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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 0-16947
PEOPLES HERITAGE FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
Maine 01-0437984
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 9540
One Portland Square
Portland, Maine 04112-9540
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 761-8500
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Title of Class
Preferred Stock Purchase Rights
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Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 1998, the aggregate market value of the 27,825,603 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 721,012 shares held by all directors and executive officers of the
Registrant as a group (excluding the effects of unexercised stock options), was
$1.27 billion. This figure is based on the last sale price of $46.75 per share
of the Registrant's Common Stock on March 20, 1998, as reported in THE WALL
STREET JOURNAL on March 23, 1998. Although directors of the Registrant and
executive officers of the Registrant and its subsidiaries were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 20, 1998: 27,825,603
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated by reference into Part II, Items 5-8 and
Part IV, Item 14 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 1998 are incorporated by reference
into Part III, Items 10-13 of this Form 10-K.
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PART I.
ITEM 1. BUSINESS
THE COMPANY
Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank and
financial services holding company which is incorporated under the laws of the
State of Maine. The Company conducts business from its executive offices in
Portland, Maine and 142 banking offices located throughout Maine, New Hampshire
and northern Massachusetts. At December 31, 1997, the Company had consolidated
assets of $6.8 billion and consolidated shareholders' equity of $475.1 million.
Based on total assets at December 31, 1997, the Company is the largest
independent bank holding company headquartered in northern New England and the
fifth largest independent bank holding company headquartered in New England.
The Company offers a broad range of commercial and consumer banking
services and products and trust and investment advisory services through three
wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New
Hampshire ("BNH") and Family Bank, FSB ("Family Bank"). PHB is a Maine-chartered
bank which operates 75 offices throughout Maine and, through subsidiaries,
engages in mortgage banking, financial planning, equipment leasing, securities
brokerage and insurance brokerage activities. At December 31, 1997, PHB had
consolidated assets of $3.8 billion and consolidated shareholder's equity of
$269.4 million. BNH is a New Hampshire-chartered commercial bank which operates
46 offices throughout New Hampshire. At December 31, 1997, BNH had consolidated
assets of $2.1 billion and consolidated shareholder's equity of $146.4 million.
Family Bank is a federally-chartered savings bank which operates 17 banking
offices in the Merrimack Valley area of Greater Haverhill and Greater Lowell,
Massachusetts and four offices in southern New Hampshire. At December 31, 1997,
Family Bank had consolidated assets of $1.1 billion and consolidated
shareholder's equity of $106.7 million.
Acquisitions have been, and are expected to continue to be, an important
part of the expansion of the Company's business. Since January 1, 1995, the
Company has completed one acquisition which has been accounted for under the
pooling-of-interests method and six acquisitions accounted for under the
purchase method. These transactions do not include the Company's pending
acquisition of CFX Corporation.
Unless the context otherwise requires, references herein to the Company
include its direct and indirect subsidiaries.
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BUSINESS OF THE COMPANY
The principal business of the Company consists of attracting deposits from
the general public through its offices and using such deposits to originate
loans secured by first mortgage liens on existing single-family (one-to-four
units) residential real estate and existing multi-family (over four units)
residential and commercial real estate, construction loans, commercial business
loans and leases and consumer loans and leases. The Company also provides
various mortgage banking services and, as discussed below, various trust and
investment advisory services, as well as engages in equipment leasing, financial
planning, securities brokerage and insurance brokerage activities. The Company
also invests in investment securities and other permitted investments.
The Company derives its income principally from interest charged on loans
and leases and, to a lesser extent, from interest and dividends earned on
investments, fees received in connection with the sale and servicing of loans,
deposit services and for other services and gains on the sale of assets. The
Company's principal expenses are interest expense on deposits and borrowings,
operating expenses, provisions for loan and lease losses and income tax expense.
Funds for activities are provided principally by deposits, advances from the
Federal Home Loan Bank ("FHLB") of Boston, securities sold under repurchase
agreements, amortization and prepayments of outstanding loans, maturities and
sales of investments and other sources.
PHB, BNH and, commencing in 1997, Family Bank provide full trust services
to their customers. Each of the Company's banking subsidiaries focuses on
offering employee benefit trust services in which it will act as trustee,
custodian, administrator and/or investment advisor, among other things, for
employee benefit plans for corporate, self-employed, municipal and
not-for-profit employers throughout the Company's market areas. In addition, the
Company's banking subsidiaries serve as trustee of both living trust and trusts
under wills and as such hold, account for and manage financial assets, real
estate and special assets. Custody, estate settlement and fiduciary tax
services, among others, also are offered the Company's banking subsidiaries. At
December 31, 1997, the Company had $2.2 billion of assets held by the trust
departments of its banking subsidiaries, which are not included in the Company's
consolidated balance sheet for financial reporting purposes.
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and as such is subject to regulation
and examination by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). The Company also is registered as a Maine financial
institution holding company under Maine law and as such is subject to regulation
and examination by the Superintendent of Banking of the State of Maine
("Superintendent").
As a Maine-chartered bank, PHB is subject to regulation and examination by
the Superintendent, as a New Hampshire-chartered commercial bank, BNH is subject
to regulation and examination by the New Hampshire Bank Commissioner and as a
federally-
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chartered savings bank, Family Bank is subject to regulation and examination by
the Office of Thrift Supervision ("OTS"). Each of PHB, BNH and Family Bank is a
member of the Bank Insurance Fund ("BIF") administered by the Federal Deposit
Insurance Corporation ("FDIC").
SUBSIDIARIES
At December 31, 1997, the Company's only direct subsidiaries were PHB, Bank
of New Hampshire Corporation, a holding company for BNH, Peoples Heritage Merger
Corp., a holding company for Family Bank, and Peoples Heritage Capital Trust I
(the "Trust"). For additional information on the Trust, see Note 11 to the
Consolidated Financial Statements included in Item 8 hereof.
Set forth below is a brief description of certain indirect non-banking
subsidiaries of the Company.
Mortgage Banking Activities. During 1993, PHB formed Peoples Heritage
Mortgage Company ("PHMC") for the purpose of expanding its residential real
estate mortgage origination business outside of the Company's principal lending
areas of Maine and New Hampshire. Currently, the activities of PHMC are not
material.
Investments In Real Estate. The Company's banking subsidiaries hold certain
investments in real estate. Exclusive of other real estate owned and investments
in office properties and facilities, which are discussed under Item 2 hereof, at
December 31, 1997 the Company's banking subsidiaries' investments in real estate
consisted entirely of interests in limited partnerships formed for the purpose
of investing in real estate for lower-income families, elderly housing projects
and/or the preservation or restoration of historically or architecturally
significant buildings or structures. At December 31, 1997, the Company's banking
subsidiaries investments in these limited partnerships had a carrying value of
$5.2 million.
Equipment Leasing Activities. PHB conducts equipment leasing activities
through Peoples Heritage Leasing Corporation, Inc. ("PHLC"). PHLC is
headquartered in Portland, Maine and engages in direct equipment leasing
activities, primarily involving office equipment, in the Portland, Maine
metropolitan area and elsewhere in the States of Maine, New Hampshire and
Massachusetts. At December 31, 1997, PHLC had $20.8 million of leases
outstanding.
Financial Planning And Securities Brokerage Activities. PHB conducts
financial planning, investment planning and securities brokerage activities
through Heritage Investment Planning Group, Inc. ("HIPG"). PHB also offers
through HIPG investments in mutual funds and annuities throughout the Company's
market areas. HIPG offers its services to individuals and small businesses from
its office located in Portland, Maine and from certain of the Company's other
locations in Maine and New Hampshire. Sales
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professionals at HIPG are registered representatives of Royal Alliance, a
registered broker/dealer, and all securities brokerage activities are conducted
through Royal Alliance. The sales professionals receive referrals from the
Company's branch offices throughout its market areas.
Insurance Brokerage Activities. PHB conducts insurance brokerage activities
through MPN Holdings, the holding company for Morse, Payson & Noyes, which the
Company acquired on October 10, 1997. Morse Payson and Noyes is the largest
insurance brokerage firm in Maine.
COMPETITION
The Company encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from savings institutions,
commercial banks and credit unions with offices in the market areas served by
the Company. The Company also encounters competition for deposits from money
market funds, as well as corporate and government securities. The principal
methods used by the Company to attract deposit accounts include the variety of
services offered, the competitive interest rates offered and the convenience of
office locations, automated teller machines and expanded banking hours.
The Company's competition for real estate and other loans comes principally
from savings institutions, credit unions, commercial banks, mortgage banking
companies, insurance companies and other institutional lenders. The Company
competes for loans through interest rates, branch locations, loan maturities,
loan fees and the quality of service extended to borrowers and brokers.
In recent years, Maine, New Hampshire and Massachusetts laws have enabled
the acquisition of financial institutions in these respective states by
financial institutions and financial institution holding companies based outside
of these states. As a result, the Company has encountered substantial
competition in its market areas, particularly from out-of-state banking
organizations that have entered the Maine, New Hampshire and Massachusetts
banking markets, and the Company expects to continue to encounter such
competition in the future.
EMPLOYEES
The Company had approximately 2,560 full-time employees as of December 31,
1997. None of these employees is represented by a collective bargaining agent,
and the Company believes that it enjoys good relations with its personnel.
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REGULATION OF THE COMPANY
The following references to laws and regulations which are applicable to
the Company and its banking subsidiaries are brief summaries thereof which do
not purport to be complete and are qualified in their entirety by reference to
such laws and regulations.
BHCA - General. The Company, as a bank holding company, is subject to
regulation and supervision by the Federal Reserve Board. Under the BHCA, a bank
holding company is required to file annually with the Federal Reserve Board a
report of its operations and, with its subsidiaries, is subject to examination
by the Federal Reserve Board.
BHCA - Activities and Other Limitations. The BHCA generally prohibits a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. As a
result of recent amendments to the BHCA, the Federal Reserve Board generally may
approve an application by a bank holding company that is adequately capitalized
and adequately managed to acquire control of, or to acquire all or substantially
all of the assets of, a bank located in a state other than the home state of
such bank holding company, without regard to whether such transaction is
prohibited under the law of any state, provided, however, that the Federal
Reserve Board may not approve any such application that would have the effect of
permitting an out-of-state bank holding company to acquire a bank in a host
state that has not been in existence for any minimum period of time, not to
exceed five years, specified in the statutory law of the host state.
The BHCA also generally prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
Capital Requirements. For a description of the capital adequacy guidelines
adopted by the Federal Reserve Board to assess the adequacy of capital of bank
holding companies, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital" included in Item 7 hereof.
Affiliated Institutions. Under Federal Reserve Board policy, the Company is
expected to act as a source of financial strength to each subsidiary bank and to
commit resources to
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support each subsidiary bank in circumstances when it might not do so absent
such policy. The Federal Reserve Board takes the position that in implementing
this policy it may require bank holding companies to provide such support when
the holding company otherwise would not consider itself able to do so.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a subsidiary bank to its
holding company in the form of loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are limited to 10% of a bank's
capital and surplus with respect to each affiliate and to 20% in the aggregate,
and are also subject to certain collateral requirements. These transactions, as
well as other transactions between a subsidiary bank and its holding company,
also must be on terms substantially the same as, or at least as favorable as,
those prevailing at the time for comparable transactions with non-affiliated
companies or, in the absence of comparable transactions, on terms or under
circumstances, including credit standards, that would be offered to, or would
apply to, non-affiliated companies.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to expiration of
the disapproval period if the Federal Reserve Board issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the Federal Reserve Board, the acquisition of more than 10% of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act would, under the circumstances set forth in
the presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that
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is a bank holding company) or more of the outstanding Common Stock of, or such
lesser number of shares as constitute control over, the Company.
Maine Law. Under Maine law, the prior approval of the Superintendent is
required in any case in which (i) any person or company proposes to acquire
control of a Maine financial institution or a Maine financial institution
holding company and (ii) a Maine financial institution or Maine financial
institution holding company proposes to acquire more than 5% of the voting
shares of a Maine financial institution or a Maine financial institution holding
company. In addition, the prior approval of the Superintendent is required for
the acquisition of more than 5% of the voting shares of a financial institution,
whose home state is not Maine, by a Maine financial institution or a Maine
financial institution holding company.
In addition, any person or company which directly or indirectly acquires
more than 5% of the voting shares of a Maine financial institution or a Maine
financial institution holding company is required within five days of the
acquisition to file with the Superintendent a statement containing specified
information, including the background and identity of the person or company, the
source and amount of funds or other consideration for the purchase and any plans
or proposals which the acquiring person may have to liquidate the financial
institution or financial institution holding company, to sell its assets or
merge it with any company or to make any other major change in its business,
corporate structure or management. Any person or company also must file a notice
with the Superintendent when there is a material change in ownership. Under
Maine law, the acquisition of an aggregate of more than another 5% of the voting
shares is a material change.
A Maine financial institution holding company may not engage in any
activity other than managing or controlling financial institutions or other
activities deemed permissible by the Superintendent. The Superintendent has by
regulation determined that, with the prior approval of the Superintendent, a
financial institution holding company may engage in those activities which are
permissible for bank holding companies under the BHCA and those activities which
are permissible for savings and loan holding companies under the Home Owners'
Loan Act, and additional activities as specified by regulations.
New Hampshire Law. New Hampshire law generally prohibits a bank holding
company organized under the laws of New Hampshire or doing business in the State
of New Hampshire from directly or indirectly acquiring ownership or control of
any voting stock of any bank or national bank, if upon such acquisition (i) the
bank holding company would have more than twelve bank affiliates in New
Hampshire, or (ii) the dollar volume of the total of time, savings and demand
deposits in New Hampshire of the bank holding company and all its affiliates
would exceed 20% of the dollar volume of the total of time, savings and demand
deposits of all banks, national banks and federal savings and loan associations
in the State of New Hampshire as determined by the New Hampshire Bank
Commissioner. The above-referenced 20% limitation may be waived by the New
Hampshire Bank
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Commissioner and the New Hampshire Attorney General if both determine that it is
in the best interests of the State of New Hampshire, provided that under no
circumstances shall the total dollar volume of total deposits exceed 30%.
REGULATION OF BANKING SUBSIDIARIES
General. Each of PHB, BNH and Family Bank is subject to extensive
regulation and examination by the Superintendent, the New Hampshire Bank
Commissioner and the OTS, respectively. Each of the Company's banking
subsidiaries also is subject to regulation and examination by the FDIC, which
insures the deposits of each of the Company's banking subsidiaries to the
maximum extent permitted by law, and certain requirements established by the
Federal Reserve Board. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans. The laws and regulations governing the Company's banking subsidiaries
generally have been promulgated to protect depositors and not for the purpose of
protecting stockholders.
Capital Requirements. Each of the Company's banking subsidiaries is subject
to regulatory capital requirements of the FDIC (in the case of PHB and BNH) and
the OTS (in the case of Family Bank) which are substantially comparable to the
regulatory capital requirements of the Federal Reserve Board applicable to bank
holding companies such as the Company. At December 31, 1997, the regulatory
capital of each of the Company's banking subsidiaries substantially exceeded
applicable requirements.
Prompt Corrective Action. Section 38 of the Federal Deposit Insurance Act
("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations
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also provide that a federal banking regulator may, after notice and an
opportunity for a hearing, reclassify a "well capitalized" institution as
"adequately capitalized" and may require an "adequately capitalized" institution
or an "undercapitalized" institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with an appropriate federal banking regulator
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Immediately upon becoming undercapitalized, an
institution becomes subject to statutory provisions which, among other things,
set forth various mandatory and discretionary restrictions on the operations of
such an institution.
At December 31, 1997, each of the Company's banking subsidiaries had
capital levels which qualified it as a "well-capitalized" institution.
Fdic Insurance Premiums. Each of the Company's banking subsidiaries is a
member of the BIF administered by the FDIC, although certain deposits of each of
these entities acquired in acquisitions are insured by the Savings Association
Insurance Fund ("SAIF") administered by the FDIC.
As an FDIC-insured institution, each of the Company's banking subsidiaries
is required to pay deposit insurance premiums to the FDIC. Effective January 1,
1997, the assessment schedule for both BIF and SAIF ranges from 0 basis points
(subject to a $2,000 annual minimum) to 27 basis points. In addition, both
BIF-insured institutions and SAIF-insured institutions are assessed amounts in
order for a federally-chartered Finance Corporation to make payments on it
bonds.
Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement
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prescribed by its appropriate federal banking agency. The FDIC may, on a
case-by-case basis and upon application by an adequately capitalized insured
depository institution, waive the restriction on brokered deposits upon a
finding that the acceptance of brokered deposits does not constitute an unsafe
or unsound practice with respect to such institution. The Company's banking
subsidiaries had no brokered deposits outstanding at December 31, 1997.
Community Investment and Consumer Protection Laws. In connection with its
lending activities, each of the Company's banking subsidiaries is subject to a
variety of federal laws designed to protect borrowers and promote lending to
various sectors of the economy and population. Included among these are the
federal Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act,
Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act
and Community Reinvestment Act ("CRA").
The CRA requires insured institutions to define the communities that they
serve, identify the credit needs of those communities and adopt and implement a
"Community Reinvestment Act Statement" pursuant to which they offer credit
products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank
and FNB, the FDIC and the OCC, respectively) must conduct regular CRA
examinations of insured financial institutions and assign to them a CRA rating
of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In
1997, the CRA rating of the Company's banking subsidiaries was either
"outstanding" or "satisfactory."
Limitations on Dividends. The Company is a legal entity separate and
distinct from its banking and other subsidiaries. The Company's principal source
of revenue consists of dividends from its banking subsidiaries. The payment of
dividends by the Company's banking subsidiaries is subject to various regulatory
requirements.
Miscellaneous. The Company's banking subsidiaries are subject to certain
restrictions on loans to the Company or its non-bank subsidiaries, on
investments in the stock or securities thereof, on the taking of such stock or
securities as collateral for loans to any borrower, and on the issuance of a
guarantee or letter of credit on behalf of the Company or its non-bank
subsidiaries. The Company's banking subsidiaries also are subject to certain
restrictions on most types of transactions with the Company or its non-bank
subsidiaries, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms.
Regulatory Enforcement Authority. The enforcement powers available to
federal banking regulators is substantial and includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
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enforcement action, including misleading or untimely reports filed with
regulatory authorities.
TAXATION
Federal Taxation. The Company and its banking subsidiaries are subject to
those rules of federal income taxation generally applicable to corporations
under the Code. The Company and its banking subsidiaries, as members of an
affiliated group of corporations within the meaning of Section 1504 of the Code,
file a consolidated federal income tax return, which has the effect of
eliminating or deferring the tax consequences of inter-company distributions,
including dividends, in the computation of consolidated taxable income.
State Taxation. As a financial institution holding company, the Company is
subject to a separate state franchise tax in lieu of state corporate income tax.
The amount of the tax is the sum of 1% of Maine net income and $.08 per $1,000
of Maine assets as defined in Maine law. Maine assets are the Company's total
end of the year assets as reported to the United States Government on the
federal income tax return. Maine net income is the Company's net income or loss
as reported by the Company on its consolidated financial statements which is
apportioned to Maine under Maine law.
The Company is subject to New Hampshire business profits tax based on
federal taxable income attributable to New Hampshire apportionments. The tax is
essentially computed by excluding from taxable income any interest on U.S.
Government obligations, adding back New Hampshire business profits taxes used in
computing federal taxable income, and then multiplying the resulting New
Hampshire taxable income by 7.0%. The computed tax is offset by a credit for any
New Hampshire enterprise tax assessed on the affiliates' compensation, interest
and dividends paid.
The Company is subject to Massachusetts financial institution excise tax
based on federal taxable income primarily attributable to its Massachusetts
affiliates. The tax is computed by adding back tax-exempt income excluded from
federal taxable income, state income tax/excise taxes deducted from federal
taxable income, and then multiplying the resulting Massachusetts taxable income
by 11.32%. Certain affiliates chartered as Massachusetts Security Corporations
pay excise taxes to Massachusetts at a rate of 1.32% on gross investment income.
ITEM 2. PROPERTIES
At December 31, 1997, the Company conducted its business from its
headquarters and main office at One Portland Square, Portland, Maine, and 141
banking offices located throughout Maine, New Hampshire and northern
Massachusetts. For additional information regarding the Company's lease
obligations, see Note 13 to the Consolidated Financial Statements included in
Item 8 hereof.
11
<PAGE> 13
The following table sets forth certain information with respect to the
offices of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
Net Book Value of
Number of Property and Leasehold
State Banking Offices Improvements Deposits
----- --------------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C>
PHB 75 $41,417 $2,499,242
BNH 46 20,547 1,518,857
Family Bank 21 11,844 784,541
---- ------ ---------
Total 142 $73,808 $4,802,640
=== ====== =========
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Like some of the larger financial institutions across the country, PHB 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,
operations or liquidity of the Company. Management currently believes the action
to be without merit and intends to vigorously defend the action.
In addition to the foregoing litigation, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information contained under the section captioned "Common Stock Prices"
on the inside back cover of the Company's Annual Report to Stockholders for the
year ended December 31, 1997 (the "Annual Report") is incorporated herein by
reference.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Five-Year
Consolidated Financial and Other Data" on page 17 of the Company's Annual Report
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 19
through 31 of the Company's Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Interest Rate
Risk and Asset-Liability Management" on pages 23 and 24 of the Company's Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required are contained on
pages 32 through 52 of the Company's Annual Report and are incorporated herein
by reference.
PART III.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to "Election of Directors" on pages 2 through 5
and "Executive Officers who are not Directors" on pages 8 and 9 of the
definitive Proxy Statement of the Company, dated March 23, 1998 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to "Compensation of Executive Officers and
Transactions with Management" on pages 12 through 17 of the Proxy Statement.
13
<PAGE> 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to "Beneficial Ownership of Common Stock by
Certain Beneficial Owners and Management" on pages 10 and 11 of the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to "Certain Transactions" on pages 17 and 18 of
the Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are incorporated by reference
from Item 8 hereof and the Annual Report to Stockholders included herein as
Exhibit 13:
Consolidated balance sheets at December 31, 1997 and 1996
Consolidated statements of income for each of the years in the three-year
period ended December 31, 1997
Consolidated statements of changes in shareholders' equity for each of the
years in the three-year period ended December 31, 1997
Consolidated statements of cash flows for each of the years in the
three-year period ended December 31, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are omitted
because of the absence of conditions under which they are required or because
the required information is included in the financial statements and related
notes thereto.
(a)(3) The following exhibits are included as part of this Form 10-K.
14
<PAGE> 16
Exhibit No. Exhibit Location
- ----------- ------- --------
3(a)(1) Articles of Incorporation of the Company, as amended (1)
3(a)(2) Amended and Restated Articles of (2)
Incorporation of the Company (to become effective
upon consummation of the Company's pending
acquisition of CFX Corporation)
3(a)(3) Amendment to the Articles of Incorporation of (3)
the Company (subject to approval of the Company's
stockholders at the annual meeting of stockholders to be
held on April 28, 1998)
3(b) Bylaws of the Company (1)
4(a) Specimen Common Stock certificate (1)
4(b) Form of Indenture between the Company and Mellon
Bank, N.A., as trustee (4)
4(c) Form of Debenture due 2000 (4)
4(d) Amended and Restated Declaration of Trust relating to (5)
Peoples Heritage Capital Trust I, dated as of January
31, 1997, between the Company and the trustees named
therein
4(e) Form of Common Securities and form of Capital (5)
Securities of Peoples Heritage Capital Trust I (included
as Exhibits to the Amended and Restated Declaration
included as Exhibit 4(d))
4(f) Indenture, dated as of January 31, 1997, between the (5)
Company and The Bank of New York, as trustee,
relating to Junior Subordinated Deferrable Interest
Debentures due 2027 of the Company
4(g) Form of Junior Subordinated Deferrable Interest (5)
Debentures due 2027 of the Company (included as
Exhibit A to the Indenture included as Exhibit 4(f))
4(h) Series A Capital Securities Guarantee Agreement, dated (6)
as of January 31, 1997, relating to the Series A Capital
Securities of Peoples Heritage Capital Trust I
4(i) Common Securities Guarantee Agreement, dated as of (6)
January 31, 1997, relating to the Common Securities of
Peoples Heritage Capital Trust I
15
<PAGE> 17
10(a) Amended and Restated Severance Agreement between (7)
the Company and William J. Ryan
10(b) Amended and Restated Severance Agreement between (7)
the Company and Peter J. Verrill
10(c) Form of Severance Agreement between the Company (6)
and each of R. Scott Bacon, David D. Hindle, John W.
Fridlington, Glenn McAllister, Carol L. Mitchell and
Wendy Suehrstedt
10(d) Form of Amendment to Severance Agreement between
the Company and each of R. Scott Bacon and David D.
