 1996
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Miscellaneous loan costs $1,231 $ 912 $1,078 $ 778 $ 978 $ 394
Telephone 1,018 1,005 1,215 921 838 677
Postage and freight 1,004 1,070 765 825 673 815
Office supplies 876 824 1,009 755 677 677
Deposits and other assessments 378 372 111 2,270 (1) 324 345
Collection and carrying costs
of non-performing assets 9 213 189 502 378 504
Other 2,866 2,350 2,206 1,413 3,361 2,458
$7,382 $6,746 $6,573 $7,464 $7,229 $5,870
(1) Third quarter 1996 includes a $1.9 million Savings Association Insurance Fund ("SAIF")
assessment.
</TABLE>
<PAGE>
TAXES
The second quarter effective tax rate of 36% compares to 37% in
the second quarter of 1996 and 37% in the first quarter.
ASSET QUALITY
As shown in Table 6, nonperforming assets were $46.3 million at
June 30, 1997, which represented 0.83% of total assets. This
compares to $46.9 million or 1.07% at June 30, 1996 and $45.2
million or 0.86% at December 31, 1996. 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
June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31,
1997 1997 1996 1996 1996 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 5,406 $ 5,053 $ 3,867 $ 3,901 $ 5,032 $ 6,089
Commercial real estate loans:
Nonaccrual loans 16,785 15,854 15,270 16,233 15,628 16,917
Troubled debt restructurings 1,356 1,473 1,581 1,691 1,878 1,793
Total 18,141 17,327 16,851 17,924 17,506 18,710
Commercial loans:
Nonaccrual loans 7,732 6,875 8,016 7,688 7,567 5,631
Troubled debt restructurings 193 199 579 614 1,114 1,349
Total 7,925 7,074 8,595 8,302 8,681 6,980
Consumer loans:
Nonaccrual loans 6,564 6,439 5,097 4,505 4,368 4,099
Total nonperforming loans:
Nonaccrual loans 36,487 34,221 32,250 32,327 32,595 32,736
Troubled debt restructurings 1,549 1,672 2,160 2,305 2,992 3,142
Total 38,036 35,893 34,410 34,632 35,587 35,878
Other nonperforming assets:
Other real estate owned, net of related
reserves 5,652 7,390 10,000 9,674 10,033 11,089
Repossessions, net of related reserves 2,564 1,964 1,818 1,572 1,316 1,865
Total other nonperforming assets 8,216 9,354 11,818 11,246 11,349 12,954
Total nonperforming assets $46,252 $45,247 $46,228 $45,878 $46,936 $48,832
Accruing loans which are 90 days overdue $ 4,894 $ 5,820 $ 8,038 $ 5,123 $ 2,840 $ 5,090
Total nonperforming loans as a percentage
of total loans (1) 1.01% 0.98% 0.94% 1.09% 1.14% 1.19%
Total nonperforming assets as a percentage
of total assets 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 1.23% 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 accounts for 30% of
the total loan portfolio at June 30, 1997 as compared with
33% at June 30, 1996 and 32% at 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 June 30, 1997, 0.47% of the
Company's residential loans were non-performing, as compared
with 0.49% at June 30, 1996 and 0.33% at December 31, 1996.
The Company's commercial real estate loan portfolio accounts
for 26% of the total loan portfolio at June 30, 1997 as
compared with 26% at June 30, 1996 and 26% at December 31,
1996. It is the intention of the Company to maintain
commercial real estate loans as a percentage in the overall
loan portfolio at the same or lower levels in the future.
At June 30, 1997, 1.84% of the Company's commercial real
estate loans were non-performing, as compared with 2.13% at
June 30, 1996 and 1.75% at December 31, 1996.
The Company's commercial business loan portfolio accounts
for 14% of the total loan portfolio at June 30, 1997 as
compared with 14% at June 30, 1996 and 13% at December 31,
1996. It is the intention of the Company to increase
commercial business loans as a percentage in 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
business located within its geographic market area. At June
30, 1997, 1.48% of the Company's commercial business loans
were non-performing, as compared with 2.01% at June 30, 1996
and 1.80% at December 31, 1996.
