<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
July 23, 1998
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(Date of earliest event reported)
Peoples Heritage Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Maine 0-16947 01-0437984
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
P.O. Box 9540, One Portland Square, Portland, Maine 04112-9540
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(Address of principal executive offices) (Zip Code)
(207) 761-8500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
As previously reported by Peoples Heritage Financial Group, Inc. (the
"Company") in its Current Report on Form 8-K, filed on April 22, 1998, the
Company completed its acquisition of CFX Corporation ("CFX") on April 10, 1998.
The acquisition was accounted for as a pooling of interests for accounting and
financial reporting purposes.
Included under Item 7 of this Form 8-K are (i) supplemental financial
information, including restated consolidated financial statements, as of
December 31, 1997 and 1996 and for the three years ended December 31, 1997 and
(ii) supplemental financial information, including restated consolidated
financial statements, as of March 31, 1998 and for the three months ended March
31, 1998 and 1997, in each case giving retroactive effect to the acquisition of
CFX for all periods presented. The supplemental consolidated financial
statements will become, in all material respects, the historical financial
statements of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Not applicable.
(b) Not applicable.
(c) The following exhibits are included with this Report:
Exhibit 23 Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedules at December 31, 1997
and March 31, 1998
Exhibit 99(a) Supplemental financial information as of
December 31, 1997 and 1996 and for the three
years ended December 31, 1997
Exhibit 99(b) Supplemental financial information as of
March 31, 1998 and for the three months ended
March 31, 1998 and 1997
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date: July 23, 1998 By: /s/ Peter J. Verrill
--------------------------------------
Name: Peter J. Verrill
Title: Executive Vice President, Chief
Financial Officer and Treasurer
<PAGE> 4
INDEX TO EXHIBITS
Exhibit 23 Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedules at December 31, 1997 and
March 31, 1998
Exhibit 99(a) Supplemental financial information as of December 31,
1997 and 1996 and for the three years ended
December 31, 1997
Exhibit 99(b) Supplemental financial information as of March 31,
1998 and for the three months ended March 31, 1998
and 1997
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the 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. (the "Company") and the
Registration Statement on Form S-3 (No. 333-34931) of the Company of our report,
dated July 3, 1998, relating to the supplemental consolidated balance sheets of
the Company as of December 31, 1997 and 1996 and the related supplemental
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,
which report appears in the Current Report on Form 8-K of the Company dated
July 21, 1998.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
July 13, 1998
<PAGE> 1
EXHIBIT 99(a)
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
Page
----
Selected Supplemental Consolidated Financial Data 1
Management's Discussion and Analysis
of Financial Condition and Results of Operations 3
Supplemental Consolidated Balance Sheets 20
Notes to Supplemental Consolidated Financial Statements 25
Report of Independent Auditor 48
<PAGE> 2
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Share Data) 1997 1996 % Change 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C>
RESULTS FOR THE YEAR
Net interest income $ 344,476 $ 279,295 23% $ 251,897 $ 223,737 $ 204,082
Provision for loan and lease losses 4,548 5,185 (12) 8,044 6,996 28,077
Non-interest income (excluding
securities transactions) 79,783 57,423 39 46,656 41,625 42,871
Securities transactions 2,697 3,287 (18) 2,499 401 1,183
Non-interest expense (excluding
special charges) 261,965 209,716 25 188,573 186,287 181,071
Special charges (1) 18,591 9,627 93 4,958 559 300
Net income 92,335 76,033 21 66,040 50,785 35,316
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SHARE DATA
Earnings per share:
Basic $ 1.06 $ 0.94 13% $ 0.82 $ 0.64 $ 0.46
Diluted 1.04 0.92 13 0.80 0.63 0.46
Earnings per share (excluding
special charges) (1):
Basic 1.20 1.03 17 0.86 0.65 0.46
Diluted 1.18 1.01 17 0.85 0.64 0.46
Dividends per share 0.46 0.34 35 0.29 0.18 0.11
Book value per share 8.23 7.71 7 7.24 6.45 6.25
Tangible book value per share 6.79 6.78 0 6.84 6.08 5.83
Stock price:
High 23.82 14.32 66 11.44 7.57 6.25
Low 12.94 9.50 36 5.88 5.07 4.07
Close 23.00 14.00 64 11.38 6.00 6.00