Hindle
10(e) Supplemental Retirement Agreement among the (8)
Company, its subsidiaries and William J. Ryan
10(f) Supplemental Retirement Agreement among the (8)
Company, its subsidiaries and Peter J. Verrill
10(g) Supplemental Retirement among the Company, its (9)
subsidiaries and John W. Fridlington
10(h) Form of Supplemental Retirement Agreement among the
Company, its subsidiaries and each of R. Scott Bacon,
Carol L. Mitchell and Wendy Suehrstedt
10(i) Senior Officers' Deferred Compensation Plan, as (10)
amended
10(j) Directors' Deferred Compensation Plan, as amended (10)
10(k) 1986 Stock Option and Stock Appreciation Rights (1)(11)
Plan, as amended
10(l) 1986 Employee Stock Purchase Plan, as amended (1)(11)
10(m) Amended and Restated Restricted Stock Plan for Non- (6)
Employee Directors
10(n) Amended and Restated 1995 Stock Option Plan for Non- (12)
Employee Directors
10(o)(1) Amended and Restated Thrift Incentive Plan (6)
10(o)(2) First Amendment to Amended and Restated Thrift (6)
Incentive Plan
10(p)(1) Profit Sharing Employee Stock Ownership Plan (13)
16
<PAGE> 18
10(p)(2) First Amendment to Profit Sharing Employee Stock (7)
Ownership Plan
10(p)(3) Second Amendment to Profit Sharing Employee Stock (7)
Ownership Plan
10(q)(1) 1996 Equity Incentive Plan (14)
10(q)(2) 1996 Equity Incentive Plan, as amended (subject to (3)
approval of the Company's stockholders at the annual
meeting of the Company's stockholders to be held on
April 28, 1998)
10(r) Agreement, dated January 1, 1989, by and among the (10)
Company and Robert P. Bahre
10(s) Stockholders Rights Agreement, dated September 12, (15)
1989, between the Company and American Stock
Transfer & Trust Company, as Rights Agent
10(t) Supplemental Retirement Agreement among the (6)
Company, its subsidiaries and Glen McAllister
10(u) Bank of New Hampshire Corporation Executive Excess (16)
Benefit Plan for Paul R. Shea
10(v) Supplemental Executive Retirement Plan agreement (17)
between The Family Mutual Savings Bank and
David D. Hindle
10(w) Split Dollar Insurance Agreement between The (18)
Family Mutual Savings Bank and David D. Hindle
13 Annual Report to Stockholders for 1997
21 Subsidiaries of the Company
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
- -----------
(1) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-20243) filed by the Company with the Securities and Exchange Commission
("SEC") on February 22, 1988. An amendment to the Articles of Incorporation is
incorporated by reference to the proxy statement filed by the Company with the
SEC on April 23, 1996.
17
<PAGE> 19
(2) Incorporated by reference to the Agreement and Plan of Merger, dated as of
October 27, 1997, between the Company and CFX Corporation, which is included as
Exhibit A to the Prospectus/Proxy Statement included in the Form S-4
Registration Statement (No. 333- 23991) filed by the Company on December 31,
1997.
(3) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 23, 1998.
(4) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on February 28, 1995.
(5) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 333-23991) filed by the Company with the SEC on March 26, 1997.
(6) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1996, filed with the SEC on March 31, 1997.
(7) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1995, filed with the SEC on March 29, 1996.
(8) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1990, filed with the SEC on March 23, 1991.
(9) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1994, filed with the SEC on March 30, 1995.
(10) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1993, filed with the SEC on March 17, 1994.
(11) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1993.
(12) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 21, 1997.
(13) Exhibit is incorporated by reference to the Form S-1 Registration Statement
(No. 33- 53236) filed by the Company with the SEC on November 23, 1992.
(14) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 20, 1996.
18
<PAGE> 20
(15) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on September 13, 1989.
(16) Exhibit is incorporated by reference to the Form 10-K report filed by Bank
of New Hampshire Corporation (File No. 0-9517) for the year ended December 31,
1994.
(17) Exhibit is incorporated by reference to the Form 10-K report filed by
Family Bancorp (File No. 0-17252) for the year ended December 31, 1993.
(18) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33- 18613) filed by Family Bancorp.
The Company's management contracts or compensatory plans or arrangements
consist of Exhibit Nos. 10(a)-(w) (excluding Exhibit 10(s)).
(b) The Company filed reports on Form 8-K on October 1, 1997, October 10,
1997, October 27, 1997 and November 3, 1997.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to Stockholders which are
required to be included herein.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 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 organized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
By: /s/ William J. Ryan Date: March 24, 1998
-------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ Robert P. Bahre Date: March 24, 1998
- -----------------------------------------
Robert P. Bahre
Director
/s/ Everett W. Gray Date: March 24, 1998
- -----------------------------------------
Everett W. Gray
Director
/s/ Andrew W. Greene Date: March 24, 1998
- -----------------------------------------
Andrew W. Greene
Director
/s/ Katherine M. Greenleaf Date: March 24, 1998
- -----------------------------------------
Katherine M. Greenleaf
Director
20
<PAGE> 22
/s/ Dana S. Levenson Date: March 24, 1998
- -----------------------------------------
Dana S. Levenson
/s/ Robert A. Marden, Sr. Date: March 24, 1998
- -----------------------------------------
Robert A. Marden, Sr.
Vice Chairman
/s/ Malcolm W. Philbrook, Jr. Date: March 24, 1998
- -----------------------------------------
Malcolm W. Philbrook, Jr.
Director
/s/ Pamela P. Plumb Date: March 24, 1998
- -----------------------------------------
Pamela P. Plumb
Vice Chairman
/s/ William J. Ryan Date: March 24, 1998
- -----------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer
(principal executive officer)
/s/ Curtis M. Scribner Date: March 24, 1998
- -----------------------------------------
Curtis M. Scribner
Director
/s/ Paul R. Shea Date: March 24, 1998
- -----------------------------------------
Paul R. Shea
Director
21
<PAGE> 23
/s/ Davis P. Thurber Date: March 24, 1998
- -----------------------------------------
Davis P. Thurber
Director
/s/ John E. Veasey Date: March 24, 1998
- -----------------------------------------
John E. Veasey
Director
/s/ Peter J. Verrill Date: March 24, 1998
- -----------------------------------------
Peter J. Verrill
Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer (principal financial
and accounting officer)
22
<PAGE> 24
EXHIBIT INDEX
Exhibit No. Exhibit Location
- ----------- ------- --------
3(a)(1) Articles of Incorporation of the Company, as amended (1)
3(a)(2) Amended and Restated Articles of Incorporation (2)
of the Company (to become effective upon
consummation of the Company's pending acquisition
of CFX Corporation)
3(a)(3) Amendment to the Articles of Incorporation of (3)
the Company (subject to approval of the Company's
stockholders at the annual meeting of stockholders
to be held on April 28, 1998)
3(b) Bylaws of the Company (1)
4(a) Specimen Common Stock certificate (1)
4(b) Form of Indenture between the Company and Mellon
Bank, N.A., as trustee (4)
4(c) Form of Debenture due 2000 (4)
4(d) Amended and Restated Declaration of Trust relating to (5)
Peoples Heritage Capital Trust I, dated as of January
31, 1997, between the Company and the trustees named
therein
4(e) Form of Common Securities and form of Capital (5)
Securities of Peoples Heritage Capital Trust I (included
as Exhibits to the Amended and Restated Declaration
included as Exhibit 4(d))
4(f) Indenture, dated as of January 31, 1997, between the (5)
Company and The Bank of New York, as trustee,
relating to Junior Subordinated Deferrable Interest
Debentures due 2027 of the Company
4(g) Form of Junior Subordinated Deferrable Interest (5)
Debentures due 2027 of the Company (included as
Exhibit A to the Indenture included as Exhibit 4(f))
4(h) Series A Capital Securities Guarantee Agreement, dated (6)
as of January 31, 1997, relating to the Series A Capital
Securities of Peoples Heritage Capital Trust I
<PAGE> 25
Exhibit No. Exhibit Location
- ----------- ------- --------
4(i) Common Securities Guarantee Agreement, dated as of (6)
January 31, 1997, relating to the Common Securities of
Peoples Heritage Capital Trust I
10(a) Amended and Restated Severance Agreement between (7)
the Company and William J. Ryan
10(b) Amended and Restated Severance Agreement between (7)
the Company and Peter J. Verrill
10(c) Form of Severance Agreement between the Company (6)
and each of R. Scott Bacon, David D. Hindle, John W.
Fridlington, Glenn McAllister, Carol L. Mitchell and
Wendy Suehrstedt
10(d) Form of Amendment to Severance Agreement between
the Company and each of R. Scott Bacon and David D.
Hindle
10(e) Supplemental Retirement Agreement among the (8)
Company, its subsidiaries and William J. Ryan
10(f) Supplemental Retirement Agreement among the (8)
Company, its subsidiaries and Peter J. Verrill
10(g) Supplemental Retirement among the Company, its (9)
subsidiaries and John W. Fridlington
10(h) Form of Supplemental Retirement Agreement among the
Company, its subsidiaries and each of R. Scott Bacon,
Carol L. Mitchell and Wendy Suehrstedt
10(i) Senior Officers' Deferred Compensation Plan, as (10)
amended
10(j) Directors' Deferred Compensation Plan, as amended (10)
10(k) 1986 Stock Option and Stock Appreciation Rights (1)(11)
Plan, as amended
10(l) 1986 Employee Stock Purchase Plan, as amended (1)(11)
10(m) Amended and Restated Restricted Stock Plan for Non- (6)
Employee Directors
10(n) Amended and Restated 1995 Stock Option Plan for Non- (12)
Employee Directors
10(o)(1) Amended and Restated Thrift Incentive Plan (6)
<PAGE> 26
Exhibit No. Exhibit Location
- ----------- ------- --------
10(o)(2) First Amendment to Amended and Restated Thrift (6)
Incentive Plan
10(p)(1) Profit Sharing Employee Stock Ownership Plan (13)
10(p)(2) First Amendment to Profit Sharing Employee Stock (7)
Ownership Plan
10(p)(3) Second Amendment to Profit Sharing Employee Stock (7)
Ownership Plan
10(q)(1) 1996 Equity Incentive Plan (14)
10(q)(2) 1996 Equity Incentive Plan, as amended (subject to (3)
approval of the Company's stockholders at the annual
meeting of stockholders to be held on April 28, 1998)
10(r) Agreement, dated January 1, 1989, by and among the (10)
Company and Robert P. Bahre
10(s) Stockholders Rights Agreement, dated September 12, (15)
1989, between the Company and American Stock
Transfer & Trust Company, as Rights Agent
10(t) Supplemental Retirement Agreement among the (6)
Company, its subsidiaries and Glen McAllister
10(u) Bank of New Hampshire Corporation Executive Excess (16)
Benefit Plan for Paul R. Shea
10(v) Supplemental Executive Retirement Plan agreement (17)
between The Family Mutual Savings Bank and
David D. Hindle
10(w) Split Dollar Insurance Agreement between The (18)
Family Mutual Savings Bank and David D. Hindle
13 Annual Report to Stockholders for 1997
21 Subsidiaries of the Company
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
- ------------
(1) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-20243) filed by the Company with the Securities and Exchange Commission
("SEC") on February 22, 1988. An amendment to the Articles of Incorporation is
incorporated by reference to the proxy statement filed by the Company with the
SEC on April 23, 1996.
<PAGE> 27
(2) Incorporated by reference to the Agreement and Plan of Merger, dated as of
October 27, 1997, between the Company and CFX Corporation, which is included as
Exhibit A to the Prospectus/Proxy Statement included in the Form S-4
Registration Statement (No. 333- 23991) filed by the Company on December 31,
1997.
(3) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 23, 1998.
(4) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on February 28, 1995.
(5) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 333-23991) filed by the Company with the SEC on March 26, 1997.
(6) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1996, filed with the SEC on March 31, 1997.
(7) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1995, filed with the SEC on March 29, 1996.
(8) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1990, filed with the SEC on March 23, 1991.
(9) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1994, filed with the SEC on March 30, 1995.
(10) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1993, filed with the SEC on March 17, 1994.
(11) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1993.
(12) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 21, 1997.
(13) Exhibit is incorporated by reference to the Form S-1 Registration Statement
(No. 33- 53236) filed by the Company with the SEC on November 23, 1992.
(14) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 20, 1996.
<PAGE> 28
(15) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on September 13, 1989.
(16) Exhibit is incorporated by reference to the Form 10-K report filed by Bank
of New Hampshire Corporation (File No. 0-9517) for the year ended December 31,
1994.
(17) Exhibit is incorporated by reference to the Form 10-K report filed by
Family Bancorp (File No. 0-17252) for the year ended December 31, 1993.
(18) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33- 18613) filed by Family Bancorp.
<PAGE> 1
EXHIBIT 10(d)
FORM OF
AMENDMENT TO
SEVERANCE AGREEMENT
BETWEEN THE COMPANY AND EACH OF
R. SCOTT BACON AND DAVID D. HINDLE
This Amendment to the existing Severance Agreement between the parties
hereto is entered into this first day of January 1998 by and between Peoples
Heritage Financial Group, Inc., (the "Company"), a Maine financial institution
with its principal place of business at One Portland Square, Portland, Maine
04112, and David D. Hindle (the "Executive"), an individual and employee of the
Company.
WHEREAS, the Company and the Executive have previously entered into a
Severance Agreement dated December 7, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive wish to modify said Agreement;
NOW THEREFORE, in consideration of the above, the legal sufficiency of
which is acknowledged by the parties hereto, said parties agree to amend their
Agreement as follows:
Paragraph 7(d)(ii) is deleted in its original form and replaced by the
following:
the Executive shall receive from the Company, no less than ten days
following termination of his or her employment, a lump sum payment
(the "Termination Payment") equal to three (3) times the Executive's
Annual Compensation;
Paragraph 7(d)(v) is deleted in its original form and replaced by the
following:
the Executive shall continue to be covered at the expense of the
Company by the same or equivalent hospital, medical, dental, accident,
disability and life insurance coverage as in effect for the Executive
immediately prior to his or her employment, until the earlier of (A)
thirty-six (36) months following termination of employment, or (B) the
date the Executive has commenced new employment and has thereby become
eligible for comparable benefits.
All other provisions of the Agreement shall, unless altered hereby, remain
in full force and effect.
<PAGE> 2
WHEREFORE, in recognition and acceptance of this Amendment to the Severance
Agreement, the parties hereto have set their hands as of the first date written
above and upon which date this Amendment, when executed, shall be given effect.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
By:
-----------------------------------------
Attest:
-------------------------------------
Executive:
----------------------------------
Address:
------------------------------------
2
<PAGE> 1
EXHIBIT 10(h)
FORM OF
SUPPLEMENTAL RETIREMENT AGREEMENT BETWEEN
THE COMPANY AND EACH OF R. SCOTT BACON,
CAROL L. MITCHELL AND WENDY SUEHRSTEDT
THIS AGREEMENT made as of this first day of January 1998 by and between
Peoples Heritage Financial Group, Inc. ("PHFG"), and ___________________________
(the "Executive"). (PHFG and its subsidiaries and affiliates are hereinafter
collectively referred to as the "Group").
WITNESSETH:
WHEREAS, in order to induce the Executive to continue in the employ of the
Group and in recognition of the Executive's past service, PHFG desires to enter
into a Supplemental Retirement Agreement to provide the Executive or the
Executive's beneficiaries the benefits described herein;
NOW, THEREFORE, PHFG provides as follows:
ARTICLE ONE
1.01 ADMINISTRATOR. This Agreement shall be administered by the PHFG's
Board of Directors (the "Board") or a committee thereof (the Board or such
committee administering the Agreement is hereinafter referred to as the
"Administrator"). The Administrator shall have full discretion to interpret the
Agreement, shall prescribe, amend and rescind rules relating to it from time to
time, and shall take any other action necessary for the administration of the
Agreement.
ARTICLE TWO
2.01 RETIREMENT BENEFITS.
(a) GENERAL. The Executive shall be entitled to a supplemental pension
(the "SRA") in an amount equal to the excess, if any, of:
(i) the benefit to which the Executive would be entitled under the
Peoples Heritage Financial Group, Inc. Retirement Plan (the "Pension Plan")
stated in the form described in the first sentence of Section 3.2 of the Pension
Plan (the "Normal Benefit") and commencing on the Executive's "Normal Retirement
Date" as defined in the Pension Plan (the "NRD"), computed without regard to
those provisions of the Pension Plan implementing the restrictions or
limitations imposed by the provisions of Section 1.16 of the
<PAGE> 2
Pension Plan following the first paragraph thereof or any other Pension Plan
provision implementing the limitations set forth in Section 401(a)(17) of the
Internal Revenue Code of 1986, as amended (the "Code"), and without regard to
Section 3.10 of the Pension Plan or any other Pension Plan provision
implementing the limitations set forth in Section 415 of the Code (the
"Hypothetical Unrestricted Benefit"); over
(ii) the amount of the actual Normal Benefit payable commencing on the
NRD under the Pension Plan.
(b) CHANGE IN CONTROL. In the event of a Change in Control of PHFG, as
defined in the Peoples Heritage Financial Group, Inc. Change in Control
Protection Plan, the Hypothetical Unrestricted Benefit shall be calculated under
Section 2.01(a) assuming the Plan provided a fully vested benefit at all times
(i.e., without any reduction in respect of amounts which might otherwise be
forfeited by the Participant under the terms of the Pension Plan.)
2.02 PAYMENT OF BENEFIT. Unless otherwise elected as described in this
Section 2.02, the SRA shall be paid in the form of a Normal Benefit commencing
on the Executive's NRD. The Executive may elect to receive the SRA in any of the
forms of benefit available under the Pension Plan (including any early
retirement benefit to which the Executive is entitled under the Pension Plan),
in which case the amount of payments under such alternate form shall be
determined in accordance with the provisions of the Pension Plan controlling the
determination of the amount of payments under such form under the Pension Plan.
Any election of an alternate form of benefit shall be made in the manner
determined by the Administrator.
2.03 BENEFICIARY. In the event of the Executive's death, payment of amounts
otherwise due hereunder shall be made to the Executive's Beneficiary, as defined
below, and in such case all references to the Executive shall, where applicable,
apply to the Beneficiary. The "Beneficiary" shall be the person entitled to
receive benefits following the Executive's death as provided under the Pension
Plan, if applicable. If no Beneficiary is designated, the designation is
ineffective, or the Beneficiary dies before the entire amount of the SRA is
paid, the balance shall be paid to the Executive's estate.
2
<PAGE> 3
ARTICLE THREE
3.01 ALIENABILITY. Neither the Executive, nor any beneficiary under this
Agreement shall have any power or right to transfer, assign, anticipate,
hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of
the benefits payable hereunder, nor shall any of said benefits be subject to
seizure for the payment of any debts, judgments, alimony or separate
maintenance, owed by the Executive or the Executive's beneficiary or any of
them, or be transferable by operation of law in the event of bankruptcy, or
otherwise.
ARTICLE FOUR
4.01 PARTICIPATION IN OTHER PLANS. Nothing contained in this Agreement
shall be construed to alter, abridge, or in any manner affect the rights and
privileges of the Executive to participate in and be covered by any pension,
profit-sharing, group insurance, bonus or any other employee plan or plans which
any member of the Group may have or hereafter have.
ARTICLE FIVE
5.01 FUNDING. PHFG reserves the absolute right at its sole and exclusive
discretion to insure or otherwise provide for the obligations under this
Agreement or to refrain from same, and to determine the extent, nature and
method thereof, including the establishment of one or more trusts. Should PHFG
elect to insure this Agreement, in whole or in part, through the medium of
insurance or annuities, or both, PHFG, or a designated member of the Group shall
be the owner and beneficiary of each such policy or annuity. At no time shall
the Executive be deemed to have any right, title or interest in or to any
specified asset or assets of the trust or escrow arrangement, including, but not
by way of restriction, any insurance or annuity or contracts or the proceeds
therefrom.
5.02 NO TRUST. Nothing contained in this Agreement and no action taken
pursuant to the provisions of this Agreement shall create or be construed to
create a trust of any kind or a fiduciary relationship between any member of the
Group and the Executive, the Beneficiary or any other person.
3
<PAGE> 4
ARTICLE SIX
6.01 REORGANIZATION. PHFG shall not merge or consolidate into or with
another corporation, or reorganize, or sell substantially all of its assets to
another corporation, firm, or person unless and until such succeeding or
continuing corporation, firm or person agrees to assume and discharge the
obligations of PHFG and the Group under this Agreement. Upon the occurrence of
such event, the term "PHFG" as used in this Agreement shall be deemed to refer
to such successor, assignee, or survivor corporation firm or person.
ARTICLE SEVEN
7.01 BENEFITS AND BURDENS. This Agreement shall be binding upon and inure
to the benefit of the Executive and the Executive's personal representatives,
and PHFG, and any successor organization which shall succeed to substantially
all of its assets and business without regard to the form of such succession.
ARTICLE EIGHT
8.01 COMMUNICATIONS. Any notice or communication required of either party
with respect to this Agreement shall be made in writing and may either be
delivered personally or sent by first class mail, as the case may be:
To PHFG:
Peoples Heritage Financial Group, Inc.
One Portland Square
Portland, ME 04112
Attn: Director of Human Resources
To the Executive:
Each party shall have the right by written notice to change the place to which
any notice may be addressed.
ARTICLE NINE
9.01 CLAIMS PROCEDURE. In the event that benefits under this Agreement are
not paid to the Executive (or the Executive's Beneficiary or personal
representative in the case
4
<PAGE> 5
of the Executive's death), and such person feels entitled to receive them, a
claim shall be made in writing to the Administrator within sixty (60) days after
written notice from the Administrator to the Executive or the Executive's
beneficiary or personal representative that payments are not being made or are
not to be made under this Agreement. Such claim shall be reviewed by the
Administrator. If the claim is approved or denied, in full or in part, within
sixty (60) days of receipt of the written claim the Administrator shall provide
a written notice of approval or denial setting forth the specific reason for
denial, specific reference to the provision of this Agreement upon which the
denial is based, and any additional material or information necessary to perfect
the claim, if any. Also, such written notice shall indicate the steps to be
taken if a review of the denial is desired. A claim shall be deemed denied if
the Administrator does not take action within the aforesaid sixty (60) day
period. If a claim is denied and a review is desired, the Executive or the
Executive's beneficiary or personal representative shall notify the
Administrator in writing within the earlier of 120 days after filing the claim
or 60 days following receipt of the notice of denial. In requesting a review of
the denial, the Executive or the Executive's beneficiary or personal
representative may review this Agreement or any document relating to it and
submit any written issues and comments he or she may feel appropriate. In its
sole discretion, the Administrator shall then review the claim and provide a
written decision within sixty (60) days. This decision likewise shall state the
specific reasons for the decision and shall include reference to specific
provisions of this Agreement on which the decision is based. Any decision of the
Administrator shall not preclude further action by the Executive, the
Executive's beneficiary or personal representative.
5
<PAGE> 6
ARTICLE TEN
10.01 ENTIRE AGREEMENT; MODIFICATION. This instrument contains the entire
agreement of the parties hereto and there are no agreements or representations
which are not set forth herein. This instrument may be altered or amended only
by written agreement signed by the parties hereto.
10.02 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Maine.
10.03 SEVERABILITY. The provisions of this Agreement are severable and the
invalidity of any provision shall not affect the validity of any other
provision.
10.04 EMPLOYMENT. Notwithstanding anything contained herein, this Agreement
is not an agreement of employment. Nothing herein shall restrict any member of
the Group concerning other terms and conditions of the Executive's employment.
The benefits provided by this Agreement are not part of any salary reduction
plan or an arrangement deferring a bonus or a salary increase.
IN WITNESS WHEREOF, PHFG and the Executive have caused this Agreement to be
executed as of the date and year first above written.
PEOPLES HERITAGE FINANCIAL
GROUP, INC.
By:
- ------------------------------------ --------------------------------------
Witness William J. Ryan
President and Chief Executive Officer
- ------------------------------------ -----------------------------------------
Witness
6
<PAGE> 1
REACHING HIGHER.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
1997 ANNUAL REPORT
[PHOTO]
<PAGE> 2
IN 1997, PEOPLES HERITAGE REACHED NEW HEIGHTS. WE ACHIEVED OUR FOURTH
CONSECUTIVE RECORD EARNINGS YEAR WHILE BALANCING GROWTH WITH PROFITABILITY. WITH
OUR SUCCESSFUL COMMUNITY BANKING APPROACH AND PROVEN ACQUISITION STRATEGY, WE
WILL SOON BECOME THE FOURTH LARGEST BANKING COMPANY BASED IN NEW ENGLAND.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Letter to Shareholders 2
Markets 7
Performance 7
Strategy 11
Community Banking Services 15
Selected 5-year Consolidated Financial
and Other Data 17
Management's Discussion and Analysis 19
Financial Statements 32
Corporate Directory 53
</TABLE>
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Peoples Heritage Financial Group, Inc. is a $6.8 billion multi-state banking and
financial services holding company headquartered in Portland, Maine. The
Company's subsidiaries include Peoples Heritage Bank, Bank of New Hampshire, and
Family Bank.
<PAGE> 3
[PHOTO]
<PAGE> 4
[PHOTO]
<PAGE> 5
A PICTURE OF SUCCESS IN MAINE.
Peoples Heritage Bank in Maine continued its growth and profitability in 1997.