The Company's consumer loan portfolio accounts for 29% of
the total loan portfolio at June 30, 1997, as compared with
27% at June 30, 1996 and 28% at December 31, 1996. It is
the intention of the Company to increase consumer loans as a
percentage in the overall loan portfolio. The Company has a
diversified consumer loan portfolio comprised of 35% home
equity loans, 21% automobile loans, 18% mobile home loans
and 26% of other loan types. At June 30, 1997, 0.60% of the
Company's consumer loans were non-performing, as compared
with 0.52% at June 30, 1996 and 0.49% at December 31, 1996.
Net Charge-offs
As shown in Table 7, second quarter net charge-offs were
$1.8 million or 19 basis points of average loans and leases
outstanding. This compares to $2.3 million or 29 basis
points for the second quarter of 1996 and $887 thousand or 9
basis points for the first quarter.
<PAGE>
<TABLE>
<CAPTION>
TABLE 7 - Allowance for Loan and Lease Losses
1997 1997 1996 1996 1996 1996
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average loans and leases
outstanding during
the period (1) $3,861,741 $3,799,500 $3,438,872 $3,234,629 $3,202,162 $2,959,218
Allowance at beginning
of period $ 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 425 516 582 495 1,163 434
Commercial real estate
mortgages 214 261 5,064 1,658 1,158 888
Commercial business loans
and leases 1,021 323 1,211 249 679 855
Consumer loans and leases 1,522 1,568 1,182 722 1,092 741
Total loans charged off 3,182 2,668 8,039 3,124 4,092 2,918
Recoveries:
Residential real estate
mortgages 113 90 97 93 248 62
Commercial real estate
mortgages 448 890 5,721 591 1,169 2,060
Commercial business loans
and leases 563 574 780 245 92 420
Consumer loans and leases 240 227 211 204 254 174
Total loans recovered 1,364 1,781 6,809 1,133 1,763 2,716
Net charge-offs 1,818 887 1,230 1,991 2,329 202
Additions charged to operating
expenses --- --- --- --- 450 450
Allowance at end of period $ 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) 0.19% 0.09% 0.14% 0.25% 0.29% 0.03%
Ratio of allowance to total loans
and leases at end of period(2) 1.73% 1.82% 1.85% 1.94% 2.04% 2.17%
Ratio of allowance to non-
performing loans at end
of period 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 for
either the first or second quarter of 1997. The provision for
the second quarter of 1996 was $450 thousand.
At June 30, 1997, the allowance for loan and lease losses
amounted to $64.8 million or 1.73% of loans, as compared to
2.04% at June 30, 1996 and 1.85% 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.
The ratio of allowance for loan losses to nonperforming loans
was 170% at June 30, 1997, as compared to 179% at June 30, 1996
and 196% at December 31, 1996.
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 securitization 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.
<PAGE>
CAPITAL
At June 30, 1997, shareholders' equity totaled $432 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 an $.18 per share dividend during the second quarter,
representing a 28% dividend payout ratio. See attached Table
8 for information regarding the Company's rate of internal
capital generation. On April 16, 1997, the Company's Board of
Directors approved the repurchase of up to $100 million of its
Common Stock on the open market. During the six months ended
June 30, 1997, the Company had repurchased $35.5 million of its
common stock, representing 1,111,800 shares.
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
regulatory capital requirements. At June 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
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C>
Return on Assets 1.30% 1.28% 1.32% 1.29% 0.93% 1.24%
Average equity to assets 8.03% 8.24% 7.82% 8.48% 8.32% 8.76%
Return on average equity 16.35% 15.55% 16.83% 15.21% 11.20% 14.06%
Total dividend payout ratio 28% 30% 29% 30% 42% 33%
Earnings retention rate 72% 70% 71% 70% 58% 67%
Internal capital generation rate 11.75% 10.89% 12.02% 10.59% 6.44% 9.37%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 9 - Regulatory Capital Requirements
For Capital
Actual Adequacy Purposes Excess
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
As of June 30, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted
assets) $509,048 14.36% $283,586 8.00% $225,462 6.36%
Tier 1 capital (to risk
weighted assets) $464,485 13.10% $141,793 4.00% $322,692 9.10%
Tier 1 leverage capital ratio
(to average assets) $464,485 8.62% $215,614 4.00% $248,871 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 July 9, 1997, the Company and MPN Holdings ("MPN") entered
into a definitive agreement whereby the Company will acquire all
of the outstanding stock of MPN. MPN is the holding company of
Morse Payson & Noyes Insurance Agency. It is anticipated that
the acquisition will be treated as a purchase and will be
effected through an exchange of MPN Common Stock for Company
Common Stock. Consummation of the acquisition of MPN is subject
to, among other things, all necessary regulatory and shareholder
approvals and other customary conditions. The MPN acquisition
is expected to be completed during the fourth quarter.