As Maine's own in-state bank, we are committed to products and services that
meet the needs of the people and businesses of the state. In 1997, we increased
our breadth of services with the acquisition of Morse Payson & Noyes Insurance,
formerly Maine's largest independent insurance agency. The acquisition offers
added convenience for our customers, and new cross-selling opportunities.
Additionally, in a strategic geographic move, Peoples Heritage acquired Atlantic
Bank, increasing our market share to what we believe is the number one deposit
share in Maine, while achieving excellent efficiencies.
[PHOTO]
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
Dollars in Thousands Except Share Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR 1997 1996 % Change 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 73,401 $ 52,480 40% $ 44,486 $ 34,048 $ 22,511
Net interest income 246,189 190,573 29 170,954 148,595 131,147
Non-interest income
(excluding securities transactions) 56,788 37,941 50 31,301 27,880 27,418
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 2.64 $ 2.10 26% $ 1.80 $ 1.37 $ 0.95
Diluted 2.59 2.06 26 1.78 1.36 0.94
Cash earnings per share(1):
Basic 2.89 2.29 26 1.89 1.45 1.08
Diluted 2.84 2.26 26 1.87 1.44 1.07
Dividends per share 0.76 0.65 17 0.46 0.23 0.01
Book value per share 17.13 15.48 11 14.16 12.26 11.61
- ------------------------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
- ------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.28% 1.21% 6% 1.16% 0.94% 0.64%
Return on average equity (2) 16.42 14.41 14 13.53 11.42 8.57
- ------------------------------------------------------------------------------------------------------------------------
AT YEAR END
- ------------------------------------------------------------------------------------------------------------------------
Total assets $6,795,337 $5,398,398 26% $4,058,126 $3,737,906 $3,624,641
Deposits 4,802,640 4,185,289 15 3,197,138 2,885,845 2,939,826
Total loans and leases, net 4,421,280 3,587,112 23 2,717,608 2,575,902 2,638,348
Shareholders' equity 475,066 437,010 9 354,925 304,439 287,438
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings before the amortization of goodwill and core deposit premiums.
(2) Excludes effect of unrealized gains or losses on securities.
FINANCIAL HIGHLIGHTS
In our fourth consecutive record earnings year, Peoples Heritage soared with
annual net earnings of $73.4 million, up 40% over 1996's record net earnings of
$52.5 million.
Contributing to our strong financial performance were Bank of New Hampshire
and Family Bank in Massachusetts in their first full year as affiliates of
Peoples Heritage Financial Group. Our Maine bank, Peoples Heritage Bank, also
continued to generate strong growth and profitability. We achieved significant
increases in consumer, commercial and mortgage lending across the franchise, and
expanded our fee income.
Most notably, we dramatically increased our market share and earnings
potential through two strategic acquisitions, and reached agreement on a third
which is expected to make us the fourth largest banking company in New England
with $10 billion in assets.
[Return on Assets Graph]
[Return on Equity Graph]
1
<PAGE> 7
[PHOTO]
<PAGE> 8
"IN THE LAST FOUR YEARS, WE HAVE NEARLY TRIPLED OUR ASSETS, MORE THAN TRIPLED
OUR STOCK PRICE, AND EXPANDED BEYOND MAINE AND COASTAL NEW HAMPSHIRE TO BECOME
NEW ENGLAND'S LEADING COMMUNITY BANK."
DEAR SHAREHOLDERS:
With our fourth consecutive record earnings year, Peoples Heritage is emerging
as a top-tier banking and financial services company. Our ability to grow
through profitable acquisitions while retaining our community banking focus is a
formula for success that continues to yield impressive results.
In 1997, we significantly expanded our franchise while per- forming
strongly across a wide range of financial measures. In the last four years, we
have nearly tripled our assets, more than tripled our stock price, and expanded
beyond Maine and coastal New Hampshire to become New England's leading community
bank. 1997 was also our first full year of operations with our new banking
affiliates, Bank of New Hampshire and Family Bank in Massachusetts. Both
acquisitions clearly added to our profitability.
Our strategy of seeking sound acquisitions and market share expansion
continued in 1997 with the acquisition in Maine of Atlantic Bancorp, the parent
company of Atlantic Bank, N.A. The Atlantic Bank acquisition brought us nearly
$463 million in additional assets in southern Maine and increased our market
position to number one in the Greater Portland metropolitan area, the state's
largest market. By year-end 1997, it appeared as if our market share growth had
propelled us to the state's number one market position.
In our continued growth as a financial services provider, we also acquired
Morse Payson & Noyes Insurance, Maine's largest independent insurance agency.
Like Peoples Heritage, Morse Payson & Noyes is a company committed to quality
customer service and provides a perfect strategic fit as we expand our product
offerings across the Northeast. Linking new insurance products, services and
solutions to our strong distribution system provides new opportunities for us,
and a higher level of service for our customers.
In 1997 we also reached agreement to acquire CFX Corporation. Once
completed this spring, the acquisition will make us New England's fourth largest
banking company with $10 billion in assets. Our New Hampshire affiliate, Bank of
New Hampshire, will become the state's largest bank while Family Bank pushes its
market area westward in Massachusetts. In addition to our proven track record in
rapidly achieving profitability and cost efficiencies with all our acquisitions,
community banking remains fundamental to our success.
Community banking and staying close to the customer is what continues to
differentiate us from other large financial institutions in our region. Simply
stated, when a customer comes in for a mortgage, we don't send him or her to a
phone to call a mortgage center, we sit down and help the customer through the
application. When a car dealer calls asking us to approve a customer's auto
loan, we don't give the dealer an answer the next day, we typically respond
right then and there. When a customer calls our automated PhoneBank, the first
question asked is whether the customer would like to speak directly to a person.
While these may seem like small details, our unwavering commitment to
customer service is the essential strategy behind our expansion and continued
success.
To that end, in 1997 we leveraged our experience of opening nearly a dozen
supermarket branches in Maine to open our first supermarket branches in
Massachusetts and New Hampshire. We provided more mortgages in our combined
market areas than any other bank. We won awards for small business lending. We
expanded our consumer lending without sacrificing credit quality and we pursued
innovative new opportunities to serve our customers better.
Looking ahead, we will continue to seek strategic, value-oriented
acquisitions to increase market share while maintaining our commitment to our
customers and seeking new ways to achieve profitability for our shareholders.
Sincerely yours,
William J. Ryan
Chairman, President and
Chief Executive Officer
[Net Income Graph] [Basic Earnings Per Share Graph]
2
<PAGE> 9
LOOKING AHEAD.
Staying close to our customers and our communities has enabled us to soar to new
heights as New England's premier community banking franchise. We have reached
new levels of profitability and market growth guided by our successful community
banking strategy and disciplined operational style.
Looking ahead, we will continue to seek new ways to serve our customers,
enhance shareholder value, and balance growth with profitability.
We hope you enjoyed the view.
<PAGE> 10
MARKETS
Peoples Heritage once again expanded its market share in 1997, through both
acquisitions and internal growth. As New England's premier community banking
franchise, Peoples Heritage Financial Group now includes three community banks
with more than 140 branches.
Once completed, our agreement to acquire CFX Corporation will elevate us to
$10 billion in assets to become the fourth largest banking company in New
England. We also increased our breadth of services and earnings potential with
the acquisition of Morse Payson & Noyes Insurance, Maine's largest independent
insurance agency. In addition, we acquired Atlantic Bancorp in southern Maine,
adding to our assets while achieving significant cost-efficiencies. Each of
these value-oriented acquisitions enabled us to increase our market share and
profitability as a full-service financial services provider while maintaining
our community banking approach.
PERFORMANCE
RECORD EARNINGS -- Peoples Heritage Financial Group achieved record annual net
earnings of $73.4 million, or $2.64 per basic share. That's up 40% from 1996's
annual record net earnings of $52.5 million, or $2.10 per basic share. Basic
cash earnings reached $2.89 per share, up from $2.29 for 1996.
INCREASED DEPOSITS -- A major factor in our record earnings, we achieved a 37%
increase in average balances of low cost demand deposits -- our fastest growing
deposit category.
TOTAL ASSETS -- In 1997, our total assets rose to $6.8 billion, up from $5.4
billion at the end of 1996. We expect total assets to reach $10 billion when the
anticipated acquisition of CFX Corporation is completed in 1998.
SOLID MARGINS -- We continue to achieve very solid margins despite industry-wide
pricing pressure on loans and deposits. Our 1997 net interest margin of 4.67%
was down slightly from 4.71% in 1996.
MORE LOANS -- We significantly increased our consumer, commercial and mortgage
lending by 23% as a result of market share growth and successful acquisitions.
INCREASED FEE INCOME -- Fee income was a major contributor to 1997's record net
earnings. Fee income jumped to $56.9 million from $38.4 million in 1996 -- an
increase of 48%. A brand new category of fee income is insurance commissions
with the acquisition of Morse Payson & Noyes Insurance. Insurance commissions
added $1.9 million to fee income in just the fourth quarter.
INCREASED DIVIDEND -- Our dividend payout to shareholders continues to increase
- -- from 18 cents per share following the fourth quarter of 1996 to 22 cents per
share following the fourth quarter of 1997. We continue to return about 30 % of
net income to shareholders as dividends.
RETURN ON EQUITY -- For 1997, our return on average equity reached a new record
high of 16.42%, compared to the previous high of 14.41% for 1996. The increase
was largely due to improved earnings and capital management, including the
repurchase of 1.1 million shares in 1997. In the fourth quarter of 1997, ROE
reached over 17%.
RETURN ON ASSETS -- Our return on average assets for 1997 reached a record high
level of 1.28%, as compared to 1.21% for 1996.
STRONG ASSET QUALITY -- While we continue to significantly increase our loans,
we are committed to preserving asset quality. 1997 was a milestone in asset
quality with nonperforming assets as a percentage of total assets at 0.75%.
[Strong Margins Graph]
[Nonperforming Assets Graph]
[Loan History Graph]
7
<PAGE> 11
THE BROADEST VIEW OF NEW HAMPSHIRE.
In its first full year as part of our company, our New Hampshire banking
affiliate, Bank of New Hampshire, significantly contributed to our bottom line.
In late 1997, Peoples Heritage also reached agreement to acquire CFX Corporation
- -- a move that will create New Hampshire's largest bank. CFX's New Hampshire
bank, CFX Bank, including the recently merged Portsmouth Savings Bank, Concord
Savings Bank and Centerpoint Bank, will be merged into Bank of New Hampshire. As
a result, Peoples will hold the state's largest bank with over $4 billion in
assets, a dominant branch network, and New Hampshire's largest deposit market
share.
[PHOTO]
<PAGE> 12
[PHOTO]
<PAGE> 13
[PHOTO]
<PAGE> 14
STRATEGY
COMMUNITY BANKING FOCUS -- Community banking continues to be the fundamental
strategy behind our profitable expansion and continued success. We understand
our unique market niche and our customers appreciate our strong focus on
personalized service. From retaining local management and customer contact staff
following acquisitions to providing local decision making, we seek to put our
customers first, and they in turn, have put us first in Maine and New Hampshire,
and in our markets in Massachusetts.
LEVERAGING OPPORTUNITIES -- With the overall consolidation of New England banks,
Peoples Heritage successfully seized new market opportunities in 1997. For
example, through our acquisitions and strategic expansion of products and
services such as indirect auto lending and public finance, we quickly filled
important market voids and significantly enhanced our revenues.
GROWTH WITH PROFITABILITY -- Unlike many banking companies, Peoples Heritage has
been able to achieve rapid growth while realizing record profitability. We
attribute our success to our disciplined merger and acquisitions strategy which
requires that all acquisitions add to our earnings within the first year of
operations.
OPERATIONAL EFFICIENCIES -- Our growth does not come at the expense of
profitability. For example, following our acquisition of Atlantic Bank in Maine,
we consolidated locations and back office operations, while still retaining most
Atlantic employees, and reduced operating expenses by over 50%.
BUILDING ON OUR STRENGTHS -- Our successful acquisitions continue to present
opportunities to offer more comprehensive banking and financial services to new
and existing markets, and greater investment opportunities to our customers. The
acquisition of Morse Payson & Noyes Insurance will enable us to provide
insurance products to our customers and to introduce our banking services to the
customers of Morse Payson & Noyes Insurance.
INCENTIVE COMPENSATION -- The commitment and support of employees at every level
is critical to delivering superior customer service. To that end, all employees
- -- from tellers to top management -- operate under incentive-based compensation.
Additionally, our stock option plan is provided to most managers and high-level
professional staff.
[1997 Dividends Declared by Quarter Graph]
[Dividends History Graph]
11
<PAGE> 15
A GROWING VISION IN MASSACHUSETTS.
With its 170 year history and dominant market share in several communities north
of Boston, Family Bank extends Peoples' community banking approach into
Massachusetts. The agreement in 1997 to acquire CFX Corporation includes its
Massachusetts banking subsidiaries, Orange Savings Bank and The Safety Fund
National Bank. Once completed, CFX Corporation's Massachusetts banks will be
merged into Family Bank, a merging of community banking franchises with similar
customer-driven philosophies. The merger will drive Peoples' successful
community banking approach farther west into Massachusetts and strengthen our
position as New England's leading community-based banking company.
[PHOTO]
<PAGE> 16
COMMUNITY BANKING SERVICES
START WITH NEARLY 200 BRANCHES -- That we will have once the CFX acquisition is
completed. We are adding to our branch network. After all, we wouldn't want to
be far from any of our customers.
MORTGAGE LENDING -- 1997 was another record year for mortgage originations.
Peoples Heritage continues to be the number one mortgage originator in Maine --
this year by an even wider margin. We will also be the number one mortgage
originator in New Hampshire once the acquisition of CFX Corporation is
completed.
CONSUMER LENDING -- By taking advantage of the consolidation in the banking
industry to increase our market share, we achieved dramatic growth in consumer
lending including home equity and indirect auto loans.
COMMERCIAL LENDING -- We continue to grow as a significant force in small and
mid-size business lending in the northern New England communities we serve. In
Maine, Peoples Heritage was the U.S. Small Business Administration's number one
Low Doc lender in 1997 and we were recognized by the Finance Authority of Maine
as "Bank of the Year" for our small business lending.
PUBLIC FINANCE -- Our growing Public Finance Department provides investment and
loan products to northern New England's cities, towns and other public bodies.
We now provide public finance services to most major cities and towns in Maine,
and we are expanding our presence in Massachusetts and New Hampshire.
TRUST AND INVESTMENT SERVICES -- In 1997, we established Trust Services at our
Massachusetts subsidiary, Family Bank. Our three-year old Trust Department in
Maine now has assets under management totaling more than $1 billion -- a 75%
increase from last year. And our Trust Department in New Hampshire with $1.1
billion under management will increase by 50% once the acquisition of CFX
Corporation is completed. We also plan to add to the mutual fund offerings
available to our customers in 1998 with an important new alliance.
PHONEBANK -- As part of our growing service delivery network, we expanded our
PhoneBank in 1997 to serve our customers more efficiently and handle hundreds of
thousands of calls each month. Each affiliate bank includes its own operators to
ensure the delivery of personalized, local service.
EXPANDED ATM NETWORK -- We continued to expand our ATM network in 1997, which
now totals 150 ATMs across three states. For the convenience of our customers,
we are increasing both the number and diversity of locations with more
freestanding ATMs in shopping centers, filling stations and supermarkets.
EXPANDED SUPERMARKET BANKING -- In 1997, we introduced supermarket branches at
Bank of New Hampshire and Family Bank, and brought the number of Peoples
Heritage Bank supermarket locations to nearly a dozen. Our supermarket branches
offer convenient weekend, evening and Sunday hours. We will continue to add to
our supermarket banking network at all three affiliate banks in 1998.
[Total Assets Graph]
[Total Deposits Graph]
[Shareholders' Equity Graph]
15
<PAGE> 17
<TABLE>
<CAPTION>
Peoples Heritage Financial Group, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE
DATA)
- -----------------------------------------------------------------------------------------------------------------------------------
RESULTS FOR THE YEAR 1997 1996 % Change 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 246,189 $ 190,573 29% $ 170,954 $ 148,595 $ 131,147
Provision for loan and lease losses 0 900 (100) 4,230 3,374 14,047
Non-interest income
(excluding securities transactions) 56,788 37,941 50 31,301 27,880 27,418
Securities transactions 150 507 (70) 116 (254) 1,183
Non-interest expense (excluding
merger related expenses) 187,652 142,968 31 125,322 124,578 122,091
Merger related expenses 354 5,105 (93) 4,958 559 300
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 2.64 $ 2.10 26% $ 1.80 $ 1.37 $ .95
Diluted 2.59 2.06 26 1.78 1.36 0.94
Cash earnings per share (1):
Basic 2.89 2.29 26 1.89 1.45 1.08
Diluted 2.84 2.26 26 1.87 1.44 1.07
Dividends per share 0.76 0.65 17 0.46 0.23 0.01
Book value per share 17.13 15.48 11 14.16 12.26 11.61
Tangible book value per share 12.87 12.95 (1) 13.25 11.42 10.69
Stock price:
High 47.63 28.63 66 22.88 15.13 12.50
Low 25.88 19.00 36 11.75 10.13 8.13
Close 46.00 28.00 64 22.75 12.00 12.00
Basic weighted average
shares outstanding 27,806,267 25,035,041 11 24,696,393 24,849,800 23,705,195
Diluted weighted average
shares outstanding 28,362,970 25,425,558 12 24,998,823 25,078,795 23,921,809
- -----------------------------------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.28% 1.21% 6% 1.16% 0.94% 0.64%
Cash return on average assets (1) 1.42 1.33 7 1.21 0.99 0.73
Return on average equity (2) 16.42 14.41 14 13.53 11.42 8.57
Cash return on average tangible equity (1) 22.03 17.63 25 15.21 13.30 10.65
Net interest margin (2) (3) 4.67 4.71 (1) 4.79 4.44 4.11
Average equity to average assets 7.76 8.37 (7) 8.55 8.22 7.50
Efficiency ratio (4) 59.27 64.65 (8) 64.38 71.01 76.62
Tier 1 Leverage capital ratio at end of period 7.17 7.96 (10) 8.33 7.96 7.63
Dividend payout ratio 28.79 30.95 (7) 25.56 16.79 1.05
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
- -----------------------------------------------------------------------------------------------------------------------------------
Assets $ 5,754,523 $ 4,351,653 32% $ 3,845,768 $ 3,629,958 $ 3,498,579
Total loans and leases 4,098,305 3,224,309 27 2,732,318 2,529,723 2,473,666
Deposits 4,271,937 3,383,676 26 2,999,411 2,872,515 2,896,812
Earning assets 5,286,259 4,061,872 30 3,588,971 3,360,606 3,210,564
Shareholders' equity 446,322 364,253 23 328,704 298,310 262,529
- -----------------------------------------------------------------------------------------------------------------------------------
AT YEAR END
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net $ 4,421,280 $ 3,587,112 23% $ 2,717,608 $ 2,575,902 $ 2,638,348
Debt and equity securities, net (5) 1,268,055 1,045,069 21 766,648 719,194 717,467
Total assets 6,795,337 5,398,398 26 4,058,126 3,737,906 3,624,641
Deposits 4,802,640 4,185,289 15 3,197,138 2,885,845 2,939,826
Borrowings 1,329,972 690,969 92 456,932 505,347 359,935
Shareholders' equity 475,066 437,010 9 354,925 304,439 287,438
Common shares 27,737,299 28,221,500 (2) 25,072,488 24,836,099 23,286,300
Nonperforming assets (6) 51,212 46,229 (11) 52,340 71,985 113,910
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings before the amortization of goodwill and core deposit premiums. (2)
Excludes effect of unrealized gains or losses on securities. (3) Net interest
income divided by average interest-earning assets, calculated on a fully-taxable
equivalent basis. (4) Excludes distribution on securities of subsidiary trust.
(5) All securities were classified as available for sale at December 31, 1997,
1996 and 1995. (6) Nonperforming assets consist of nonperforming loans, other
real estate owned and repossessed assets, net of related reserves where
appropriate. Nonperforming loans consist of non-accrual loans and troubled debt
restructurings.
17
<PAGE> 18
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
18
<PAGE> 19
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank holding
company which conducts business from its headquarters in Portland, Maine and 142
banking offices located throughout Maine, New Hampshire and northern
Massachusetts. Based on $6.8 billion of total assets at December 31, 1997, the
Company is the largest independent bank holding company headquartered in
northern New England.
The Company offers a broad range of commercial and consumer banking services
and products and trust and investment advisory services through three
wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New
Hampshire ("BNH") and Family Bank, FSB ("Family"). PHB is a Maine-chartered bank
which operates offices throughout Maine and, through subsidiaries, engages in
mortgage banking, financial planning, insurance brokerage and equipment leasing
activities. At December 31, 1997, PHB had cons olidated assets of $3.8 billion
and consolidated shareholder's equity of $269.4 million. BNH is a New
Hampshire-chartered commercial bank. At December 31, 1997, BNH had consolidated
assets of $2.1 billion and consolidated shareholder's equity of $146.4 million.
Family is a federally-chartered savings bank which operates offices in northern
Massachusetts and southern New Hampshire. At December 31, 1997, Family had
consolidated assets of $1.1 billion and consolidated shareholder's equity of
$106.7 million. Each of PHB, BNH and Family is a member of the Bank Insurance
Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC").
Business Strategy
The principal business of the Company consists of attracting deposits from the
general public through its offices and using such deposits and other sources of
funds to originate residential mortgage loans, commercial business loans and
leases, commercial real estate loans and a variety of consumer loans. The
Company also invests in mortgage-backed securities and securities issued by the
United States Government and agencies thereof. In addition, the Company engages
in the sale of other financial products (annuities, mutual funds and insurance
services), provides trust services and services residential mortgage loans for
investors.
The Company's goal is to sustain profitable, controlled growth by focusing
on increased loan and deposit market share in Maine, New Hampshire and northern
Massachusetts, developing new financial products, services and delivery
channels, closely managing yields on earning assets and rates on
interest-bearing liabilities, increasing noninterest income through, among other
things, expanded trust, investment advisory and insurance brokerage services and
mortgage banking operations and controlling growth of noninterest expenses. It
is also part of the business strategy of the Company to supplement internal
growth with targeted accretive acquisitions of other financial service
institutions in New England. During the period covered by this discussion, the
Company engaged in numerous merger and acquisition related activities. For
further information, see Notes 2 and 18 to the Consolidated Financial Statements
and "Overview" below. The Company regularly evaluates the potential acquisition
of, and holds discussion with, various potential acquisition candidates and as a
general rule the Company announces such acquisitions only after a definitive
agreement has been reached.
The Company generally does not as a matter of policy make any specific
projections as to future earnings nor does it endorse any projections regarding
future performance which may be made by others.
Pending and Completed Acquisitions
On October 27, 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with CFX Corporation ("CFX"). The Agreement provides, among
other things, for the merger of CFX with and into the Company (the "Merger") and
the conversion of each share of Common Stock of CFX outstanding immediately
prior to the Merger into the right to receive .667 of a share of the Company's
Common Stock. Based on the aggregate number of shares of Common Stock of CFX
outstanding at December 31, 1997 and estimated to be issuable under CFX stock
option and stock purchase plans as of such date, a maximum of approximately 16.8
million shares of Company Common Stock will be issuable upon consummation of the
Merger. The Merger has been approved by the sharehold ers of CFX and the
Company. Consummation of the Merger is subject to the receipt of all required
regulatory approvals. The Merger is expected to be accounted for as a
pooling-of-interests and close in the second quarter of 1998.
In the fourth quarter of 1997, the Company completed two acquisitions. The
Company purchased Atlantic Bancorp, the parent company of Atlantic Bank N.A.
("Atlantic") headquartered in Portland, Maine, for $70.8 million. Atlantic had
total assets of $462.9 million, net loans of $351.5 million and total deposits
of $354.2 million. In addition, the Company acquired all of the outstanding
stock of MPN Holdings, the holding company of Morse, Payson and Noyes, an
insurance brokerage firm. The transaction was effected through the exchange of
MPN stock for 222,839 shares of the Company's Common Stock. Both acquisitions
were accounted for as purchases and accordingly the Company's financial
statements reflect them from the date of acquisition.
On December 6, 1996, the Company completed the acquisition of Family
Bancorp, the holding company for Family, through the exchange of 1.26 shares of
the Company's Common Stock for each share of Family Bancorp common stock. There
were 5,480,335 shares of the Company's Common Stock issued in connection with
the acquisition of Family Bancorp, including 2,500,000 shares of treasury stock.
This transaction was accounted for as a purchase. Accordingly, the impact of the
absorption of Family's operations is reflected in the Company's consolidated
financial statements from the date of acquisition.
On April 2, 1996, the Company completed the acquisition of Bank of New
Hampshire Corporation ("BNHC"), the holding company for BNH, whereby each share
of BNHC was converted into two shares of Common Stock of the Company. Because
the acquisition was accounted for under the pooling-of-interests method of
accounting, the consolidated financial statements of the Company for periods
prior to the acquisition have been restated to include BNHC. At December 31,
1995, BNHC had total consolidated assets of $977.8 million and total
consolidated shareholders' equity of $84.5 million.
Economic Conditions in Northern New England
The Company believes that Maine, New Hampshire, northeastern Massachusetts and
New England in general have witnessed steady
19
<PAGE> 20
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
economic growth since 1992. There can be no assurance that this will continue to
be the case, however, and the economies and real estate markets in the Company's
primary market areas will continue to be significant determinants of the quality
of the Company's assets in future periods and, thus, its results of operations.
REVIEW OF FINANCIAL STATEMENTS
The discussion and analysis which follows focuses on the factors affecting the
Company's financial condition at December 31, 1997 and 1996 and financial
results of operations during 1997, 1996 and 1995. The consolidated financial
statements and related notes beginning on page 32 of this report should be read
in conjunction with this review. Certain amounts in years prior to 1997 have
been reclassified to conform to the 1997 presentation.
OVERVIEW
The Company reported net income of $73.4 million or $2.64 per basic share and
$2.59 per diluted share in 1997, as compared to $52.5 million or $2.10 per basic
share and $2.06 per diluted share in 1996 and $44.5 million or $1.80 per basic
share and $1.78 per diluted share in 1995. This represented basic earnings per
share growth of 26% and 17%, respectively. Return on average assets amounted to
1.28% in 1997, as compared to 1.21% in 1996 and 1.16% during 1995, and return on
average equity amounted to 16.42% in 1997, as compared to 14.41% in 1996 and
13.53% during 1995. The improved results were attributable to the successful
assimilation of recent acquisitions, as well as strong loan growth which
contributed to substantial increases in net interest income. Net interest income
on a fully-taxable equivalent basis was $247.0 million, $191.4 million and
$172.0 million for the years ended 1997, 1996 and 1995, respectively.
On a cash basis, which excludes the amortization of goodwill and core
deposit premiums, the Company earned $2.89 per basic share in 1997 compared to
$2.29 per basic share during 1996 and $1.89 during 1995. Cash return on average
assets was 1.42% in 1997 compared to 1.33% during 1996 and 1.21% during 1995.
Cash return on average tangible equity was 22.03%, 17.63% and 15.21% for the
years ended December 31, 1997, 1996 and 1995 respectively. The improved returns
reflect the Company's profitability before the effects of the goodwill created
from the recent acquisitions.
Total revenues increased 32% in 1997 and 13% in 1996. Net interest income
increased 29% during 1997 compared to an 11% increase in 1996. The increases in
each year were attributable to increases in the volume of average interest
earning assets, offset in part by a decrease in net interest margin from 4.79%
in 1995 to 4.71% in 1996 to 4.67% in 1997. The pressure on the interest margins
were attributable to slight decreases in yields on loans and leases compounded
with increased borrowing costs. Noninterest income rose 48% during 1997 compared
to an increase of 22% in 1996 resulting primarily from increases in customer
services and mortgage banking income.
Noninterest expenses, excluding distributions on the securities of the
subsidiary trust, increased 21% during 1997 compared to a 14% increase in 1996.
Increases in 1997 were attributable to additional amortization of goodwill and
other intangibles as well as increased salary and benefits expenses resulting
from the recent acquisitions. 1996 increases were attributable to merger
expenses, salary and data processing expenses from the acquisitions in those
years.
EARNING ASSETS
Average earning assets increased $1.2 billion or 30% in 1997, due to the
acquisition of Family in December 1996 and Atlantic Bank in the fourth quarter
of 1997 as well as internally generated growth in loans and loans held for sale.
Average loans increased $45.3 million or 14%, excluding the acquisitions.
Average earning assets increased 13% during 1996. See Table 1 for more
information on changes in average balances and yields. See Table 3 for more
information on loan growth by category.
Loans and Leases
Average residential real estate loans (which include loans held for sale) of
$1.4 billion grew 29% from 1996's $1.1 billion. Residential real estate mortgage
loan originations increased 177% over 1996 originations. Mortgage originations,
particularly refinancings, are highly dependent upon interest rates. The Company
sells substantially all its production that conforms to agency standards into
the secondary market.
Average commercial real estate loans of $1.0 billion grew 22% in 1997.
Excluding the impact of acquisitions, average commercial real estate loans grew
2% in 1997. The growth in commercial real estate 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 1997 was
9.64% compared to 9.75% in 1996. The slight drop in rates is reflective of
market conditions and increased competition.
Average commercial business loans and leases of $519.4 million increased
22.0% from 1996. Excluding the impact of acquisitions, average commercial
business loans grew 9% in 1997. The Company also originates commercial business
leases through one of its subsidiaries. The leases are direct equipment leases,
primarily office equipment.
Average consumer loans of $1.1 billion increased 32.8% in 1997. Excluding
the impact of acquisitions, average consumer loans increased 22% in 1997. The
growth in consumer loans was primarily in home equity loans and indirect auto
loans. Mobile home loans continued to decline reflecting the Company's strategy
to emphasize other types of consumer loans.
The distribution of loan maturities at December 31, 1997 is shown in Table 2
and schedule of loan activity is shown in Table 3.
20
<PAGE> 21
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Table 1 - Three Year Average Balance Sheets
- -------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE Yield/ Average Yield/
(Dollars in Thousands) BALANCE INTEREST RATE BALANCE Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and leases:(1)(2)
Residential real estate
mortgages $ 1,427,936 $112,179 7.86% $1,110,741 $ 87,357 7.86% $ 848,773 $ 69,957 8.24%
Commercial real estate
mortgages 1,010,600 97,377 9.64 829,011 80,825 9.75 762,275 75,657 9.93
Commercial business loans
and leases 519,442 49,786 9.58 425,873 40,880 9.60 371,863 37,174 10.00
Consumer loans and leases 1,140,327 107,159 9.40 858,684 80,524 9.38 749,407 71,696 9.57
Total loans and leases 4,098,305 366,501 8.94 3,224,309 289,586 8.98 2,732,318 254,484 9.31
Investment securities (3) 1,169,978 75,495 6.45 793,847 50,102 6.31 771,462 47,392 6.14
Federal funds sold 17,976 1,012 5.63 43,716 2,350 5.38 85,191 5,066 5.95
Total earning assets 5,286,259 443,008 8.38 4,061,872 342,038 8.42 3,588,971 306,942 8.55
Nonearning assets 468,264 289,781 256,797
Total assets $ 5,754,523 $4,351,653 $ 3,845,768
---------- ---------- -----------
Interest-bearing deposits:
Regular savings $ 753,273 20,188 2.68 $ 603,329 16,433 2.72 $588,581 16,753 2.85
Money market access/
NOW accounts 1,029,201 26,337 2.56 870,096 22,783 2.62 742,263 20,204 2.72
Certificates of deposit 1,877,181 102,278 5.45 1,462,097 81,227 5.56 1,299,735 71,252 5.48
Total interest-bearing
deposits 3,659,655 148,803 4.07 2,935,522 120,443 4.10 2,630,579 108,209 4.11
Borrowed funds 869,217 47,220 5.43 568,406 30,156 5.31 471,456 26,686 5.66
Total interest-bearing
liabilities 4,528,872 196,023 4.33 3,503,928 150,599 4.30 3,102,035 134,895 4.35
Demand accounts 612,282 448,154 368,832
Other liabilities 79,559 35,318 46,197
Securities of subsidiary trust 87,488 0 0
Shareholders' equity(3) 446,322 364,253 328,704
Total liabilities and
shareholders' equity $ 5,754,523 $4,351,653 $ 3,845,768
----------- ---------- -----------
Net earning assets $ 757,387 $ 557,944 $ 486,936
----------- ---------- -----------
Net interest income (fully-
taxable equivalent) 246,985 191,439 172,047
Less: fully-taxable equivalent
adjustments (796) (866) (1,093)
Net interest income(1) $246,189 $190,573 $170,954
-------- -------- --------
Net interest rate spread
(fully-taxable equivalent) 4.05% 4.12% 4.20%
----- ----- -----
Net interest margin
(fully-taxable equivalent) 4.67% 4.71% 4.79%
------ ----- -----
</TABLE>
- -------------------------------------------------------------------------------
(1) Income from interest-earning assets and net interest income is presented on
a fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
on fully-taxable investments, assuming a federal tax rate of 35%. (2) Loans and
leases include portfolio loans and leases, loans held for sale and nonperforming
loans, but unpaid interest on nonperforming loans has not been included for
purposes of determining interest income. (3) Excludes effect of unrealized gains
or losses on securities available for sale.
21
<PAGE> 22
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Table 2 - Scheduled Contractual Amortization of Loans at December 31, 1997
- -------------------------------------------------------------------------------
Table 2 sets forth scheduled contractual amortization of loans and leases in the
Company's portfolio at December 31, 1997, as well as the dollar amount of loans
which are scheduled to mature after one year which have fixed or adjustable
interest rates. Demand loans, loans having no stated schedule of repayments and
no stated maturity and overdraft loans are reported as due one year or less.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Commercial
Residential Commercial Business Consumer
Real Estate Real Estate Loans and Loans and
(Dollars in Thousands) Loans Loans Leases Leases Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 87,630 $ 325,368 $ 298,140 $ 308,371 $ 1,019,509
After one year
through five years 200,472 493,019 215,257 437,532 1,346,280
Beyond five years 1,188,414 286,267 63,252 585,643 2,123,576
Total $ 1,476,516 $ 1,104,654 $ 576,649 $ 1,331,546 $ 4,489,365
----------- ------------ --------- ----------- -----------
Interest rate terms on
amounts due after one year:
Fixed $ 752,246 $ 377,449 $ 144,641 $ 676,622 $ 1,950,958
Adjustable 636,640 401,837 133,868 346,553 1,518,898
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Table 3 - Schedule of Loan Activity
- ------------------------------------------------------------------------------
The following table sets forth loans held for sale and total loans and leases
originated, purchased, sold and repaid during 1997 and 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------
(Dollars In Thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Originations and purchases:
Residential real estate mortgages $ 3,588,607 $1,297,723
Commercial real estate mortgages 352,425 174,021
Commercial business loans and leases 674,924 522,047
Consumer loans and leases 649,550 491,261
Total originations and purchases 5,265,505 2,485,052
Loans acquired through acquisitions 358,886 691,966
Total loan originations, purchases
and acquisitions 5,624,391 3,177,018
Sales and principal reductions:
Sales 2,900,768 1,057,261
Principal reductions 1,631,497 1,211,449
Total sales and
principal reductions 4,532,265 2,268,710
Net increase in loans held
for sale and loans and leases $ 1,092,126 $ 908,308
----------- ----------
- -------------------------------------------------------------------------------
</TABLE>
Securities Available For Sale and Other Earning Assets
The average balance of the securities portfolio increased 47% to $1.2 billion
during 1997. The portfolio is comprised primarily of U. S. Treasury securities
and mortgage-backed securities, most of which are seasoned 15-year federal
agency securities. Other securities consist of collateralized mortgage
obligations and asset-backed securities. Substantially all securities are AAA or
equivalently rated. The increase in the securities portfolio during 1997
resulted primarily from the acquisition of Atlantic and the Company's efforts to
manage its liquidity and asset-liability management needs. The average yield on
the portfolio was 6.45%, 6.31% and 6.14% in 1997, 1996 and 1995, respectively.
See Table 4 for an analysis of the scheduled maturities and the weighted average
yields of the securities portfolio.
Securities available for sale are carried at fair value and had a pre-tax
unrealized gain of $5.5 million at December 31, 1997 as compared to a pre-tax
unrealized loss of $1.1 million at December 31, 1996. These unrealized gains and
losses, net of tax, do not impact net income or regulatory capital but are
recorded as adjustments to shareholders' equity.
DEPOSITS AND OTHER FUNDING SOURCES
Deposits
Average deposits increased 26% during 1997 to $4.3 billion, primarily as a
result of acquisitions. This compares to a 13% increase in 1996.
Average certificates of deposit increased $415.1 million during 1997 to $1.9
billion. Excluding the impact of acquisitions, average certificates of deposit
grew $48.8 million in 1997. The average rate paid on certificates of deposit
decreased from 5.56% in 1996 to 5.45% during 1997, which was comparable to the
average rate paid in 1995 for certificates of deposit of 5.48%. See Table 6 for
the scheduled maturities of certificates of deposits of $100,000 or more.
Average transaction accounts (demand deposit, NOW and money market accounts)
of $1.6 billion increased $323.2 million during 1997. Excluding the impact of
acquisitions, average transaction accounts grew $64.7 million in 1997. The
increase 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 continued to decline from 2.72% in 1995 to 2.62% in 1996 and to
2.56% in 1997.
Average savings deposit balances of $753.3 million increased $149.9 million
or 25% during 1997. Excluding the impact of acquisitions, average savings
deposits decreased $37.4 million in 1997. The average rate paid on savings
deposits declined from 2.85% in 1995 to 2.72% in 1996 to 2.68% in 1997. See
Table 5 for the changes in deposit mix.
In recent years the Company has not relied on deposits obtained through
investment banking firms which obtain funds from their customers for deposit
with the Company ("brokered deposits") and had no such deposits outstanding at
December 31, 1997 and 1996. The Company evaluates this source of funds from time
to time, however, and may seek to obtain brokered deposits in the future.
22
<PAGE> 23
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Table 4 - Maturities of Securities Available for Sale
- -------------------------------------------------------------------------------
The following table sets forth the scheduled maturities and weighted average
yields of the Company's debt securities available for sale at December 31, 1997.
- -------------------------------------------------------------------------------
<TABLE>
Amortized Cost Maturing in
<CAPTION>
More than One More than Five More than
One Year or Less to Five Years to Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal agencies $ 159,859 5.59% $224,968 6.23% $ 6,229 6.78% $ 489 6.63% $ 391,545 5.98%
Tax-exempt bonds and notes 18,495 4.87 875 5.54 90 6.90 -- -- 19,460 4.91
Other bonds and notes 68,692 6.11 1,303 7.68 19 6.50 -- -- 70,014 6.14
Mortgage-backed securities 117 6.89 17,121 6.35 34,482 6.72 597,823 6.73 649,543 6.72
Collateralized mortgage obligations 183 5.96 3,102 7.86 12,739 7.37 52,832 7.35 68,856 7.37
Total $ 247,346 5.68 $247,369 6.26 $53,559 6.88 $651,144 6.78 $1,199,418 6.45
--------- -------- ------- -------- ----------
</TABLE>
- -------------------------------------------------------------------------------
Table 5 - Change in Deposit Balances by Category of Deposits
- -------------------------------------------------------------------------------
The following table presents the changes in the balances of deposits outstanding
at the dates indicated:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
at December 31, 1997-1996 Change 1996-1995 Change
(Dollars in Thousands) 1997 1996 1995 Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 744,851 $ 604,980 $ 434,091 $139,871 23.1% $170,889 39.4%
Money Market access/
NOW accounts 1,166,245 1,023,448 842,056 142,797 14.0 181,392 21.5
Regular savings 747,538 760,340 557,896 (12,802) (1.7) 202,444 36.3
Certificates of deposit 2,144,006 1,796,521 1,363,095 347,485 19.3 433,426 31.8
Total deposits $ 4,802,64 $4,185,289 $3,197,138 $617,351 14.8 $988,151 30.9
---------- ---------- ---------- -------- --------
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
Table 6 - Maturity of Certificates of Deposit of $100,000 or more at
December 31, 1997
- -------------------------------------------------------------------------------
Certificates of deposit of $100,000 or more were scheduled to mature as follows
at December 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------
(Dollars In Thousands)
Balance Percent
<S> <C> <C>
3 months or less $ 112,269 29.72%
Over 3 to 6 months 78,752 20.85
Over 6 to 12 months 91,018 24.09
More than 12 months 95,713 25.34
$ 377,752 100.00%
--------- ------
- -------------------------------------------------------------------------------
</TABLE>
Other Funding Sources
The Company's primary source of funding, other than deposits, are securities
sold under repurchase agreements and advances from the Federal Home Loan Bank
(FHLB). Average FHLB borrowings for 1997 were $607.6 million compared with
$369.4 million in 1996. FHLB borrowings increased because growth in earning
assets, particularly mortgage loans held for sale, exceeded growth in deposits.
FHLB collateral consisted primarily of loans with first mortgages secured by 1-4
family properties, certain unencumbered securities and other qualified assets.
At December 31, 1997, FHLB borrowings amounted to $941.0 million. The Company's
estimated additional borrowing capacity with the FHLB at December 31, 1997 was
$727.8 million.
Average balances for securities sold under repurchase agreements were $207.4
million and $140.4 million in 1997 and 1996, respectively, and were
collateralized by mortgage backed securities and U.S. government obligations.
INTEREST RATE RISK AND
ASSET-LIABILITY MANAGEMENT
The Company's interest rate risk and asset-liability management are the
responsibility of the Liquidity and Funds Management Committee which reports to
the Board of Directors and is comprised of members of the Company's senior
management. The Committee is actively involved in formulating the economic
projections used by the Company in its planning and budgeting process and
establishes policies which monitor and coordinate the Company's sources, uses
and pricing of funds.
Interest-rate-risk, including mortgage prepayment risk, is the most
significant non-credit related risk to which the Company is exposed. 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 on the Company's balance sheet.
Interest rate risk can be defined as the exposure of the Company's net
interest income or financial position to adverse movements in interest rates. In
addition to directly impacting net interest income, changes in the level of
interest rates can also affect, (i) the amount of loans originated and sold by
the institution, (ii) the ability of borrowers to repay adjustable or variable
rate loans, (iii) the average maturity of loans, which tend to increase when new
loan rates are substantially
23
<PAGE> 24
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
higher than rates on existing loans and, conversely, decrease when rates on new
loans are substantially lower than rates on existing loans, (iv) the value of
the Company's mortgage loans and the resultant ability to realize gains on the
sale of such assets and (v) the carrying value of investment securities
classified as available for sale and the resultant adjustments to shareholders'
equity.
The primary objective of the Company's asset-liability management is to
maximize net interest income while maintaining acceptable levels of
interest-rate sensitivity. To accomplish this the Company monitors interest rate
sensitivity by use of a sophisticated simulation model which analyzes resulting
net interest income under various interest rate scenarios and anticipated levels
of business activity. Complicating management's efforts to measure interest rate
risk is the uncertainty of assumptions used for the maturity, repricing, and/or
runoff characteristics of some of the Company's assets and liabilities.
To cope with these uncertainties, management gives careful attention to its
assumptions. For example, certain of the Company's interest-bearing deposit
products (NOW accounts, savings and money market deposits) have no contractual
maturity and based on historical experience have only a fractional sensitivity
to movements in market rates. Because management believes it has some control
with respect to the extent and timing of rates paid on non-maturity deposits,
certain assumptions based on historical experience are built into the model.
Another major assumption built into the model involves the ability customers
have to prepay loans, often without penalty. The risk of prepayment tends to
increase when interest rates fall. Since future prepayment behavior of loan
customers is uncertain, the resultant interest rate sensitivity of loan assets
cannot be determined exactly. The Company utilizes market consensus prepayment
assumptions related to residential mortgages.
The Company uses simulation analysis to measure the sensitivity of net
interest income over a specified time period (generally 1 year) under various
interest-rate scenarios using the assumptions discussed above. The Company's
policy on interest rate risk specifies that if interest rates were to shift
immediately up or down 300 basis points, estimated net interest income should
decline by less than 10%. Management estimates, based on its simulation model,
that an instantaneous 3% increase in interest rates at December 31, 1997 would
result in less than a 4% decrease in net interest income over the next twelve
months, while a 3% decrease in rates would result in less than a 1% decrease in
net income over the next twelve months. It should be emphasized that the results
are highly dependent on material assumptions such as those discussed above. It
should also be noted that the exposure of the Company's net interest income to
gradual and/or modest changes in interest rates is relatively small. For
example, using the Company's "most likely" rate scenario which reflects only
modest changes in interest rates for the next twelve months, the net interest
income of the company fluctuates less than 1% compared to a flat rate scenario.
The Company does not currently use off-balance-sheet instruments
(derivatives) to manage its interest rate sensitivity of net interest income.
The Company, as a result of acquisitions, has two interest rate floors with a
combined notional amount of $10.0 million which expire in June 1998. The Company
has no direct or contingent liability as a result of these floors, which were
purchased to protect net interest income on a portion of rate sensitive assets
against falling interest rates.
The Company continues to utilize 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 values of
both CMT floors and Treasury Options are generally inversely related to
movements in interest rates. In the event that interest rates fall, any
resulting increase in value of these derivative instruments are intended to
offset, in part, the prospective decline in value of the servicing rights. At
December 31, 1997, mortgage servicing rights amounted to $50.8 million, as
compared to $33.3 million and $20.3 million at December 31, 1996 and 1995,
respectively. The value of mortgage servicing rights generally is adversely
affected by accelerated prepayments of loans resulting from decreasing interest
rates, which affect the estimated average life of loans serviced for others.
RESULTS OF OPERATIONS
Net Interest Income
The Company's taxable-equivalent net interest income increased 29% during 1997
to $247.0 million. This increase reflects strong internal loan growth discussed
above, as well as the 12 month impact of the Family acquisition and a three
month impact of the Atlantic acquisition in 1997. Both acquisitions were
accounted for as purchases. Net interest margin declined four basis points
during 1997 which partially offset the positive effects of loan growth.
Taxable-equivalent net interest income increased 11% in 1996 from 1995 also due
to loan growth. Table 7 shows the changes in tax equivalent net interest income
by category due to shifts in rate and volume. Information on average balances,
yields and rates for the past three years can be found in Table 1.
24
<PAGE> 25
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Table 7 - Changes in Net Interest Income
- -------------------------------------------------------------------------------
The following table presents certain information on a fully-taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 vs 1996 Year Ended December 31, 1996 vs 1995
Increase (Decrease) Due To Increase (Decrease) Due To
- -----------------------------------------------------------------------------------------------------------------------------------
Rate/ Rate/
(Dollars in Thousands) Rate Volume Volume Total Rate Volume Volume Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases: (1)
Residential real estate mortgages $ - $ 24,932 $ (110) $ 24,822 $(3,225) $21,586 $ (961) $17,400
Commercial real estate mortgages (912) 17,705 (241) 16,552 (1,372) 6,627 (87) 5,168
Commercial business loans and leases (85) 8,983 8 8,906 (1,487) 5,401 (208) 3,706
Consumer loans and leases 172 26,418 45 26,635 (1,424) 10,458 (206) 8,828
Total loans and leases (825) 78,038 (298) 76,915 (7,508) 44,072 (1,462) 35,102
Securities available for sale 1,111 23,734 548 25,393 1,311 1,374 25 2,710
Federal funds sold 109 (1,385) (62) (1,338) (486) (2,468) 238 (2,716)
Total 395 100,387 188 100,970 (6,683) 42,978 (1,199) 35,096
Interest-bearing liabilities:
Deposits:
Regular savings (241) 4,078 (82) 3,755 (765) 420 25 (320)
Money market access
and NOW accounts (522) 4,169 (93) 3,554 (1,179) 3,949 (191) 2,579
Certificates of deposit (1,608) 23,079 (420) 21,051 1,040 8,897 38 9,975
Total deposits (2,371) 31,326 (595) 28,360 (904) 13,266 (128) 12,234
Borrowed funds 682 15,973 409 17,064 (1,650) 5,487 (367) 3,470
Total (1,689) 47,299 (186) 45,424 (2,554) 18,753 (495) 15,704
Net interest income
(fully-taxable equivalent) $ 2,084 $ 53,088 $ 374 $ 55,546 $(4,129) $24,225 $ (704) $19,392
------- --------- ------ -------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loans and leases include portfolio loans and loans held for sale and
nonperforming loans.
Noninterest Income
Noninterest income was $56.9 million, $38.4 million and $31.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The $18.5 million or
48% increase during 1997 was largely attributable to growth of $7.8 million in
customer services income and $5.8 million in mortgage banking income. The 22%
increase in 1996 from 1995 was primarily due to a 29% incrase in customer
services income.
Customer services income of $23.1 million increased $7.8 million or 51% from
1996 and was attributable to a 23.7% increase in the number of transaction
accounts as well as increases in ATM charges.
Mortgage banking services income of $18.8 million increased $5.8 million or
45% during 1997 due to a $4.0 million increase in mortgage sales income and a
$1.9 million increase in residential mortgage servicing income. The Company's
portfolio of residential mortgages of $4.0 billion serviced for investors
increased by $798 million or 25% from December 31, 1996 to December 31, 1997.
The increase in mortgage sales income in 1997 was attributable to a significant
increase in the volume of loans originated from correspondent lenders, the vast
majority of which were sold in the secondary mortgage market. Residential
mortgage originations from correspondent lenders increased to $2.9 billion in
1997 from $844.5 million in 1996, a 237% increase. The generation of mortgage
sales income is dependent on market and economic conditions and, as a result,
there can be no assurance that the mortgage sales income reported in prior
periods can be achieved in the future or that there will not be significant
inter-period variations in the results of such activities.
<TABLE>
<CAPTION>
Table 8 - Mortgage Banking Services Income
- -------------------------------------------------------------------------------
The following table sets forth certain information relating to the Company's
mortgage banking activities.