On June 24, 1997, the Company and Atlantic Bancorp ("Atlantic"),
the parent company of Atlantic Bank, National Association
entered into a definitive agreement which provides, among other
things, for (i) the merger of PHFG, Inc., a newly-formed
subsidiary of the Company, into Atlantic (the "Merger"), (ii)
the conversion of each outstanding share of Atlantic Common
Stock outstanding immediately prior to the Merger (except for
any shares as to which the holders thereof have perfected
dissenters' rights and as set forth in the agreement) for the
right to receive $17.00 and (iii) the conversion of each
outstanding share of Atlantic Preferred Stock outstanding
immediately prior to the Merger (except for any shares as to
which the holders thereof have perfected dissenters' rights and
as set forth in the agreement) for the right to receive $17.00
multiplied by the number of shares of Atlantic Common Stock into
which each share of Atlantic Preferred Stock may be converted in
accordance with its terms. The aggregate purchase price for
Atlantic is $70.8 million. Immediately following consummation
of the Merger, Atlantic Bank National Association will be merged
with and into Peoples Heritage Bank, the Maine-based banking
subsidiary of the Company. At June 30, 1997, Atlantic had total
assets of $482.4 million and shareholders' equity of $45.1
million. Consummation of the acquisition of Atlantic is subject
to, among other things, the receipt of all necessary regulatory
and shareholder approvals and other customary conditions. The
acquisition of Atlantic is expected to be completed during the
fourth quarter and will be accounted for as a purchase.
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 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 by less than 3% than the
current reported earnings per share.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical
facts and are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. 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:
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) The following reports on Form 8-K were filed on the
dates indicated:
(i) On April 8, 1997, the Company filed a report on Form
8-K regarding the exchange of $100 million of
restricted 9.06% Capital Securities for a like amount
of registered 9.06% Capital Securities.
(ii) On April 17, 1997, the Company filed a report of Form
8-K regarding Board of Director authorization for the
repurchase of up to $100 million of the Company's
outstanding common stock in the open market.
(iii) On June 2, 1997, the Company filed a report on Form 8-
K regarding the signing of a binding letter of intent
to purchase MPN Holdings.
(iv) On June 24, 1997, the Company filed a report on Form
8-K announcing the execution of an agreement to
acquire Atlantic Bancorp 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 August 14, 1997 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
Date August 14, 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 August 14, 1997 By:
William J. Ryan
Chairman, President and
Chief Executive Officer
/s/ Peter J. Verrill
Date August 14, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 295,610
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,169,169
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,754,811
<ALLOWANCE> 64,783
<TOTAL-ASSETS> 5,591,180
<DEPOSITS> 4,213,956
<SHORT-TERM> 788,359
<LIABILITIES-OTHER> 57,143
<LONG-TERM> 0
<COMMON> 286
0
0
<OTHER-SE> 431,436
<TOTAL-LIABILITIES-AND-EQUITY> 5,591,180
<INTEREST-LOAN> 170,105
<INTEREST-INVEST> 36,075
<INTEREST-OTHER> 1,203
<INTEREST-TOTAL> 207,383
<INTEREST-DEPOSIT> 70,960
<INTEREST-EXPENSE> 18,785
<INTEREST-INCOME-NET> 117,638
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 87,839
<INCOME-PRETAX> 54,505
<INCOME-PRE-EXTRAORDINARY> 54,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,798
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 4.76
<LOANS-NON> 36,487
<LOANS-PAST> 4,894
<LOANS-TROUBLED> 1,549
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 66,601
<CHARGE-OFFS> 3,182
<RECOVERIES> 1,364
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