- --------------------------------------------------------------------------------
At or for the Year Ended December 31,
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential mortgages
serviced for investors $4,026,003 $3,227,659 $2,595,049
---------- ---------- ----------
Residential mortgage
sales income $11,016 $7,108 $ 4,224
Residential mortgage
servicing income 7,755 5,832 6,625
Mortgage banking
services income $18,771 $ 12,940 $ 10,849
--------- ---------- ----------
- -------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Trust and investment advisory services income of $8.8 million increased $1.6
million or 22% during 1997 primarily due to increases in assets under
management. Assets under management were $2.2 billion, $1.2 billion and $1.0
billion at December 31, 1997, 1996 and 1995, an increase of 83% and 20%,
respectively.
Insurance commissions of $1.9 million were generated through the Company's
subsidiary Morse, Payson and Noyes and reflects activity since the acquisition
date.
Noninterest Expense
Noninterest expense increased $39.9 million or 27% during 1997. The 1997
increase was primarily attributable to acquisitions of Family and Atlantic and
to the issuance of securities by a subsidiary trust (see Note 11 to the
Consolidated Financial Statements) during the first quarter of 1997. Excluding
the distributions on the securities of the subsidiary trust, the efficiency
ratio improved to 59.27% during 1997 from 64.65% in 1996 and 64.38% in 1995
reflecting the efficiencies created by the assimilation of recent acquisitions
as well as operating improvements. Total noninterest expenses increased $17.8
million or 14% during 1996 primarily due to the expansion of the core banking
franchise internally and through acquisitions, asset growth, new product
development and enhancements to alternative delivery systems.
Salaries and benefits expense of $92.7 million increased $19.4 million or
26% during 1997 due primarily to increased staffing resulting from the
acquisitions and higher performance-based compensation. The number of full-time
equivalent employees increased by 253 to 2,560 at December 31, 1997. Average
full-time equivalent employees were 2,403 in 1997 compared to 2,091 in 1996.
Data processing expense increased $2.4 million or 19% to $15.0 million
during 1997. The increase in expense was attributable to the implementation of
system upgrades to accommodate increased volumes.
Net occupancy expense rose $1.8 million or 14% to $14.1 million during 1997.
The increase was primarily attributable to the acquisitions, but also reflects
the cost associated with nine new supermarket branches.
Amortization of goodwill and deposit premiums increased by $3.2 million or
67% during 1997 due to goodwill associated with the recent acquisitions which
were accounted for as purchases.
Equipment expense increased 42% to $12.1 million and advertising and
marketing increased 53% to $6.6 million during 1997. These increases were
primarily due to the acquisition of Family in December of 1996.
Merger expenses decreased $4.8 million or 93% during 1997 primarily due to
the acquisition of Bank of New Hampshire in 1996.
Other noninterest expense, which is comprised primarily of general and
administrative expenses, rose $3.6 million or 13% during 1997.
Taxes
The Company recognized $41.7 million in income tax expense for the year ended
December 31, 1997 compared to $27.6 million for 1996 and $23.4 million for 1995.
The increase in 1997 was a result of growth in pre-tax earnings. The effective
tax rate rose to 36% compared to 34% in 1996 and 1995 due to increased
nondeductible goodwill amortization from the recent acquisitions and increased
state tax expense.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. The
Company has formed a Year 2000 committee to execute a plan of compliance. The
Company believes that, with modifications to existing software already completed
or contemplated in the near future, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. The Company
expects to be Year 2000 compliant by the end of 1998 and that expenses incurred
in connection with such compliance will not have a material effect on the
Company's earnings.
ASSET QUALITY
General
The Company monitors its asset quality with lending and credit policies which
require the regular review of its portfolio. The Company maintains an internal
rating system which provides a mechanism to monitor the quality of its loan
portfolio. Credit risk is monitored regularly to review the portfolio's
performance. See Table 9 for the detail of the Company's loan portfolio for the
last five years.
The Company's residential loan portfolio accounted for 33% of the total loan
portfolio at December 31, 1997 up from 32% at the end of 1996. The Company's
strategy generally is to originate fixed-rate residential loans for sale to
investors in the secondary market. The Company's residential loans are generally
secured by 1-4 family homes and have a maximum loan to value ratio of 80%,
unless they are protected by mortgage insurance. At December 31, 1997, .50% of
the Company's residential loan portfolio was nonperforming, as compared to .33%
at December 31, 1996.
The Company's commercial real estate loan portfolio accounted for 25% of the
total loan portfolio at December 31, 1997 compared to 26% at December 31, 1997.
This portfolio consists primarily of loans secured by income-producing
commercial real estate (including office buildings and industrial buildings),
service industry real estate (including hotels and health care facilities),
multi-family (over four units) residential properties and food stores. 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.
Commercial business loans and leases are generally to small and medium size
businesses located within the Company's geographic market area. These loans are
not concentrated in any particular industry, but reflect the broad-based
economies of Maine, New Hampshire and northeastern Massachusetts. Commercial
loans consist primary of loans secured by various equipment, machinery and other
corporate assets, as well as loans to provide working capital to business in the
form of lines of credit. The Company's commercial business loan portfolio
accounted for 13% of the total loan portfolio at December 31, 1997 and 1996.
Consumer loans accounted for 30% of the Company's total loan portfolio at
December 31, 1997 compared to 28% at December 31, 1996. The Company has a
diversified consumer loan portfolio which includes home equity, automobile,
mobile home, boat and recreational vehicle, and education loans. Less than 1% of
the consumer loans are credit card loans and only 6% of the portfolio is
unsecured. Consumer loan originations increased by $158.3 million or 32% during
1996, primarily due to growth in automobile and home equity loans. The growth is
consistent with the Company's strategy to provide a full range of financial
services to its customers and to originate loans which offer a higher yield than
residential mortgage loans.
26
<PAGE> 27
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 9 - Composition of Loan and Lease Portfolio
- --------------------------------------------------------------------------------
The following table sets forth the composition of the Company's loan and lease
portfolio as of the dates indicated.
- --------------------------------------------------------------------------------
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
% OF % of % of % of % of
(Dollars in Thousands) AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
loans:
Adjustable rate $ 676,808 15.08% $ 617,323 16.89% $ 402,695 14.49% $ 418,653 15.86% $ 382,485 15.70%
Fixed rate 799,708 17.81 559,551 15.31 395,381 14.23 384,845 14.58 336,391 17.81
Total 1,476,516 32.89 1,176,874 32.20 798,076 28.72 803,498 30.44 718,876 29.51
Commercial real estate
loans:
Permanent first
mortgage loans 1,020,987 22.74 901,105 24.66 753,857 27.13 745,356 28.24 731,074 30.01
Construction and
development 83,667 1.86 61,270 1.68 43,829 1.58 25,216 0.96 21,260 0.87
Total 1,104,654 24.60 962,375 26.34 797,686 28.71 770,572 29.20 752,334 30.88
Commercial business loans
and leases 576,649 12.85 477,402 13.06 408,592 14.70 324,408 12.29 303,594 12.46
Consumer loans
and leases
Home equity 462,826 10.31 362,105 9.91 283,008 10.19 247,751 9.39 222,262 9.13
Mobile home 192,724 4.29 206,061 5.64 214,761 7.73 222,600 8.43 210,682 8.65
Automobile 335,106 7.46 192,295 5.26 127,969 4.61 125,887 4.77 95,449 3.92
Education loans 117,228 2.61 106,900 2.93 38,685 1.39 43,599 1.65 17,133 0.71
Boat and recreational
vehicle 41,521 0.93 31,969 0.87 22,716 0.82 20,680 0.78 24,992 1.03
Other 182,141 4.06 138,619 3.79 87,090 3.13 80,582 3.05 90,411 3.71
Total 1,331,546 29.66 1,037,949 28.40 774,229 27.87 741,099 28.07 660,929 27.15
Total loans and
leases receivable 4,489,365 100.00% 3,654,600 100.00% 2,778,583 100.00% 2,639,577 100.00% 2,435,733 100.00%
------ ------ ------ ------ ------
Allowance for loan and
lease losses 68,085 67,488 60,975 63,675 67, 385
Net loans and
leases receivable $4,421,280 $3,587,112 $2,717,608 $2,575,902 $2,368,348
---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming Assets
Nonperforming assets consist of nonperforming loans and other real estate owned
and repossessed assets. Total nonperforming assets as a percentage of total
assets decreased to .75% at December 31, 1997 compared to .86% at December 31,
1996. In addition, total nonperforming assets as a percentage of total loans and
other nonperforming assets was 1.14% and 1.26% at December 31, 1997 and 1996,
respectively. See Table 10 for a detailed summary of nonperforming assets for
the last five years.
The Company continues to focus on asset quality issues and to allocate
significant resources to the key asset quality control functions of credit
policy and administration and loan review. The collection, workout and asset
management functions focus on the reduction of nonperforming assets. Despite the
ongoing focus on asset quality and reductions of nonperforming asset levels,
there can be no assurance that adverse changes in the real estate markets and
economic conditions in the Company's primary market areas will not result in
higher nonperforming asset levels in the future and negatively impact the
Company's operations through higher provisions for loan losses, net loan
chargeoffs, decreased accrual of interest income and increased noninterest
expenses as a result of the allocation of resources to the collection and
workout of nonperforming assets.
It is the policy of the Company to generally place all commercial real
estate loans and commercial business loans and leases which are 90 days or more
past due, unless secured by sufficient cash or other assets immediately
convertible to cash, on nonaccrual status. All such loans 90 days or more past
due, whether on nonaccrual status or not, are considered nonperforming loans.
Residential real estate loans are placed on nonaccrual status generally when in
management's judgment the collectibility of interest and/or principal is
doubtful. Consumer loans and leases are placed on nonaccrual status generally at
90 days or more past due or when in management's judgment the collectibility of
interest and/or principal is doubtful. At December 31, 1997, the Company had
$8.4 million of accruing loans which were 90 days or more delinquent, as
compared to $8.0 million and $4.4 million of such loans at December 31, 1996 and
1995, respectively.
It is also the policy of the Company to place on nonaccrual and therefore
nonperforming status loans currently less than 90 days past due or performing in
accordance with their terms but which in management's judgment are likely to
present future principal and/or interest repayment problems and which thus
ultimately would be classified as nonperforming.
27
<PAGE> 28
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Net Charge-offs
Net charge-offs were $6.8 million during 1997, as compared to $5.8 million in
1996 and $9.2 million in 1995. The increase in 1997 was attributable to
decreased recoveries in commercial real estate mortgages which more than offset
the effects of a decrease in loans charged off during 1997. Gross charge-offs
decreased in 1997 by $1.9 million compared to an increase in 1996 from 1995 of
$205 thousand.
Net charge-offs in 1997 represented .17% of average loans and leases
outstanding, as compared to .18% in 1996 and .34% in 1995. See Table 11 for the
details for the last five years of charge-offs and recoveries.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Table 10 - Five Year Schedule of Nonperforming Assets
- -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth information regarding nonperforming assets at the dates indicated:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 7,357 $ 3,867 $ 5,713 $ 3,317 $ 4,806
Troubled debt restructurings -- -- -- -- 111
Total 7,357 3,867 5,713 3,317 4,917
Commercial real estate loans:
Nonaccrual loans 15,654 15,270 17,029 26,978 30,780
Troubled debt restructurings 1,073 1,581 3,186 6,284 15,275
Total 16,727 16,851 20,215 33,262 46,055
Commercial business loans and leases:
Nonaccrual loans 11,668 8,016 6,735 6,871 14,399
Troubled debt restructurings 114 579 1,859 2,684 2,547
Total 11,782 8,595 8,594 9,555 16,946
Consumer loans:
Nonaccrual loans 7,967 5,097 3,586 3,775 3,386
Troubled debt restructurings -- -- -- -- 26
Total 7,967 5,097 3,586 3,775 3,412
Total nonperforming loans:
Nonaccrual loans 42,646 32,250 33,063 40,941 53,371
Troubled debt restructurings 1,187 2,160 5,045 8,968 17,959
Total 43,833 34,410 38,108 49,909 71,330
Other nonperforming assets:
Other real estate owned,
net of related reserves 4,873 10,000 12,679 16,682 28,867
In-substance foreclosures,
net of related reserves -- -- -- 3,391 11,752
Repossessions, net of related reserves 2,507 1,819 1,553 2,003 1,961
Total 7,380 11,819 14,232 22,076 42,580
Total nonperforming assets $ 51,212 $46,229 $ 52,340 $ 71,985 $113,910
-------- ------- -------- -------- --------
Accruing loans 90 days or more overdue $ 8,355 $ 8,038 $ 4,412 $ 6,354 $ 6,166
-------- ------- -------- -------- --------
Total nonperforming loans as a
percentage of total loans 0.98% 0.94% 1.37% 1.89% 2.93%
Total nonperforming assets
as a percentage of total assets 0.75 0.86 1.29 1.93 3.14
Total nonperforming assets as a percentage of
total loans and other nonperforming assets 1.14 1.26 1.87 2.70 4.60
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Table 11 - Five Year Table of Net Charge-offs
- -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth information concerning the activity in the
Company's allowance for loan and lease losses during the periods indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $4,098,304 $3,224,309 $2,732,316 $2,529,723 $2,473,666
---------- ---------- ---------- ---------- ----------
Allowance at beginning of period $ 67,488 $ 60,975 $ 63,675 $ 67,385 $ 71,223
Additions due to acquisitions 7,361 11,365 2,314 -- --
Charge-offs:
Residential real estate mortgages 1,796 2,812 4,139 4,646 6,607
Commercial real estate mortgages 1,312 8,769 8,964 6,207 8,482
Commercial business loans and
leases 4,640 2,994 2,234 4,124 9,622
Consumer loans and leases 8,539 3,598 2,631 2,225 3,861
Total loans charged off 16,287 18,173 17,968 17,202 28,572
Recoveries:
Residential real estate mortgages 534 507 620 904 642
Commercial real estate mortgages 4,772 9,541 5,185 4,917 6,293
Commercial business loans and leases 2,573 1,536 2,181 3,440 2,035
Consumer loans and leases 1,644 837 738 857 1,717
Total loans recovered 9,523 12,421 8,724 10,118 10,687
Net charge-offs 6,764 5,752 9,244 7,084 17,885
Additions charged to operating
expenses -- 900 4,230 3,374 14,047
Allowance at the end of the period $ 68,085 $ 67,488 $ 60,975 $ 63,675 $ 67,385
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs to average
loans and leases outstanding 0.17% 0.18% 0.34% 0.28% 0.72%
Ratio of allowance to total loans
and leases at end of period 1.52 1.85 2.19 2.41 2.77
Ratio of allowance to nonperforming
loans at end of period 155.33 196.13 160.00 127.58 94.47
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Provision and Allowance for Loan and Lease Losses
The Company did not record a provision for loan and lease losses in 1997
compared to a $900 thousand provision in 1996. The activity in the allowance for
loan and lease losses, as shown in Table 11, also reflects a decreased level of
gross charge-offs. The ratio of the allowance to nonperforming loans at December
31, 1997 was 155%, as compared to 196% and 160% at December 31, 1996 and 1995,
respectively. The allowance for loan and lease losses represented 1.52% of loans
outstanding at December 31, 1997, as compared to 1.85% and 2.19% at December 31,
1996 and 1995, respectively. This decline reflects the impact of acquiring
institutions with lower allowances as a percentage of loans and leases, as well
as the fact that net charge-offs have exceeded provisions in 1997 and 1996.
Management believes that this reduction is consistent with the improved asset
quality of the loan portfolio.
The allowance for loan and leases losses is maintained at a level determined
to be adequate by management to absorb future charge-offs of loans and leases
deemed noncollectible. This allowance is increased by provisions charged to
operating expense and by recoveries on loans previously charged off. Arriving at
an appropriate level of allowance for loan and lease losses necessarily involves
a high degree of judgment and is determined based on management's ongoing
evaluation. The evaluation process 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 judgment in providing for possible losses,
for the reasons discussed above under "Nonperforming Assets", there can be no
assurance that the Company will not have to change its provision for loan losses
in subsequent periods. Based on anticipated growth in assets, it is likely that
the Company will resume recording a provision for loan and lease losses in 1998.
The allowance for loan and lease losses is available for offsetting credit
losses in connection with any loan but is internally allocated to various loan
categories as part of the Company's process for evaluating the adequacy of the
allowance for loan and lease losses. Table 12 presents for information
concerning the allocation of the Company's allowance for loan and lease losses
by loan categories for the last five years.
29
<PAGE> 30
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Table 12 - Five Year Schedule of Allocation of Allowance for Loan and Lease Losses
- -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth information concerning the allocation of the Company's allowance for loan and lease losses by loan
categories at the dates indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance to Allowance to Allowance to Allowance to Allowance to
Percent of Percent of Percent of Percent of Percent of
Total Loans by Total Loans by Total Loans by Total Loans by Total Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans $ 6,211 0.42% $ 7,723 0.66% $10,118 1.27% $ 8,567 1.07% $ 9,864 1.37%
Commercial real
estate loans 36,200 3.28 35,478 3.69 31,673 3.97 35,505 4.61 38,177 5.07
Commercial business
loans and leases 12,730 2.21 13,449 2.82 9,491 2.32 9,274 2.86 8,734 2.88
Consumer loans
and leases 12,944 0.97 10,838 1.04 9,693 1.25 10,329 1.39 10,610 1.61
$ 68,085 1.52 $67,488 1.85 $60,975 2.19 $63,675 2.41 $67,385 2.77
-------- ------- ------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 a significant 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. For additional information regarding off-balance sheet
risks and commitments see Note 13 to the Consolidated Financial Statements.
CAPITAL
At December 31, 1997, shareholders' equity totaled $475.1 million or 7.0% of
total assets, as compared to $437.0 million or 8.1% at December 31, 1996. The 9%
increase in shareholders' equity was due to earnings which more than offset a
$35.5 million stock repurchase program and $21.0 million in dividends to
shareholders. See Table 13 for the Company's rate of internal capital generation
and the component factors which determine it.
During 1997, the Company repurchased 1,111,800 shares of common stock for
$35.5 million. The stock repurchase authorization was rescinded by the Company's
Board of Directors in October 1997. In January 1997, the Company issued $100
million of Trust Capital Securities which mature in 2027 and which qualify as
Tier 1 Capital. See Note 11 to the Consolidated Financial Statements for more
information.
Capital guidelines issued by the Federal Reserve Board require the Company
to maintain certain ratios. The Company's Tier 1 Capital, as defined by federal
banking agency regulations, was $452.6 million at December 31, 1997 compared to
$367.0 million at December 31, 1996. The Company's regulatory capital currently
exceeds all applicable requirements. See Note 10 to the Consolidated Financial
Statements.
The Company's banking subsidiaries also are subject to federal, and in
certain cases state, regulatory capital requirements. At December 31, 1997, each
of the Company's banking subsidiaries was deemed to be "well capitalized" under
the regulations of the applicable federal banking agency and in compliance with
applicable state regulatory capital requirements.
<TABLE>
<CAPTION>
Table 13 - Internal Capital Generation
- -------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.28% 1.21% 1.16% 0.94% 0.64%
Average equity to
average assets 7.76 8.37 8.55 8.22 7.50
Return on average equity 16.42 14.41 13.53 11.42 8.57
Total dividend
payout ratio 28.79 30.95 25.56 16.79 1.05
Earnings retention rate 71.21 69.05 74.44 83.21 98.95
Internal capital
generation rate 11.69 9.95 10.07 9.50 8.48
- -------------------------------------------------------------------------------
</TABLE>
IMPACT OF NEW ACCOUNTING STANDARDS
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. This statement will be effective for the Company's 1998 annual
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
30
<PAGE> 31
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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 provides a reconciliation of operating segment information
to the company's consolidated balances. This statement will be effective for the
Company's 1998 annual financial statements.
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 these 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 polices 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.
31
<PAGE> 32
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------
(In Thousands, Except Number of Shares and Per Share Data) 1997 1996
- ------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 339,270 $ 276,995
Federal funds sold 6,091 83,000
Securities available for sale, at market value 1,268,055 1,045,069
Loans held for sale, market value $362,397 in 1997
and $103,790 in 1996 360,631 103,270
Loans and leases 4,489,365 3,654,600
Less: Allowance for loan and lease losses 68,085 67,488
Net loans and leases 4,421,280 3,587,112
Premises and equipment 75,968 73,956
Goodwill and other intangibles 118,019 71,649
Mortgage servicing rights 50,808 33,314
Other assets 155,215 124,033
$ 6,795,337 $5,398,398
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 747,538 $ 760,340
Money market access and NOW accounts 1,166,245 1,023,448
Certificates of deposit (including certificates of $100 or more
of $377,752 and $116,472 in 1997 and 1996, respectively) 2,144,006 1,796,521
Demand deposits 744,851 604,980
4,802,640 4,185,289
Federal funds purchased and securities sold under
repurchase agreements 370,219 197,005
Borrowings from the Federal Home Loan Bank of Boston 940,991 470,080
Other borrowings 18,762 23,884
Other liabilities 87,659 85,130
Total liabilities 6,220,271 4,961,388
Company obligated, mandatorily redeemable securities of
subsidiary trust holding solely parent junior subordinated
debentures 100,000 --
Shareholders' equity
Preferred stock, par value $0.01; 5,000,000 shares
authorized, none issued -- --
Common stock, par value $0.01; 100,000,000 shares authorized,
28,576,885 issued 286 286
Paid-in capital 271,790 271,790
Retained earnings 224,784 170,855
Net unrealized gain (loss) on securities available
for sale, net of applicable income taxes 3,565 (582)
Treasury stock at cost (839,586 shares and
355,385 shares in 1997 and 1996, respectively) (25,359) (5,339)
Total shareholders' equity 475,066 437,010
$ 6,795,337 $5,398,398
----------- ----------
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
32
<PAGE> 33
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Number of Shares and Per Share Data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans and leases $ 366,029 $ 288,999 $ 253,787
Interest and dividends on securities 76,183 52,173 52,062
Total interest and dividend income 442,212 341,172 305,849
Interest expense:
Interest on deposits 148,803 120,443 108,209
Interest on borrowed funds 47,220 30,156 26,686
Total interest expense 196,023 150,599 134,895
Net interest income 246,189 190,573 170,954
Provision for loan and lease losses -- 900 4,230
----------- ------------- -------------
Net interest income after provision
for loan and lease losses 246,189 189,673 166,724
Noninterest income:
Customer services 23,191 15,353 11,908
Mortgage banking services 18,771 12,940 10,849
Trust and investment advisory services 8,809 7,233 5,850
Insurance commissions 1,899 -- --
Net securities gains 150 507 116
Other noninterest income 4,118 2,415 2,694
56,938 38,448 31,417
Noninterest expenses:
Salaries and employee benefits 92,703 73,303 67,472
Data processing 14,962 12,528 8,924
Occupancy 14,102 12,320 10,574
Equipment 12,078 8,479 6,844
Distributions on securities of subsidiary trust 8,351 -- --
Amortization of goodwill and deposit premiums 8,120 4,874 2,211
Advertising and marketing 6,624 4,327 4,642
Merger expenses 354 5,105 4,958
Other noninterest expenses 30,712 27,137 24,655
188,006 148,073 130,280
Income before income tax expense 115,121 80,048 67,861
Applicable income tax expense 41,720 27,568 23,375
Net income $ 73,401 $ 52,480 $ 44,486
------------ ------------- -------------
Basic weighted average shares outstanding 27,806,267 25,035,041 24,696,393
Diluted weighted average shares outstanding 28,362,970 25,425,558 24,998,823
Earnings per share:
Basic $ 2.64 $ 2.10 $ 1.80
Diluted 2.59 2.06 1.78
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
33
<PAGE> 34
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Net
Number of Shares Par Paid-in Retained Unrealized Treasury
and Share Data) Value Capital Earnings Gain (Loss) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $256 $224,267 % 99,955 $(9,079) $(10,960) $304,439
Treasury stock issued for employee benefit plans
(132,022 shares at an average price of $9.76) -- -- (401) -- 1,908 1,507
Treasury stock purchased (647,357
shares at an average price of $12.85) -- -- -- -- (8,317) (8,317)
Reissuance of treasury stock pursuant to acquisition
of Bankcore, Inc. (751,600 shares at $15.00) -- -- 1,710 -- 9,564 11,274
Changes in unrealized gains (losses) on securities
available for sale, net of tax effect of $7,293 -- -- -- 12,842 -- 12,842
Compensation cost of employee stock plan, 124 shares -- 1 -- -- -- 1
Net income -- -- 44,486 -- -- 44,486
Cash dividends $0.46 per share -- -- (11,307) -- -- (11,307)
Balances at December 31, 1995 $256 $224,268 $ 134,443 $ 3,763 $ (7,805) $354,925
Treasury stock issued for employee benefit plans
(168,677 shares at an average price of $14.62) -- -- (134) -- 2,466 2,332
Purchase of 2,500,000 shares of treasury
stock pursuant to acquisition of Family Bancorp -- -- -- -- (60,342) (60,342)
Issuance of 2,980,335 shares of common stock
and 2,500,000 shares from treasury stock
pursuant to acquisition of Family Bancorp 30 47,522 -- 344 60,342 108,238
Change in unrealized gains (losses) on securities
available for sale, net of taxes of $2,194 -- -- -- (4,689) -- (4,689)
Net income -- -- 52,480 -- -- 52,480
Cash dividends $0.65 per share -- -- (15,934) -- -- (15,934)
Balances at December 31, 1996 $286 $271,790 $ 170,855 $ (582) $ (5,339) $437,010
Treasury stock issued for employee benefit plans
(404,760 shares at an average price of $19.16) -- -- (1,042) -- 8,798 7,756
Treasury stock purchased (1,111,800 shares
at an average price of $31.97) -- -- -- -- (35,549) (35,549)
Reissuance of treasury stock pursuant to acquisition
of Atlantic Bancorp (222,839 shares at $41.75) -- -- 2,572 -- 6,731 9,303
Change in unrealized gains (losses) on securities
available for sale, net of taxes -- -- -- 4,147 -- 4,147
Net income -- -- 73,401 -- -- 73,401
Cash dividends $0.76 per share -- -- (21,002) -- -- (21,002)
Balances at December 31, 1997 $286 $271,790 $ 224,784 $ 3,565 $(25,359) $475,066
---- -------- --------- ------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
34
<PAGE> 35
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 73,401 $ 52,480 $ 44,486
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan and lease losses -- 900 4,230
Provision for depreciation 10,212 7,409 6,286
Amortization of goodwill and other intangibles 8,120 4,874 2,211
Net (increase) decrease in net deferred tax assets 7,471 (394) 3,919
Net (gains) losses from other real estate owned (558) 435 (430)
Net (gains) losses realized from sales of securities and consumer loans (150) (507) (116)
Net (gains) losses realized from sales of loans held for
sale (a component or mortgage banking services) (11,016) (7,108) 664
Net decrease (increase) in mortgage servicing rights (17,494) (9,305) (3,034)
Proceeds from sales of loans held for sale 2,900,768 1,057,261 552,774
Residential loans originated and purchased for sale (3,147,113) (1,082,444) (613,171)
Net decrease (increase) in interest and dividends
receivable and other assets (26,929) (9,101) (2,925)
Net increase in other liabilities (13,721) 29,743 366
Net cash provided (used) by operating activities $ (217,009) $ 44,243 $ (4,740)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal repayments of investment securities $ -- $ -- $ 125,540
Purchase of investment securities -- -- (114,491)
Proceeds from sales of securities available for sale 62,195 42,620 9,814
Proceeds from maturities of securities available for sale 434,958 516,395 135,972
Purchases of securities available for sale (659,121) (487,789) (184,040)
Net (increase) decrease in loans and leases (480,70) (398,152) (184,323)
Proceeds from sales of loans -- -- 31,425
Premiums paid on deposits purchased -- (18,230) (4,290)
Net additions to premises and equipment (7,780) (12,155) (15,800)
Net decrease in repossessed assets owned 2,725 5,388 15,082
Payment for acquisitions, net of cash acquired (28,261) 72,835 --
Net cash provided (used) by investing activities $ (675,654) $ (279,088) $ (185,111)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 263,175 $ 213,572 $ 311,293
Net increase (decrease) in securities sold under repurchase agreements 50,064 10,675 53,438
Proceeds from Federal Home Loan Bank of Boston borrowings 947,283 481,998 415,998
Payments on Federal Home Loan Bank of Boston borrowings (539,000) (328,507) (526,002)
Proceeds from issuance of securities of subsidiary trust 98,361 -- --
Net increase (decrease) in other borrowings (8,052) 1,855 11,055
Issuance of treasury stock 7,756 2,332 1,507
Purchase of treasury stock (35,549) (60,342) (8,317)
Reissuance of treasury stock pursuant to acquisition -- -- 11,274
Cash dividends paid to shareholders (21,002) (15,934) (11,307)
Net cash provided by financing activities $ 763,036 $ 305,649 $ 258,939
Increase (decrease) in cash and cash equivalents (129,627) 70,804 69,088
Cash and cash equivalents at beginning of period 359,995 289,191 220,103
Cash and cash equivalents at end of period $ 230,638 $ 359,995 $ 289,191
----------- --------- ----------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996, the Company purchased Family Bancorp whereby each share of Family
Bancorp was exchanged for 1.26 shares of the Company's stock. In 1997, the
Company purchased MPN Holdings whereby 222,839 shares of PHFG stock were issued.
In conjunction with the acquisitions, assets were acquired and liabilities were
assumed as follows:
<TABLE>
<CAPTION>
Family Bancorp MPN Holdings
<S> <C> <C>
Fair value of assets acquired $ 959,089 $21,425
Less liabilities assumed 850,851 12,122
Net effect on capital $ 108,238 $ 9,303
--------- -------
</TABLE>
Additionally in 1997, the Company purchased Atlantic Bancorp for $70.8 million
representing $462.9 million in assets and $425.2 million in liabilities.
For the year ended December 31,1997, 1996 and 1995, interest of $195,957,
$147,785 and $132,301 and income taxes of $33,898, $22,905 and $18,272 were
paid, respectively.
During 1997, 1996 and 1995, $4,326, $5,188 and $12,828 of loans were transferred
to other real estate owned. The company also originated loans to finance the
sales of other real estate owned of $6,597, $3,602 and $6,020 during 1997, 1996
and 1995, respectively.
During 1995, $275,528 of investment securities were transferred to securities
available for sale.
See accompanying notes to Consolidated Financial Statements.
35
<PAGE> 36
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts Expressed in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Peoples Heritage Financial Group, Inc.
(the "Company") and its subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry. The Company's
principal business activities are retail, commercial and mortgage banking as
well as trust, insurance brokerage and investment advisory services, and are
conducted through the Company's direct and indirect wholly-owned subsidiaries
located in Maine, New Hampshire and northern Massachusetts. The Company and its
subsidiaries are subject to competition from other financial institutions and
are also subject to regulation of, and periodic examination by, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Maine
Bureau of Banking, the New Hampshire Bank Commissioner and the Federal Reserve
Board. The following is a description of the more significant accounting
policies.
Financial Statement Presentation.
The consolidated financial statements include the accounts of Peoples Heritage
Financial Group, Inc., and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
Assets held in a fiduciary capacity by subsidiary trust departments are not
assets of the Company and, accordingly, are not included in the Consolidated
Balance Sheets.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that effect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan and lease losses
and the valuation of mortgage servicing rights.
Cash and Cash Equivalents.
The Company is required to comply with various laws and regulations of the
Federal Reserve Bank which require that the Company maintain certain amounts of
cash on deposit and is restricted from investing those amounts.
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits in banks, and federal funds sold
minus federal funds purchased.
Securities Available for Sale.
Securities available for sale consist of debt and equity securities that are
available for sale in response to changes in market interest rates, liquidity
needs, changes in funding sources and other similar factors. These assets are
specifically identified and are carried at market value. Changes in market
value, net of applicable income taxes, are reported as a separate component of
shareholders' equity. When a decline in market value of a security is considered
other than temporary, the loss is charged to net securities gains (losses) in
the consolidated statements of income as a writedown. Premiums and discounts are
amortized and accreted over the term of the securities on a level yield method
adjusted for prepayments. Gains and losses on the sale of securities are
recognized at the time of the sale using the specific identification method.
Loans.
Loans are carried at the principal amounts outstanding reduced by partial
charge-offs and net deferred loan fees. Loans are generally placed on nonaccrual
status when they are past due 90 days as to either principal or interest, or
when in management's judgment the collectibility of interest or principal of the
loan has been significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against interest
on loans. A loan can be returned to accrual status when collectibility of
principal is reasonably assured and the loan has performed for a period of time,
generally six months. Loans are classified as impaired when it is probable that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status and collateral value.
Allowance for Loan and Lease Losses.
The allowance for loan and lease losses is maintained at a level determined to
be adequate by management to absorb future charge-offs of loans and leases
deemed uncollectible. This allowance is increased by provisions charged to
operating expense and by recoveries on loans previously charged off, and reduced
by charge-offs on loans and leases.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and management's estimation of
future potential losses. Although management uses available information to
establish the appropriate level of the allowance for loan and lease losses,
future additions to the allowance may be necessary based on estimates that are
susceptible to change as a result of changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize adjustments to
the allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment.
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of related assets.
Long-lived assets are evaluated periodically for other-than-temporary
impairment. An assessment of recoverability is performed prior to any writedown
of the asset. If circumstances suggest that their value may be permanently
impaired, an expense would then be charged in the current period.
Goodwill and Other Intangibles.
Goodwill and other intangibles are amortized on a straight-line basis over
various periods not exceeding twenty years. Goodwill and other intangible assets
are reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the asset.
Mortgage Banking and Loans Held for Sale.
Loans originated for sale are classified as held for sale. These loans are
specifically identified and carried at the lower of aggregate cost or
36
<PAGE> 37
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
estimated market value. Market value is estimated based on outstanding investor
commitments or, in the absence of such commitments, current investor yield
requirements.
Forward commitments to sell residential real estate mortgages are contracts
which the Company enters into for the purpose of reducing the market risk
associated with originating loans for sale. In the event the Company is unable
to originate loans to fulfill the contracts, it would normally purchase loans
from correspondents or in the open market to deliver against the contract. Such
loans are also classified as held for sale.
Gains and losses on sales of mortgage loans are determined using the
specific identification method and recorded as mortgage sales income, a
component of mortgage banking services income. The gains and losses resulting
from the sales of loans with servicing retained are adjusted to recognize the
present value of future servicing fee income over the estimated lives of the
related loans. Purchased mortgage servicing rights are recorded at cost upon
acquisition.
Mortgage servicing rights are amortized on an accelerated method over the
estimated weighted average life of the loans. Amortization is recorded as a
charge against mortgage service fee income, a component of mortgage banking
services income. The Company's assumptions with respect to prepayments, which
affect the estimated average life of the loans, are adjusted periodically to
reflect current circumstances. In evaluating the realizability of the carrying
values of mortgage servicing rights, the Company assesses the estimated life of
its servicing portfolio based on data which is disaggregated to reflect note
rate, type and term on the underlying loans.
Mortgage servicing fees received from investors for servicing their loan
portfolios are recorded as mortgage servicing fee income when received. Loan
servicing costs are charged to noninterest expenses when incurred.
Derivative Financial Instruments
The Company purchases interest rate floors tied to the CMT index and Treasury
options to mitigate the prepayment risk associated with mortgage servicing
rights. Changes in the fair value of risk management instruments are included in
the determination of the carrying value of mortgage servicing rights. If
correlation of a particular instrument were to cease, it would be accounted for
as a trading instrument. If the instrument hedging the mortgage servicing rights
is terminated, the gain or loss is treated as an adjustment of the carrying
value of the mortgage servicing rights. Net premiums paid are amortized into
income over the life of the contract.
Pension Accounting.
The Company provides pension benefits to its employees under a noncontributory
defined benefit plan which is funded on a current basis in compliance with the
requirements of the Employee Retirement Income Security Act of 1974 and
recognizes costs over the estimated employee service period.
Income Taxes.
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share.
Earnings per share has been computed in accordance with SFAS No. 128, Earnings
Per Share. Basic earnings per share has been calculated by dividing net income
by weighted average shares outstanding before any dilution, and diluted earnings
per share has been calculated by dividing net income by weighted average shares
outstanding after giving effect to the potential dilution that could occur if
the dilutive stock options were converted into common stock using the treasury
stock method.
2. MERGERS AND ACQUISITIONS
In October 1997, the Company completed its purchase of Atlantic Bancorp, the
parent company of Atlantic Bank N.A. ("Atlantic") headquartered in Portland,
Maine, for $70.8 million or $17 per share. Atlantic had total assets of $462.9
million, net loans of $351.5 million and total deposits of $354.2 million. The
acquisition was accounted for as a purchase and resulted in the recording of
$46.2 million of goodwill.
Also in October 1997, the Company acquired all of the outstanding stock of
MPN Holdings ("MPN"). MPN is the holding company of Morse, Payson & Noyes. 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.
The Company recorded $10.2 million in goodwill.
On December 6, 1996, the Company completed its purchase of Family Bancorp,
the parent Company of Family Bank, FSB located in northern Massachusetts and
southern New Hampshire. The purchase included 22 branch offices and $473.8
million in loans and $774.6 million in deposits. The transaction was treated as
a purchase for accounting purposes and, accordingly, the Company's financial
statements reflect the acquisition from the time of purchase. The Company issued
5,480,335 shares of common stock and recorded $29 million in goodwill.
On April 2, 1996, the Company completed its merger with the Bank of New
Hampshire Corporation ("BNHC") which was accounted for under the
pooling-of-interests method. Accordingly, the consolidated financial statements
of the Company have been restated to reflect the acquisition at the beginning of
each period presented. At December 31, 1995, BNHC had total assets of $977.8
million and total shareholders' equity of $84.5 million.
Pending acquisition.
On October 27, 1997 the Company entered into an Agreement and Plan of Merger
(the "Agreement") with CFX Corporation ("CFX"). CFX is headquartered in Keene,
New Hampshire and has 56 offices located throughout New Hampshire and
north-central Massachusetts. The Agreement provides, among other things, for the
merger of CFX with and into the Company (the "Merger") and the conversion of
each outstanding share of common stock of CFX into .667 of newly issued share of
the Company's common stock or approximately 16.8 million shares of newly issued
Company common stock. The Merger has been approved by the shareholders of CFX
and the Company. Consummation of the Merger is subject to regulatory approval.
The Merger is expected to be accounted for using the pooling-of-interest method
and close in the first half of 1998.
37
<PAGE> 38
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
3. SECURITIES AVAILABLE FOR SALE
A summary of the amortized cost and market values of securities available for
sale follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U. S. Government obligations
and obligations of U.S.
Government agencies and
corporations $ 391,545 $ 1,372 $ (252) $ 392,665
Tax-exempt bonds and notes 19,460 38 -- 19,498
Other bonds and notes 70,014 15 (33) 69,996
Mortgage-backed securities 649,543 5,116 (1,187) 653,472
Collateralized mortgage obligations 68,856 382 (114) 69,124
Total debt securities 1,199,418 6,923 (1,586) 1,204,755
Federal Home Loan Bank of
Boston stock 61,605 -- -- 61,605
Other equity securities 1,518 177 -- 1,695
Total equity securities 63,123 177 -- 63,300
Total securities available
for sale $1,262,541 $ 7,100 $ (1,586) $1,268,055
---------- -------- ------------ ----------
</TABLE>
- --------------------------------------------------------------------------------
The excess of market value over amortized cost of $5.5 million, net of tax
effect of $1.9 million, is recorded as a separate component of shareholders'
equity.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Unrealized Market
Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996:
U. S. Government obligations
and obligations of U.S.
Government agencies and
corporations $ 432,367 $ 934 $(1,071) $ 432,230
Tax-exempt bonds and notes 17,789 39 -- 17,828
Other bonds and notes 7,858 11 (50) 7,819
Mortgage-backed securities 444,613 2,217 (2,835) 443,995
Collateralized mortgage obligations 103,237 286 (706) 102,817
Total debt securities 1,005,864 3,487 (4,662) 1,004,689
Federal Home Loan Bank of
Boston stock 37,948 -- -- 37,948
Other equity securities 2,330 102 -- 2,432
Total equity securities 40,278 102 -- 40,380
Total securities available
for sale $1,046,142 $3,589 $(4,662) $1,045,069
---------- -------- ---------- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The excess of amortized cost over market value of $1.1 million, net of tax
effect of $491 thousand, is recorded as a separate component of shareholders'
equity.
38
<PAGE> 39
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The amortized cost and market values of debt securities available for sale
at December 31, 1997 by contractual maturity are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. At
December 31, 1997, the Company had $25.8 million of securities available for
sale with call provisions.
- --------------------------------------------------------------------------------
Amortized Cost Market Value
- --------------------------------------------------------------------------------
December 31, 1997:
Due in one year or less $ 247,346 $ 247,491
Due after one year through five years 247,369 248,313
Due after five years through ten years 53,559 53,744
Due after ten years 651,144 655,207
Total debt securities $1,199,418 $1,204,755
---------- ----------
- --------------------------------------------------------------------------------
A summary of realized gains and losses on securities available for sale for
1997, 1996 and 1995 follows:
Gross Gross
Realized Realized
Gains Losses
- --------------------------------------------------------------------------------
1997 $ 158 $ 8
1996 533 26
1995 305 189
- --------------------------------------------------------------------------------
4. LOANS AND LEASES
The Company's lending activities are conducted principally in Maine, New
Hampshire and northern Massachusetts. The principal categories of loans in the
Company's portfolio are residential real estate loans, which are secured by
single-family (one to four units) residences; commercial real estate loans,
which are secured by multi-family (five or more units) residential and
commercial real estate; commercial business loans and leases; and consumer loans
and leases.
A summary of loans and leases follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Residential real estate mortgages:
Adjustable-rate $ 676,808 $617,323
Fixed-rate 799,708 559,551
1,476,516 1,176,874
Commercial real estate mortgages:
Commercial real estate 1,020,987 901,105
Construction and development 83,667 61,270
1,104,654 962,375
Commercial business loans and leases 576,649 477,402
Consumer loans and leases:
Home equity 462,826 362,105
Mobile home 192,724 206,061
Automobile 335,106 192,295
Education loans 117,228 106,900
Boat and recreational vehicle 41,521 31,969
Other 182,141 138,619
1,331,546 1,037,949
Total loans and leases $ 4,489,365 $3,654,600
----------- ----------
- --------------------------------------------------------------------------------
Loan and lease balances are stated net of deferred loan fees totaling $3,076 and
$3,324 at December 31, 1997 and 1996, respectively.
39
<PAGE> 40
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NONPERFORMING LOANS
The following table sets forth information regarding nonperforming loans and
accruing loans 90 days or more overdue at the dates indicated:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Residential real estate mortgages:
Nonaccrual loans $ 7,357 $3,867
Commercial real estate loans:
Nonaccrual loans 15,654 15,270
Troubled debt restructurings 1,073 1,581
Total 16,727 16,851
Commercial business loans and leases:
Nonaccrual loans 11,668 8,016
Troubled debt restructurings 114 579
Total 11,782 8,595
Consumer loans:
Nonaccrual loans 7,967 5,097
Total nonperforming loans:
Nonaccrual loans 42,646 32,250
Troubled debt restructurings 1,187 2,160
Total $ 43,833 $34,410
-------- -------
Accruing loans which are 90 days or more overdue $ 8,355 $ 8,038
------- -------
- --------------------------------------------------------------------------------
The ability and willingness of the residential real estate, commercial real
estate, commercial business and consumer borrowers to repay loans is generally
dependent on current economic conditions and real estate values within the
borrowers' geographic areas.
During 1997, the Company's policy was generally to limit new loans to one
borrower to $15.0 million. These limitations are substantially below the
limitations set forth in applicable laws and regulations.
Interest income that would have been recognized for 1997, 1996 and 1995, if
nonperforming loans at December 31, 1997, 1996 and 1995 had been performing in
accordance with their original terms, approximated $4.7 million, $4.7 million,
and $5.3 million, respectively. The actual amount that was collected on these
loans during the periods and included in interest income approximated $2.0
million, $1.9 million, and $1.6 million, respectively. As a result, the
reduction in interest income for 1997, 1996, and 1995 associated with
nonperforming loans held at the end of such periods approximated $2.7 million,
$2.8 million, and $3.7 million, respectively.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and loans on which the accrual of
interest is discontinued when collectibility of principal
or interest is uncertain or on which payments of principal or interest have
become contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is probable that the Company
will collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is not a commercial, commercial real estate or an
individually significant mortgage or consumer loan. The amount of impairment for
these types of impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into the consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
At December 31, 1997 and 1996, total impaired loans were $32.6 million and
$28.3 million, of which $22.6 million and $22.7 million had related allowances
of $5.9 million and $4.2 million, respectively. During the years ended December
31, 1997, 1996 and 1995, the income recognized related to impaired loans was
$2.1 million, $1.6 million and $1.5 million, and the average balance of
outstanding impaired loans was $31.1 million, $25.2 million and $29.1 million
respectively. The Company recognizes interest on impaired loans on a cash basis
when the ability to collect the principal balance is not in doubt; otherwise,
cash received is applied to the principal balance of the loan.
40
<PAGE> 41
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses follow:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
Balance at beginning of period $ 67,488 $ 60,975 $ 63,675
Allowance on acquired loans 7,361 11,365 2,314
Provisions charged to operations -- 900 4,230
Loans and leases charged off (16,287) (18,173) (17,968)
Recoveries 9,523 12,421 8,724
Balance at end of period $ 68,085 $ 67,488 $ 60,975
-------- -------- --------
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996
Land $ 13,467 $ 10,227
Buildings and improvements 60,286 61,398
Leasehold improvements 12,794 12,273
Furniture, fixtures and equipment 75,225 65,326
161,772 149,224
Less accumulated depreciation
and amortization 85,804 75,268
$ 75,968 $ 73,956
-------- --------
- --------------------------------------------------------------------------------
7. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31, 1997,
1996 and 1995 follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of period $33,314 $20,309 $17,275
Mortgage servicing rights capitalized 50,812 17,299 9,101
Mortgage servicing rights acquired
through acquisition -- 3,700 --
Amortization charged against
mortgage servicing fee income (6,134) (4,375) (3,483)
Mortgage servicing rights sold (27,184) (3,619) (2,584)
Balance at end of period $50,808 $33,314 $20,309
------- ------- -------
- --------------------------------------------------------------------------------
The Company often continues to service the residential real estate mortgages
sold in the secondary market. The Company pays the investor an agreed-upon rate
on the loan, which is less than the interest rate the Company receives from the
borrower. The difference is retained by the Company as a fee for servicing the
residential real estate mortgages. As required by SFAS No. 125, the Company
capitalizes mortgage servicing rights at their allocated cost, based on relative
fair values upon sale of the related loans.
The Company periodically sells residential mortgage servicing rights.
Residential real estate mortgages serviced for investors at December 31,
1997, 1996 and 1995 amounted to $4.0 billion, $3.2 billion, and $2.6 billion,
respectively.
- --------------------------------------------------------------------------------
8. INCOME TAXES
The current and deferred components of income tax expense follow:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current (including $3,004, $1,381,
and $805,respectively,
of state income tax) $33,026 $27,134 $19,480
Deferred 8,694 434 3,895
$41,720 $27,568 $23,375
-------- ------- -------
- --------------------------------------------------------------------------------
The following table reconciles the expected federal income tax expense (computed
by applying the federal statutory tax rate to income before taxes) to recorded
income tax expense:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Computed federal tax expense $40,292 $28,017 $23,585
State income tax, net of
federal benefits 1,953 898 523
Benefit of tax-exempt income (730) (740) (585)
Merger expenses -- 623 380
Amortization of goodwill and
other intangibles 1,932 916 839
Low income/rehabilitation credits (1,864) (1,231) (1,265)
Other, net 137 (915) (102)
Recorded income tax expense $41,720 $27,568 $23,375
------- ------- --------
- --------------------------------------------------------------------------------
41
<PAGE> 42
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities which are included in Other Assets and Other
Liabilities, respectively, at December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan and lease losses $25,101 $25,003
Reserve for mobile home dealers 1,812 2,000
Accrued pension expense 1,434 2,085
Difference of tax and book basis of other real estate owned 623 666
Interest accrued and payments received on nonperforming loans for tax purposes 1,444 1,032
Unrealized depreciation on securities -- 491
Other 495 4,107
Total gross deferred tax assets 30,909 35,384
Deferred tax liabilities
Difference in tax and book basis of leases 408 313
Difference in tax and book basis of premises and equipment 1,427 1,819
Difference in tax and book basis of securities 27 256
Difference in tax and book basis of partnership investments 4,296 2,606
Tax bad debt reserve 7,761 6,143
Unrealized appreciation of securities 1,637 --
Other 1,642
Total gross deferred tax liabilities 17,198 12,079
Net deferred tax asset $13,711 $23,305
------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's net deferred tax asset was increased by $1.2 million and $828
thousand during 1997 and 1996 as a result of various acquisitions. In assessing
the realizability of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considers the scheduled
reversal of deferred tax liabilities and projected future taxable income in
making this assessment. The Company estimates that substantially all of its
gross deferred tax assets and liabilities will reverse within the next five
years. In order to fully realize the net deferred tax asset, the Company will
need to generate future taxable income of approximately $39.1 million. Pre-tax
book income for the year ended December 31, 1997 was $115.1 million. Based upon
the level of 1997 taxable income and projections for future taxable income over
the periods which the deferred tax assets are deductible, the Company believes
it is more likely than not that it will realize the benefits of these deductible
temporary differences at December 31, 1997. Accordingly, no valuation allowance
has been recorded at December 31, 1997.
- --------------------------------------------------------------------------------
9. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The details of federal funds purchased and securities sold under repurchase
agreements were as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Federal funds purchased $114,993 $ --
Securities sold under
repurchases agreements 255,226 197,005
$370,219 $197,005
--------- ---------
- --------------------------------------------------------------------------------
A summary of securities sold under repurchase agreements follows:
- --------------------------------------------------------------------------------
At or for the Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Balance outstanding at
end of period $ 255,226 $197,005 $180,957
Market value of collateral
at end of period 265,589 205,084 195,861
Amortized cost of collateral
at end of period 262,638 204,470 194,560
Average balance outstanding 207,393 140,365 152,411
Maximum outstanding
at any month end
during the period 268,555 197,005 213,104
Average interest rate
during the period 4.38% 4.47% 4.90%
Average interest rate at
end of period 4.65% 4.06% 4.64%
- --------------------------------------------------------------------------------
Securities sold under repurchase agreements generally have maturities of 180
days or less and are collateralized by mortgage-backed securities and U.S.
Government obligations.
42
<PAGE> 43
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
10. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
A summary of the borrowings from the Federal Home Loan Bank of Boston is as
follows:
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Principal Amounts Interest Rates Maturity Dates
- --------------------------------------------------------------------------------
$ 120,248 5.19% - 7.04% 1998
157,855 5.02% - 6.26% 1999
654,987 4.70% - 6.14% 2000
2,079 5.20% - 6.14% 2001
2,207 5.20% - 6.14% 2002
2,239 5.20% - 6.14% 2003
778 5.68% - 6.14% 2004
598 6.14% 2005
$ 940,991
---------
- --------------------------------------------------------------------------------
December 31, 1996
- --------------------------------------------------------------------------------
Principal Amounts Interest Rates Maturity Dates
- --------------------------------------------------------------------------------
$ 90,983 4.81% - 6.87% 1997
62,500 5.19% - 5.87% 1998
225,000 5.30% - 5.65% 1999
75,025 4.70% - 6.05% 2000
4,728 5.20% - 5.82% 2003
5,793 5.68% - 5.72% 2004
6,051 6.14% - 6.90% 2005
$ 470,080
---------
- --------------------------------------------------------------------------------
Short and long-term borrowings from the Federal Home Loan Bank of Boston, which
consist of both fixed and adjustable rate borrowings, are secured by a blanket
lien on qualified collateral consisting primarily of loans with first mortgages
secured by 1 to 4 family properties, certain unencumbered investment securities
and other qualified assets. The Company has the ability to prepay most of its
borrowings without penalty. In addition the Company has an existing line of
credit with the Federal Home Loan Bank of $125 million, none of which was
outstanding at December 31, 1997.
11. CAPITAL TRUST SECURITIES
On January 24, 1997, the Company sponsored the creation of Peoples Heritage
Capital Trust I (the "Trust") a statutory business trust created under the laws
of Delaware. The Company is the owner of all of the Common Securities of the
Trust (the "Common Securities"). On January 31, 1997, the Trust issued $100.0
million of 9.06% Capital Securities (the "Capital Securities," and with the
Common Securities, the "Trust Securities"), the proceeds from which were used by
the Trust, along with the Company's $3.1 million capital contribution for the
Common Securities, to acquire $103.1 million aggregate principal amount of the
Company's 9.06% Junior Subordinated Deferrable Interest Debentures due February
1, 2027 (the "Debentures"), which constitute the sole assets of the Trust. The
Company has, through the Declaration of Trust establishing the Trust, Common
Securities and Capital Securities Guarantee Agreements, the Debentures and a
related Indenture, taken together, fully irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Securities. Separate
financial statements of the Trust are not required pursuant to Staff Accounting
Bulletin 53 of the Securities and Exchange Commission.
12. SHAREHOLDERS' EQUITY
Regulatory Capital Requirements.
Bank regulatory agencies have established capital adequacy standards which are
used extensively in their monitoring and control of the industry. These
standards relate capital to average assets and to level of risk by assigning
different weighting to assets and certain off-balance sheet activity. The
Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Capital
Actual Requirements Excess
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $505,714 11.95% $338,460 8.00% $167,254 3.95%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS) 452,642 10.70 169,230 4.00 283,412 6.70
TIER 1 CAPITAL (TO AVERAGE QUARTERLY ASSETS) 452,642 7.16 252,978 4.00 197,664 3.16
As of December 31, 1996:
Total capital (to risk weighted assets) $409,144 12.24% $267,428 8.00% $141,716 4.24%
Tier I capital (to risk weighted assets) 367,041 10.98 133,714 4.00 233,327 6.98
Tier I capital (to average quarterly assets) 367,041 7.96 184,445 4.00 182,596 3.96
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the Company and each of its banking subsidiaries
were well-capitalized and in compliance with all applicable regulatory capital
requirements and had capital ratios in excess of federal and regulatory
risk-based and leverage requirements.
- --------------------------------------------------------------------------------
43
<PAGE> 44
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Dividend Limitations.
Dividends paid by subsidiaries are the primary source of funds available to the
Company for payment of dividends to its shareholders. The Company's subsidiary
banks are subject to certain requirements imposed by state and federal banking
laws and regulations. These requirements, among other things, establish minimum
levels of capital and restrict the amount of dividends that may be distributed
by the subsidiary banks to the Company.
Stockholder Rights Plan.
In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan
declaring a dividend of one preferred Stock Purchase Right for each outstanding
share of Common Stock. The rights will remain attached to the Common Stock and
are not exercisable except under limited circumstances relating to acquisition
of, the right to acquire beneficial ownership of, or tender offer for, 20% or
more of the outstanding shares of Common Stock. The Rights have no voting or
dividend privileges and, until they become exercisable, have no dilutive effect
on the earnings of the Company.
13. COMMITMENTS, CONTINGENT LIABILITIES
AND OTHER OFF-BALANCE SHEET RISKS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans, standby letters of credit,
recourse arrangements on serviced loans, and forward commitments to sell loans.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans, the contract or notional
amounts do not represent exposure to credit loss. The Company controls the
credit risk of its forward commitments to sell loans through credit approvals,
limits and monitoring procedures.
Financial instruments with off-balance sheet risk at December 31, 1997 and 1996
follow:
- --------------------------------------------------------------------------------
Contract or Notional Amount
at December 31,
1997 1996
- --------------------------------------------------------------------------------
Financial instruments with contract amounts
which represent credit risk:
Commitments to originate loans, unused
lines, standby letters of credit and
unadvanced portions of construction loans $1,164,610 $828,845
Loans serviced with recourse 32,603 38,286
Financial instruments with notional
or contract amounts which
exceed the amount of credit risk:
Forward commitments
to sell loans 660,823 149,330
Interest rate floors (fair value of $10) 10,000 -
Treasury put options (fair value of $156) 50,000 -
Treasury call options (fair value of $371) 12,500 -
CMTfloors (fair value of $736) 60,000 60,000
- --------------------------------------------------------------------------------
Commitments to originate loans, unused lines of credit and unadvanced portions
of construction loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Because many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company has retained credit risk on certain residential mortgage loans
sold with full or partial recourse and on certain residential mortgage loans
whose servicing rights were acquired during 1990.
Forward commitments to sell residential mortgage loans are contracts which
the Company enters into for the purpose of reducing the market risk associated
with originating loans for sale. Risks may arise from the possible inability of
the Company to originate loans to fulfill the contracts, in which case the
Company would normally purchase loans from correspondent banks or in the open
market to deliver against the contract.
Legal Proceedings.
The Company and certain of its subsidiaries have been named as defendants in
various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, which is based in part upon
the opinions of counsel, any such liability will not have a material effect on
the consolidated financial position or results of operations of the Company and
its subsidiaries.
44
<PAGE> 45
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Lease Obligations.
The Company leases certain properties used in operations under terms of
operating leases which include renewal options. Rental expense under these
leases approximated $5.6 million, $4.5 million, and $3.4 million for the years
ended 1997, 1996 and 1995 respectively.
Approximate minimum lease payments over the remaining terms of the leases at
December 31, 1997 follow:
- --------------------------------------------------------------------------------
1998 $ 6,240
1999 5,947
2000 5,726
2001 5,265
2002 4,322
2003 and after 16,863
$ 44,363
--------
- --------------------------------------------------------------------------------
14. STOCK BASED COMPENSATION PLANS
Profit Sharing Employee Stock Ownership Plan.
In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan which
is designed to invest primarily in Common Stock of the Company. Substantially
all employees are eligible for the Plan following one year of service. Employees
may not make contributions to the Plan but may receive a discretionary
contribution from the Company based on their pro-rata share of eligible
compensation. For 1997, 1996 and 1995 the Directors voted to contribute 3%, 4%
and 3% of eligible compensation, respectively. The approximate expense of this
contribution for 1997, 1996 and 1995 was $1.3 million, $1.5 million, and $850
thousand, respectively.
Stock Option Plans.
In 1995, the Company adopted a stock option plan for non-employee directors. The
maximum number of shares which may be granted under the plan is 265,000 shares,
of which 29,500 were granted in 1997 at $31.63 per share, 20,000 were granted in
1996 at $20.88 per share and 18,000 granted in 1995 at $13.63 per share. 3,500
shares had been issued upon exercise of the stock options cumulatively through
December 31, 1997.
The Company has adopted various stock option and stock appreciation rights
plans for key employees. These plans include a stock option plan adopted in 1996
(the "1996 Option Plan") and a stock option plan adopted in 1986 (the "1986
Option Plan"). The 1986 Option Plan, as amended, authorized the issuance of
1,670,000 shares of common stock, substantially all of which have been granted.
The 1996 Option Plan authorizes grants of options to purchase up to 1,250,000
shares of common stock. Stock options are granted with an exercise price equal
to the stock's fair market value at the date of the grant and expire 10 years
from the date of the grant. At December 31, 1997, there were 626,475 additional
shares available for grant under the 1996 Option Plan. The Company issued no
stock appreciation rights in 1997 or 1996.
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $12.42, $7.91 and $7.04 on the date of the grants using
the Black Scholes option-pricing model with the following average assumptions:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Expected dividend yield 2.50% 2.50% 2.50%
Risk-free interest rate 5.82% 6.06% 5.84%
Expected life 5.00 Years 5.56 Years 5.63 Years
Volatility 32.9% 34.5% 36.6%
- --------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no cost has been recognized for its stock options in the
financial statements. Had the Company determined cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the proforma amounts indicated below:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net Income
As reported $73,401 $52,480 $44,486
Proforma $71,827 $51,399 $44,263
Basic Earnings per share
As reported: $ 2.64 $ 2.10 $ 1.80
Proforma $ 2.58 $ 2.05 $ 1.79
Diluted Earnings per share
As reported: $ 2.59 $ 2.06 $ 1.78
Proforma $ 2.55 $ 2.02 $ 1.77
- --------------------------------------------------------------------------------
Proforma net income reflects only stock options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating cost for stock options under SFAS No.
123 is not reflected in the proforma net income amounts presented above because
cost is reflected over the options' vesting period and cost for options granted
prior to January 1, 1995 is not considered.
Stock option activity during the periods indicated was as follows:
- --------------------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance at December 31, 1995 1,454,130 $ 13.36
Granted 366,950 23.73
Exercised 137,973 9.54
Forfeited 30,296 18.59
Expired -- --
Assumed in acquisitions 91,665 7.34
Balance at December 31, 1996 1,744,476 15.44
GRANTED 329,100 38.89
EXERCISED 373,011 11.63
FORFEITED 19,950 23.48
EXPIRED -- --
BALANCE AT
DECEMBER 31, 1997 1,680,615 $20.69
---------
- --------------------------------------------------------------------------------
45
<PAGE> 46
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The range of per share prices for outstanding and exercisable stock options at
December 31, 1997 and 1996 were as follows:
- --------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------
OPTIONS OPTIONS Options Options
RANGE OUTSTANDING EXERCISABLE Outstanding Exercisable
- --------------------------------------------------------------------------------
$ 2.75 to $10.00 247,015 247,018 391,937 391,937
$10.01 to $20.00 452,071 330,061 607,181 494,540
$20.01 to $30.00 653,629 346,951 745,358 158,429
$30.01 to $39.25 327,900 29,275 -- --
Total options 1,680,615 953,305 1,744,476 1,044,906
--------- ------- --------- -----------
Weighted
average price $20.69 $14.97 $15.44 $11.67
- --------------------------------------------------------------------------------
Employee Stock Purchase Plan.
The Company has an Employee Stock Purchase Plan covering all full-time employees
with one year of service. The maximum number of shares which may be issued under
the Employee Stock Purchase Plan is 676,000 shares. Employees have the right to
authorize payroll deductions up to 10% of their salary. As of December 31, 1997,
366,259 shares had been purchased under this plan.
Restricted Stock Plan.
In 1990, the Company adopted a Restricted Stock Plan under which $4,000 of the
annual fee payable to each non-employee Director of the Company is payable
solely in shares of Common Stock. Each member of the Board of Directors of the
Company and participating banking subsidiaries who is not a full-time employee
of the Company or any of its subsidiaries is eligible to participate. Shares
issued were 1,920, 3,180 and 3,662 in 1997, 1996 and 1995, respectively.
15. RETIREMENT AND OTHER BENEFIT PLANS
Defined Benefit Pension Plan.
The Company and its subsidiaries have noncontributory defined benefit plans
covering substantially all permanent, full-time employees. Benefits are based on
career average earnings and length of service. The Company's funding policy is
to contribute annually the maximum amount that can be deducted for federal
income tax purposes.
The following tables set forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1997 and
1996.
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of $35,372
and $34,285 $ 38,698 $ 36,161
-------- ---------
Projected benefit obligation for service
rendered to date 41,374 $ 42,628
Plan assets at fair value, primarily listed
stocks and corporate bonds (46,855) (42,331)
Plan assets (greater) less than projected
benefit obligation (5,481) 297
Unrecognized net gain (loss) from past
experience different from that assumed
and effects of changes in assumptions 6,413 (114)
Unrecognized prior service cost 316 72
Unrecognized net asset at adoption of
SFAS No. 87, net of amortization 1,565 1,814
Accrued pension cost included
in other liabilities $ 2,813 $ 2,069
-------- -------
- --------------------------------------------------------------------------------
Net pension cost for 1997, 1996 and 1995 included the following components:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost during the period $ 2,252 $ 1,667 $ 1,650
Interest cost on projected
benefit obligation 2,901 2,515 2,268
Actual return on plan assets (7,395) (3,673) (5,518)
Net amortization and deferral 3,464 693 3,158
Net periodic pension cost $1,222 $ 1,202 $ 1,558
------ ------- --------
- --------------------------------------------------------------------------------
Assumptions used to determine actuarial present value of benefit obligations
were as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
Weighted average 1997 1996 1995
- --------------------------------------------------------------------------------
Discount rate 7.00% 7.50% 7.25%
Increase in compensation levels 4.50 4.50 4.50
Expected long term return on assets 8.50 8.25 8.25
- --------------------------------------------------------------------------------
46
<PAGE> 47
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Thrift Incentive Plan.
The Company has a Contributory Thrift Incentive Plan, covering substantially all
permanent employees after completion of one year of service. The Company matches
employee contributions based on a predetermined formula and may make additional
discretionary contributions. The total expense for 1997, 1996 and 1995 was $1.2
million, $870 thousand, and $659 thousand, respectively.
Supplemental Retirement Plans.
The Company has adopted supplemental retirement plans for several key officers.
These plans were designed to offset the impact of changes in the Pension Plan
which reduced benefits for highly paid employees. The cost of these plans was
$507 thousand, $343 thousand, and $823 thousand for 1997, 1996 and 1995,
respectively.
Postretirement Benefits Other Than Pensions.
The Company and its subsidiaries sponsor postretirement benefit programs which
provides medical coverage and life insurance benefits to employees and directors
who meet minimum age and service requirements.
The Company and its subsidiaries recognize costs related to post retirement
benefits under the accrual method, which recognizes costs over the employee's
period of active employment. The impact of adopting SFAS No. 106 is being
amortized over a twenty year period beginning January 1, 1993.
The following reconciles the program's funded status with amounts recognized
in the Company's Consolidated Balance Sheet at December 31, 1997 and 1996:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $4,848 $ 4,146
Fully eligible active program participants 130 427
Other active program participants 995 1,476
5,973 6,049
Plan assets -- --
Accumulated postretirement benefit
obligation in excess of plan assets 5,973 6,049
Unrecognized net gain 844 1,067
Unrecognized prior service cost (4,257) (4,764)
Accrued postretirement benefit cost
included in other liabilities $ 2,560 $ 2,352
------- -------
- --------------------------------------------------------------------------------
Net postretirement benefit cost for the year ended December 31, 1997, 1996 and
1995 included the following components:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 58 $ 127 $ 100
Interest cost 418 417 469
Amortization of accumulated
postretirement obligation 258 263 313
Net periodic postretirement
benefit cost $734 $ 807 $ 882
---- ----- -----
- --------------------------------------------------------------------------------
16. Fair Value of Financial Instruments
The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value estimates are made as of a specific point in
time based on the characteristics of the financial instruments and relevant
market information. Where available, quoted market prices are used. In other
cases, fair values are based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and judgments made regarding risk
characteristics of various financial instruments, discount rates, estimates of
future cash flows, future expected loss experience and other factors. Changes in
assumptions could significantly affect these estimates. Derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in an immediate sale of the instrument. Also,
because of differences in methodologies and assumptions used to estimate fair
values, the Company's fair values should not be compared to those of other
banks.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the Company. For certain assets and
liabilities, the information required under SFAS No. 107 is supplemented with
additional information relevant to an understanding of the fair value. Also,
fair values are presented for certain assets that are not financial instruments
under the definition in SFAS No. 107.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments and certain non-financial
instruments:
CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS,
INTEREST-BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD. For these cash and
cash equivalents, which have maturities of 90 days or less, the carrying amounts
reported in the balance sheet approximate fair values.
SECURITIES AVAILABLE FOR SALE AND LOANS HELD FOR SALE. Fair values are based
on quoted bid market prices, where available. Where quoted market prices for an
instrument are not available, fair values are based on quoted market prices of
similar instruments, adjusted for differences between the quoted instruments and
the instrument being valued. Fair values are calculated based on the value of
one unit without regard to premiums or discounts that might result from selling
all of the Company's holdings of a particular security in one transaction.
Loans and leases. The fair values of commercial, commercial real estate,
residential real estate, and certain consumer loans and leases are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of
credit the carrying value approximates fair value.
For nonperforming loans and certain loans where the credit quality of the
borrower has deteriorated significantly, fair values are estimated by
discounting cash flows at a rate commensurate with the risk associated with
those cash flows.
47
<PAGE> 48
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage
servicing rights is based on the expected present value of future mortgage
servicing income, net of estimated servicing costs, considering market consensus
loan prepayment predictions.
DEPOSITS. The fair value of deposits with no stated maturity is equal to the
carrying amount. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered
on the deposit products of similar maturities.
The fair value estimates for deposits do not include the benefit that
results from the low-cost funding provided by the deposit liabilities compared
to the cost of alternative forms of funding ("deposit base intangibles")
BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON,
SUBORDINATED CAPITAL NOTES AND OTHER BORROWINGS. The fair value of the Company's
long-term borrowings is estimated based on quoted market prices for the issues
for which there is a market, or by discounting cash flows based on current rates
available to the Company for similar types of borrowing arrangem ents. For
short-term borrowings that mature or reprice in 90 days or less, carrying value
approximates fair value.
OFF-BALANCE SHEET INSTRUMENTS:
COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY
LETTERS OF CREDIT. In the course of originating loans and extending credit and
standby letters of credit, the Company will charge fees in exchange for its
lending commitment. While these commitment fees have value, the Company has not
estimated their value due to the short-term nature of the underlying
commitments.
FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward
commitments to sell loans reflects the value of origination fees and mortgage
servicing rights recognizable upon sale of loans net of any cost to the Company
if it fails to meet its sale obligation. Of the $660.8 million of forward sales
commitments at December 31, 1997, the Company had $360.6 million loans available
to sell at that date as well as sufficient loan originations subsequent to
December 31, 1997 to fulfill the commitments. Consequently, the Company has no
unmet sales obligation to value and due to the short-term nature of the
commitments has not estimated the value of the fees and servicing.
LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing
arrangements with investors, the Company has recourse obligation to those
serviced loan portfolios. In the event of foreclosure on a serviced loan, the
Company is obligated to repay the investor to the extent of the investor's
remaining balance after application of proceeds from the sale of the underlying
collateral. To date, losses related to these recourse arrangements have been
insignificant and while the Company cannot project future losses, the fair value
of this recourse obligation is deemed to be likewise insignificant.
A summary of the fair values of the Company's significant financial instruments
at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 345,361 $ 345,361 359,995 $ 359,995
Securities 1,268,055 1,268,055 1,045,069 1,045,069
Loans held for sale 360,631 362,397 103,270 103,790
Loans and leases 4,421,280 4,488,040 3,587,112 3,767,093
Mortgage servicing rights 50,808 54,788 33,314 35,908
Liabilities:
Deposit (with no stated maturity) 2,658,634 2,658,634 2,388,768 2,388,768
Time deposits 2,144,006 2,164,105 1,796,521 1,823,214
Borrowings 1,329,972 1,329,694 690,969 689,003
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 49
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
17. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheets 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 37,979 $ 2,401
Securities 26 --
Investment in bank subsidiaries 527,170 418,074
Goodwill and other intangibles 11,383 13,206
Amounts receivable from subsidiaries 5,087 6,331
Other assets 7,370 4,088
Total assets $589,015 $444,100
-------- --------
Liabilities and shareholders' equity
Amounts payable to subsidiaries $ 25 $188
Subordinated debentures supporting
mandatorily redeemable trust securities 107,446 6,530
Other liabilities 6,478 372
Shareholders' equity 475,066 437,010
Total liabilities and shareholders' equity $589,015 $444,100
-------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Income 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income:
Dividends from banking subsidiaries $42,271 $ 67,710 $23,007
Other operating income 3,373 625 474
Total operating income 45,644 68,335 23,481
Operating expenses:
Interest on borrowings 9,070 609 363
Amortization of intangibles 1,864 1,864 1,864
Merger related 354 37 4,958
Other operating expenses 697 907 731
Total operating expenses 11,985 3,417 7,916
Income before income taxes and equity in
undistributed net income of subsidiaries 33,659 64,918 15,565
Income tax benefit (2,362) (25) (1,492)
Income before equity in undistributed
net income of subsidiaries 36,021 64,943 17,057
Equity in undistributed net income
of subsidiaries (1) 37,380 (12,463) 27,429
Net income $ 73,401 $ 52,480 $ 44,486
-------- -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts in parenthesis represent the excess of dividends over net income
from subsidiaries.
49
<PAGE> 50
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 73,401 $ 52,480 $ 44,486
Adjustments to reconcile net income to net
Cash (used) provided by operating
activities:
Undistributed net income from subsidiaries (37,380) 12,463 (27,429)
Amortization of intangibles 1,864 1,864 1,864
Securities losses (gains) -- -- 1
(Increase) decrease in amounts
receivable from subsidiaries 1,245 3,032 (7,973)
Decrease (increase) in other assets (3,322) 549 (119)
Increase (decrease) in amounts
payable to subsidiaries (163) 56 47
Increase (decrease) in other liabilities 6,104 (1,325) 488
Other, net (3,285) (2,081) (1,021)
Net cash provided by operating activities 38,464 67,038 10,344
Cash flows from investing activities:
Reissuance of treasury stock pursuant to acquisition -- -- 11,274
Sales of available for sale securities -- 1,045 622
Purchase of available for sale securities (7) -- (622)
Capital contribution to subsidiary (55,000) (13,000) --
Net cash (used) provided by investing activities (55,007) (11,955) 11,274
Cash flows from financing activities:
Issuance of notes payable (net) 103,093 -- 7,836
Payment of notes payable (2,177) (1,306) --
Dividends paid to shareholders (21,002) (15,934) (11,307)
Treasury stock acquired (35,549) (60,342) (8,317)
Treasury stock sold 7,756 2,332 1,507
Net cash provided (used) by financing activities 52,121 (75,250) (10,281)
Net increase (decrease) in cash due from banks 35,578 (20,167) 11,337
Cash and due from banks at beginning of year 2,401 22,568 11,231
Cash and due from banks at end of year $ 37,979 $ 2,401 $ 22,568
-------- ------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure information:
Interest paid on borrowings $ 5,156 $609 $363
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 51
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
18. SUBSEQUENT EVENT (UNAUDITED)
As discussed in Note 2, the Company has entered into an agreement to merge
with CFX. The following proforma condensed consolidated balance sheet was
prepared as if the pending acquisition noted above had been completed at
December 31, 1997 and the proforma condensed consolidated statement of income
was prepared as if the pending acquisition had been completed as of January 1,
1997.
This unaudited proforma information may not be indicative of the results
that would actually have occurred if the merger had been in effect on the date
indicated or which may be obtained in the future. The proforma information does
not give effect to anticipated cost savings in connection with the Merger.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Proforma
PHFG CFX Adjustments Combined
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments $1,268,055 $ 562,735 $1,830,790
Total loans and leases, net 4,421,280 2,012,957 6,434,237
Other assets 1,106,002 298,075 1,404,077
Total assets $6,795,337 $2,873,767 $9,669,104
---------- ----------- ----------
Liabilities and equity:
Deposits $4,802,640 $1,941,996 $6,744,636
Borrowings 1,329,972 652,365 1,982,337
Other liabilities 87,659 33,689 $ 12,770(1) 134,118
Total liabilities 6,220,271 2,628,050 12,770 8,861,091
Securities of subsidiary trust 100,000 -- 100,000
Shareholders' equity 475,066 245,717 (12,770)(1) 708,013
Total liabilities and shareholders' equity $6,795,337 $2,873,767 $ -- $9,669,104
---------- ---------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Proforma
PHFG CFX Combined
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $442,212 $199,539 $641,751
Interest expense 196,023 101,252 297,275
Net interest income 246,189 98,287 344,476
Provision for loan and lease losses -- 4,548 4,548
Net interest income after provision
for loan and lease losses 246,189 93,739 339,928
Noninterest income 56,938 25,542 82,480
Noninterest expense 188,006 92,550 280,556
Income before income taxes 115,121 26,731 141,852
Income tax expense 41,720 7,797 49,517
Net income $ 73,401 $ 18,934 $ 92,335
-------- -------- --------
Earnings per share:
Basic $ 2.64 $ 0.79 $ 2.11
Diluted 2.59 0.78 2.07
Average shares outstanding (in 000's):
Basic 27,806 23,866 43,725
Diluted 28,363 24,274 44,554
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The $12.8 million reflects estimated one-time reorganization and
restructuring costs related to the Merger, net of taxes.
51
<PAGE> 52
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $124,461 $110,368 $105,460 $101,923 $90,827 $85,506 $84,085 $80,754
Interest expense 57,873 48,405 45,535 44,210 40,168 37,562 37,254 35,615
Provision for loan losses -- -- -- -- -- -- 450 450
Net interest income after
provision for loan losses 66,588 61,963 59,925 57,713 50,659 47,944 46,381 44,689
Noninterest income 18,180 14,240 12,372 12,334 9,979 9,804 9,196 9,469
Merger expenses 354 -- -- -- -- -- 4,652 453
Noninterest expenses 52,789 47,212 44,605 43,234 37,649 36,256 34,934 34,129
Income before income taxes 31,625 28,991 27,692 26,813 22,989 21,492 15,991 19,576
Income tax expense 11,628 10,385 9,904 9,803 7,450 7,300 5,848 6,970
Net income $ 19,997 $ 18,606 $ 17,788 $ 17,010 $15,539 $14,192 $10,143 $12,606
-------- -------- -------- -------- ------- ------- ------- -------
Earnings per share
Basic $ .72 $ .68 $ .64 $ .60 $ .63 $ .56 $ .40 $ .51
Diluted .71 .66 .63 .59 .62 .56 .40 .49
Cash earnings per share (1)
Basic .80 .75 .71 .67 .69 .61 .45 .54
Diluted .78 .73 .70 .65 .68 .60 .44 .53
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings before the amortization of goodwill and core deposit premiums.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Peoples Heritage Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Peoples Heritage
Financial Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Heritage
Financial Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
January 14, 1998
Boston, Massachusetts
52
<PAGE> 53
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PEOPLES HERITAGE WILLIAM J. RYAN 1,4 EVERETT W. GRAY 2,3,5 CURTIS M. SCRIBNER 1,2,5
FINANCIAL GROUP, INC. Chairman of the Board Retired Attorney Chairman, Asset Review
BOARD OF DIRECTORS President & Chief Executive Officer Real Estate Investor President
Chairman, Governance & C. M. Scribner & Company
Nominating Committee DAVIS P. THURBER
Peoples Heritage Financial Retired Chairman DANA S. LEVENSON 1,3,5
Group, Inc. Bank of New Hampshire Corp. President
President & Chief Executive Officer Quatro Realty Corp.
Peoples Heritage Bank ANDREW W. GREENE 1,3,5 Partner
Chief Executive Officer Levenson Business Group
ROBERT A. MARDEN 1,4 LegacyCo. Services, Inc.
Vice Chairman of the Board PAUL R. SHEA
Chairman, Executive/ KATHERINE M. GREENLEAF 1,3 Retired President & CEO
ALCO Committee Chairman, Human Resources Bank of New Hampshire Corp.
Attorney-at-Law Committee
Marden, Dubord, Bernier & Stevens Principal JOHN E. VEASEY
Katherine M. Greenleaf President
PAMELA P. PLUMB 1,3,4 Consulting Cedardale, Inc.
Vice Chairman of the Board
Pamela Plumb & Associates MALCOLM W. PHILBROOK, JR. 1,2,5 1. Executive/ALCO Committee
Former President - Chairman, Audit Committee 2. Audit Committee
National League of Cities Attorney & President 3. Human Resources Committee
Crockett, Philbrook & Crouch, P.A. 4. Governance & Nominating
ROBERT P. BAHRE 1 Committee
President & Chief Executive Officer 5. Asset Review Committee
New Hampshire International
Speedway
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PEOPLES HERITAGE BANK ROBERT A. MARDEN 1,3,6 EVERETT W. GRAY 1,2,3,5 WILLIAM J. RYAN 1,3,4,5
BOARD OF DIRECTORS Chairman of the Board Retired Attorney Chairman,
[PEOPLES LOGO] Attorney-at-Law Real Estate Investor President & Chief Executive Officer
Marden, Dubord, Peoples Heritage Financial
Bernier & Stevens GUY A. HARTNETT 1,3,5 Group, Inc.
President, Treasurer, Owner President & Chief Executive Officer
WILLARD B. ARNOLD III 1,3,4 One-Right Systems, Inc. Peoples Heritage Bank
Chairman, Nominating Committee President
Retired Sales Executive Lydimap Corp. DAVID M. MACMAHON 2,6
President
EARL B. AUSTIN, JR. 1,2,4,6 GALEN N. HOGAN 2,4 Gates Formed-Fibre Products, Inc.
Accountant President, Treasurer,
Earl B. Austin, JL & Assoc., P.A. Chief Executive Officer SHELTON S. WHITE, JR. 4
Hogan Tire Co. President
CHARLES BELLEGARDE, JR. 2,4,6 H.E. Callahan Construction Co.
Consultant & President MALCOLM W. PHILBROOK, JR.
Charles Bellegarde & Son, Inc. Vice Chairman of the Board MEG BAXTER
Chairman, Executive Committee President
PETER B. CHAPMAN 2,3,5,6 Chairman, Liquidity & Funds United Way of Greater Portland
President & Chief Management Committee
Executive Officer Chairman, Trust Committee CYNTHIA FOSS BOWMAN, M.D.
Paris Farmers Union Attorney & President Medical Director, Clinical Lab
Crockett, Philbrook & Crouch P.A. Maine General Medical Center
MADELEINE R. FREEMAN 2
Chairman CURTIS M. SCRIBNER 1,4,5 1. Executive Committee
Audit Committee Chairman 2. Audit Committee
Retired Executive Director Asset Review Committee 3. Nominating Committee
Eastern Area Agency on Aging Principal 4. Liquidity & Funds Management
C.M. Scribner & Company Committee
5. Asset Review Committee
6. Trust Committee
</TABLE>
53
<PAGE> 54
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PEOPLES HERITAGE WILLIAM J. RYAN GLENN H. MCALLISTER DAVID D. HINDLE
FINANCIAL GROUP, INC. President & Chief Executive Vice President Executive Vice President
SENIOR MANAGEMENT Executive Officer Residential and Consumer Family Bank
Lending
PETER J. VERRILL, CPA CAROL L. MITCHELL, ESQ.
Executive Vice President & WENDY P. SUEHRSTEDT Executive Vice President
Chief Operating Officer & Executive Vice President General Counsel,
Chief Financial Officer Retail Delivery Clerk & Secretary
JOHN W. FRIDLINGTON R. SCOTT BACON MARK H. LAWLER
Executive Vice President Executive Vice President Senior Vice President
Commercial Lending Bank of New Hampshire Commercial Workout
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PEOPLES HERITAGE WILLIAM J. RYAN ANNE T. DUNNE THEODORE N. SCONTRAS
SENIOR MANAGEMENT President & Chief President Senior Vice President
Executive Officer Heritage Investment Public Finance
Planning Services
GLENN H. MCALLISTER STEPHEN J. BOYLE
Executive Vice President NORMAND J. ALBERT Senior Vice President
Residential and Consumer Senior Vice President Chief Financial Officer
Lending Commercial Lending
CYNTHIA H. HAMILTON
RICHARD S. VAIL ROGER C. LEVESQUE Senior Vice President
Executive Vice President Senior Vice President Human Resources
Commercial Lending Commercial Lending
ELIZABETH K. WARN
CAROL L. MITCHELL, ESQ. THOMAS P. HOGAN Senior Vice President
Executive Vice President & Senior Vice President Retail Mortgage
General Counsel Consumer Lending
Legal Affairs, Human Resources, GARY L. ROBINSON
Facilities JOSEPH W. HANSON, JR. Senior Vice President
Senior Vice President Trust and Investment Group
MARY A. SCHNOBRICH Operations
Executive Vice President HALL THOMPSON
Retail Banking MAURICE C. GALLANT, JR. Senior Vice President
Senior Vice President Investments
Audit
LEIGH A. BAGLEY
Senior Vice President
Marketing
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
OXFORD BANK & TRUST SENIOR MANAGEMENT EDWARD L. DILWORTH, JR. NEIL R. ELDER
A DIVISION OF PEOPLES HERITAGE BANK Division President Senior Vice President
</TABLE>
54
<PAGE> 55
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PEOPLES HERITAGE ASHLAND GRAY SANFORD
BANKING CENTERS 10 Main Street Gray Plaza, Rt. # 26 Lower Main Street
273 Main Street
AUBURN HOULTON
223 Center Street 6 North Street SCARBOROUGH
Great Falls Plaza 4 Shop 'N Save Drive
600 Center Street (Supermarket) KENNEBUNK
56 Portland Road SEARSPORT
AUGUSTA Main Street
101 Western Ave KITTERY
30 State Road SOUTH PORTLAND
BANGOR Millcreek Shopping Center
1067 Union Street LEWISTON 9 Market Street
74 Hammond Street 217 Main Street 250 Maine Mall Road
353 Main Street (Supermarket) 664 Main Street
46 Springer Drive (Supermarket) 790 Lisbon Street STANDISH
111 Ossipee Trail (Supermarket)
BIDDEFORD LIMESTONE
299 Elm Street 222 Main Street THOMASTON
510 Alfred Street (Supermarket) 115 Main Street
LINCOLN
BREWER Lincoln Plaza VAN BUREN
508 Wilson Street 29 Main Street
LISBON FALLS
BRIDGTON 38 Main Street WASHBURN
84 Main Street 12 Main Street
MARS HILL
BRUNSWICK 37 Main Street WATERVILLE
35 Elm Street (Supermarket) 182 Main Street
Merrymeeting Plaza (Supermarket) NEWPORT Shaw's Plaza (Supermarket)
99 Main Street
CAMDEN WESTBROOK
89 Elm Street NORTH WINDHAM 835 Main Street
756 Roosevelt Trail
CARIBOU Shaw's Supermarket on YARMOUTH
Downtown Mall Route #302 Shop 'N Save Plaza,
U.S. Route #1
EAGLE LAKE OAKLAND
Church Street 11 Main Street YORK
127 Long Sands Road
EASTON PITTSFIELD
Main Street 60 Main Street ----------------------------
ELLSWORTH PORTLAND OXFORD BANK & TRUST
204 Main Street One Portland Square BANKING CENTERS
481 Congress Street
FAIRFIELD Westgate Shopping Center CASCO
112 Main Street 449 Forest Avenue Leach Hill Road
883 Forest Avenue
FALMOUTH Northgate Shopping Center MECHANIC FALLS
200 U.S. Route #1 80 Lewiston Street
PRESQUE ISLE
FARMINGTON 551 Main Street
60 Main Street OXFORD
Mt Blue Shopping Center (Drive up) ROCKLAND 1586 Main Street
Shop 'N Save Plaza (Supermarket) 34 School Street
SOUTH PARIS
FORT FAIRFIELD SACO 45 Main Street
206 Main Street Saco Valley
Shopping Center (Supermarket) WEST PARIS
FORT KENT 180 Main Street 233 Main Street
Pleasant Street Plaza
</TABLE>
55
<PAGE> 56
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BANK OF DAVIS P. THURBER RALPH GABARRO JOHN E. MENARIO
NEW HAMPSHIRE Chairman of the Board Chief Executive Officer Special Assistant to the President
BOARD OF DIRECTORS Mayo-Regional Hospital, Peoples Heritage Financial
R. SCOTT BACON Quorum Health Resources, Inc. Group, Inc.
[BANK OF NEW President & Chief Executive Officer
HAMPSHIRE LOGO] PETER J. GRIFFIN JOHN M. PARSONS
ARTHUR E. COMOLLI, DMD President Treasurer
General Dentistry Great Bay Marine, Inc. MH Parsons & Son Lumber Co.
RAYMOND G. COTE DONALD G. HAYES PETER PRUDDEN, JR.
President (Retired) President Senior Account Executive
Harvey Construction Co., Inc. Ricci Supply Company, Inc. Moore Business Forms, Inc.
RAYMOND J. CRETEAU DIANA JURIS PAUL R. SHEA
President (Retired) Vice President and Retired President & Chief
Riverside Millwork Co., Inc. Chief Operating Officer Executive Officer
Nashua Motor Express Bank of New Hampshire
JOSEPH A. DESMOND
Chairman & Chief Executive Officer DANA S. LEVENSON GERRY S. WEIDEMA
The Concord Group Insurance President Partner
Companies Quatro Realty Corp. Weidema & Lavin, CPAs
Partner
Levenson Business Group
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BANK OF R. SCOTT BACON MAUREEN F. DONOVAN STEVEN C. WEBB
NEW HAMPSHIRE President & CEO Senior Vice President Senior Vice President
SENIOR OFFICERS Human Resources Commercial Lending
HAROLD R. ACRES
Senior Executive Vice President THOMAS FURLONG DONNA F. CLARICO
Chief Lending Officer Senior Vice President Senior Vice President
Trust Services Financial Services
MARK A. COLLINS
Executive Vice President CORNEILUS J. JOYCE PAUL E. DUFFY
Marketing & Branch Senior Vice President Senior Vice President
Administration Consumer & Mortgage Banking Commercial Lending
ROBERT B. ESAU DAVID H. MCARDLE MARY W. MCLAUGHLIN
Executive Vice President Senior Vice President Senior Vice President
Trust Services Commercial Lending Commercial Lending
CAROLYN A. CLOUTIER ROBERT J. MCDONALD
Senior Vice President Senior Vice President
Commercial Lending Loan Administration
</TABLE>
56
<PAGE> 57
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BANK OF BARRINGTON HAMPTON NEWMARKET
NEW HAMPSHIRE Route 125 & Province Road 853 Lafayette Road 72 Exeter Street
LOCATIONS 40 High Street
BEDFORD NORTH CONWAY
184 Route 101 HILLSBOROUGH Routes 16 & 302
School Street Mountain Valley Mall
BRISTOL
Central Square HOOKSETT NORTHWOOD
1288 Hooksett Road Route 4
CONCORD
143 North Main Street HUDSON PLYMOUTH
216 Loudon Road 80 Derry Road Tenney Mt. Highway (Supermarket)
CONTOOCOOK LITTLETON PORTSMOUTH
884 Main Street 76 Main Street Two Harbour Place
325 State Street
CONWAY MANCHESTER Market Basket Plaza,
51 White Mountain Highway 300 Franklin Street 1500 Lafayette Road
Two South Beech Street
DOVER 293 South Main Street ROCHESTER
353 Central Ave 1255 South Willow 1 Merchants Plaza,
Shaw's Plaza, 70 Bay Street Intersection Rts. 125 & 16B
845 Central Ave
MERRIMACK RYE
EPSOM 300 Daniel Webster Highway 500 Washington Road
Epsom Circle Harris Pond,
32 Daniel Webster Highway STRATHAM
FRANKLIN 28 Portsmouth Avenue
952 Center Street (Supermarket) NASHUA
191 Main Street SUNCOOK
GLEN Nashua Mall 50 Glass Street
Junction Routes 16 & 302 300 Main Street
4 Northwest Boulevard WEST OSSIPEE
GOFFSTOWN Daniel Webster Plaza, Junction Routes 16 & 25
3 Elm Street 225 Daniel Webster Highway
GREENLAND NEWINGTON
650 Portsmouth Avenue 2033 Woodbury Avenue
</TABLE>
57
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PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FAMILY BANK DAVID D. HINDLE FRANCIS J. BERUBE JOHN F. REILLY, JR.
BOARD OF DIRECTORS Chairman of the Board President & Treasurer President & Chief Executive Officer
President & Chief Executive Westville Enterprises, Inc. Fred C. Church, Inc.
[FAMILY Officer
BANK NELSON D. BLINN NICOLA S. TSONGAS
LOGO] CHARLES GEORGE, JR. Principal Former Partner
Partner Blinn & Farrell, CPAs Tsongas & Murphy, P.C.
Bellavance, Iarrobino, Wren,
George, Inc. LAWRENCE J. EWING, JR. L. DAVID VINCOLA
Retired Principal
KENNETH L. PAUL Lyman Associates, Management
Vice President WILLIAM J. LETOILE, JR. Consultants
Process Engineering, Inc. President & Treasurer
Letoile Roofing Co., Inc.
JOHN E. VEASEY
President DONALD R. MAIN
Cedardale, Inc. President
Don Main Auto Center, Inc.
RICHARD L. BAILLY
Executive Vice President
UFP Technologies, Inc.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FAMILY BANK DAVID D. HINDLE DAVID J. LAFLAMME RONALD G. TROMBLEY
SENIOR OFFICERS President & Chief Executive Senior Vice President Senior Vice President
Officer Commercial Retail
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FAMILY BANK ----------------------------- ------------------------
LOCATIONS MASSACHUSETTS GEORGETOWN NEW HAMPSHIRE
BRANCH OFFICES 63 Central Street BRANCH OFFICES
HAVERHILL GROVELAND HAMPSTEAD
Main Office, 280 Main Street Main Street,
153 Merrimack Street Route 121
Stateline, LOWELL
102 Plaistow Road, Route 125 45 Central Street, KINGSTON
Whittier Regional Vo-Tech HS, 32 Mammoth Road, Carriage Towne Plaza
115 Amesbury Line Road 350 Westford Street
PLAISTOW
ANDOVER MIDDLETON 47 Plaistow Road
77 Main Street 230 South Main Street,
Route 114 SEABROOK
BOXFORD 270 Lafayette Road
7 Elm Street TOPSFIELD
16 Main Street,
BRADFORD Masconomet Regional
860 South Main Street High School,
20 Endicott Road
CHELMSFORD
41 Drum Hill Road TYNGSBORO
66-2 Drum Hill Road (Supermarket) One Pondview Place,
Middlesex Road
DRACUT
1255 Bridge Street WEST PEABODY
636 Lowell Street (Supermarket)
</TABLE>
58
<PAGE> 59
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SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The 1998 Annual Meeting of the Shareholders of Peoples Heritage Financial
Group, Inc. will be held at 10:30 a.m. on Tuesday, April 28, 1998 at the
Portland Marriott at Sable Oaks, 200 Sable Oaks Drive, South Portland, Maine.
CORPORATE HEADQUARTERS
One Portland Square
Portland, Maine
Mailing Address:
P.O. Box 9540
Portland, ME 04112-9540
Contact: Brian S. Arsenault, Vice President,
Corporate Communications
(207)761-8517
1-800-462-3666 Outside Maine
1-800-462-6606 Outside Greater Portland
or
Peter J. Verrill
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
(207)761-8507
STOCK LISTING
Peoples Heritage Financial Group, Inc. is traded over the counter on the
NASDAQ National Market System under the symbol: PHBK.
FORM 10-K AND OTHER REPORTS
Peoples Heritage will send a copy of its 1997 Annual Report on Form 10-K to
shareholders upon request. Requests should be addressed to Investor Relations at
the Corporate Headquarters.
TRANSFER AGENT
Shareholder inquiries regarding change of address or title should be directed
to:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: 718-921-8206
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110-2371
RESEARCH COVERAGE
Recent research coverage on Peoples Heritage Financial Group, Inc. is available
from: BTAlex.Brown Inc., Donaldson, Lufkin & Jenrette, First Albany Corp.,
Fox-Pitt, Kelton, Inc., Friedman Billings Ramsey & Co., Johnston, Lemon & Co.,
Keefe, Bruyette & Woods, Inc., Legg Mason Wood Walker, Inc., Lehman Brothers,
Inc., Maine Securities Corp., Merrill, Lynch, Pierce, Fenner, Southeast Research
Partners Inc., Tucker Anthony Inc.,
MARKET MAKERS
The following companies have generally been market makers for Peoples Heritage
Financial Group, Inc. Common Stock as of December 31, 1997:
Advest, Inc.
Bear, Stearns & Co., Inc.
BTAlex.Brown Inc.
Carl P. Sherr & Co.
Capital Resources, Inc.
Fox-Pitt Kelton, Inc.
Friedman Billings Ramsey & Co.
Herzog, Heine, Geduld, Inc.
Johnston, Lemon & Co.,
Keefe, Bruyette & Woods, Inc.
Knight Securities, L.P.
Legg Mason Wood Walker, Inc.
Lehman Brothers, Inc.
Macallister Pitfield Mackay
Merrill Lynch, Pierce, Fenner
Nash Weiss/Div. of Shatkin Inv.
PaineWebber, Inc.
Ryan Beck & Co., Inc.
Sherwood Securities Corp.
Smith Barney Salomon Brothers
Southeast Research Partners, Inc.
Troster Singer Corp.
Tucker Anthony Incorporated
Weeden and Co., Inc.
- --------------------------------------------------------------------------------
COMMON STOCK PRICES
Market prices for Peoples Heritage Financial Group, Inc.'s common stock and
dividends declared per quarter during 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DIVIDENDS DECLARED MARKET PRICES
1997 QUARTERS PER SHARE HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FIRST $.18 $32 1\2 $25 7\8
SECOND .19 38 26
THIRD .21 43 1\8 36
FOURTH .22 47 5\8 37 7\8
1996 Quarters
- --------------------------------------------------------------------------------
First $.17 $22 3\4 $19
Second .17 22 1\4 19 3\8
Third .17 23 5\8 19
Fourth .18 28 5\8 22 1\2
- --------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, the Company had approximately 5,765 shareholders of
record and 27,737,299 shares outstanding. These numbers do not reflect the
number of individuals or institutional investors holding stock in nominee name
through banks, brokerage firms and others.
<PAGE> 60
Peoples Heritage Financial Group, Inc.
One Portland Square
Post Office Box 9540
Portland, Maine 04112-9540
<PAGE> 1
EXHIBIT 21
Information relating to certain of the subsidiaries of Peoples Heritage
Financial Group, Inc. is set forth below. All of the indicated subsidiaries are
directly or indirectly wholly-owned by Peoples Heritage Financial Group, Inc.
Direct Subsidiaries:
Name Jurisdiction of Incorporation
---- -----------------------------
Peoples Heritage Bank Maine
Bank of New Hampshire Corporation New Hampshire
Peoples Heritage Merger Corp. Maine
Peoples Heritage Capital Trust I Delaware
Indirect Subsidiaries:
Name Jurisdiction of Incorporation
---- -----------------------------
Bank of New Hampshire(1) New Hampshire
Family Bank, FSB(2) United States
Heritage Investment Planning Group, Inc. (3) Maine
Peoples Heritage Leasing Corp. (3) Maine
Peoples Heritage Mortgage Company(3) Maine
MPN Holdings (holding company for Maine
Morse Payson & Noyes) (3)
- -------------------
(1) Subsidiary of Bank of New Hampshire Corporation.
(2) Subsidiary of Peoples Heritage Merger Corp.
(3) Subsidiary of Peoples Heritage Bank.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Peoples Heritage Financial Group, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-22205, 33-22206, 33-80310, 333-17467 and 333-46367) on Form S-8 of Peoples
Heritage Financial Group, Inc. of our report, dated January 14, 1998,
incorporated by reference in the December 31, 1997 Annual Report on Form 10-K
of Peoples Heritage Financial Group, Inc.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 339,270
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,091
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,268,055
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,489,365
<ALLOWANCE> 68,085
<TOTAL-ASSETS> 6,795,337
<DEPOSITS> 4,802,640
<SHORT-TERM> 1,329,972
<LIABILITIES-OTHER> 87,659
<LONG-TERM> 0
100,000
0
<COMMON> 286
<OTHER-SE> 475,066
<TOTAL-LIABILITIES-AND-EQUITY> 6,795,337
<INTEREST-LOAN> 366,029
<INTEREST-INVEST> 76,183
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 442,212
<INTEREST-DEPOSIT> 148,803
<INTEREST-EXPENSE> 47,220
<INTEREST-INCOME-NET> 246,189
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 150
<EXPENSE-OTHER> 188,006
<INCOME-PRETAX> 115,121
<INCOME-PRE-EXTRAORDINARY> 115,121
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,401
<EPS-PRIMARY> 2.64
<EPS-DILUTED> 2.59
<YIELD-ACTUAL> 4.67
<LOANS-NON> 42,645
<LOANS-PAST> 8,355
<LOANS-TROUBLED> 1,187
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 67,488
<CHARGE-OFFS> 16,287
<RECOVERIES> 9,523
<ALLOWANCE-CLOSE> 68,085
<ALLOWANCE-DOMESTIC> 68,085
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