Basic weighted average shares outstanding 87,449,885 81,263,004 8 80,314,906 79,751,952 76,596,976
Diluted weighted average shares outstanding 89,180,826 82,729,714 8 82,105,692 80,863,602 77,567,806
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KEY PERFORMANCE RATIOS
Return on average assets 1.09% 1.15% (5%) 1.13% 0.92% 0.67%
Return on average assets (excluding
special charges) (1) 1.25 1.27 (2) 1.19 0.93 0.67
Return on average equity (2) 13.29 12.69 5 12.04 9.97 7.56
Return on average equity (excluding
special charges) (1) (2) 15.17 13.99 8 12.71 10.12 7.60
Net interest margin (2)(3) 4.45 4.56 (2) 4.64 4.40 4.21
Average equity to average assets 8.23 9.05 (9) 9.35 9.19 8.83
Efficiency ratio (4) 59.78 62.28 (4) 63.16 70.20 73.32
Tier 1 leverage capital ratio 7.51 8.56 (12) 9.14 8.93 8.77
Dividend payout ratio 43.63 38.75 13 35.69 28.49 24.14
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
AVERAGE BALANCES
Assets $8,439,645 $6,618,692 28% $5,864,498 $5,542,649 $5,291,261
Total loans and leases, net 5,923,445 4,692,204 26 3,986,530 3,661,200 3,575,833
Deposits 6,138,887 5,094,826 20 4,604,675 4,387,601 4,407,759
Earning assets 7,776,991 6,171,913 26 5,479,306 5,124,291 4,885,408
Shareholders' equity 694,580 599,015 16 548,331 509,136 467,328
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AT YEAR END
Total loans and leases, net $6,434,238 $5,161,179 25% $4,024,307 $3,740,024 $3,420,416
Debt and equity securities, net (5) 1,830,942 1,564,647 17 1,307,767 1,305,269 1,356,368
Total assets 9,668,242 7,767,655 24 6,168,281 5,673,436 5,494,810
Deposits 6,747,419 5,936,430 14 4,834,969 4,426,847 4,457,219
Borrowings 1,982,190 1,042,312 90 674,694 670,829 450,637
Shareholders equity 720,783 676,847 6 586,500 515,423 495,522
Common shares outstanding (thousands) 87,585 87,760 0 81,022 79,960 79,274
Nonperforming assets (6) 69,427 62,266 13 67,394 89,295 145,651
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</TABLE>
(1) Special charges consist of merger related expenses and charges related to
CFX Funding. See Note 9 to the Supplemental Consolidated Financial
Statements.
(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, special charges
and net securities gains.
(5) All securities were classified as available for sale at December 31, 1997,
1996 and 1995, except for $28.2 million, $104.7 million and $164.7 million
of securities which were classified as held to maturity at such dates,
respectively.
(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.
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<PAGE> 4
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On April 10, 1998, Peoples Heritage Financial Group, Inc. completed its
merger with CFX Corporation ("CFX"). The merger was accounted for as a pooling
of interests and accordingly all related financial information has been restated
for all periods presented. In May 1998, the Company completed a 2-for-1 stock
split of its Common Stock. All financial data included in the current report on
Form 8-K reflects the impact of the merger and stock split.
GENERAL
Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank
holding company which conducts business from its headquarters in Portland, Maine
and, as of December 31, 1997, 199 offices located throughout Maine, New
Hampshire and northern and central Massachusetts. Based on $9.7 billion of total
assets at December 31, 1997, the Company is the largest bank holding company
headquartered in northern New England and the fifth largest bank holding company
headquartered in New England.
The Company offers a broad range of commercial and consumer banking services
and products as well as trust, investment advisory and insurance brokerage
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
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
offices throughout New Hampshire. At December 31, 1997, BNH had consolidated
assets of $4.5 billion and consolidated shareholder's equity of $319 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 $1.5 billion and consolidated shareholder's equity of
$140 million. Each of PHB, BNH and Family is a member of the Bank Insurance Fund
("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC").
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 Supplemental Consolidated
Financial Statements and related notes should be read in conjunction with this
review. Certain amounts in years prior to 1997 have been reclassified to conform
to the 1997 presentation.
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. In
addition to keeping loans for its own portfolio, the Company sells loans in the
secondary market. The Company also invests in mortgage-backed securities and
securities issued by the United States Government and agencies thereof, as well
as other securities. In addition, the Company engages in trust, investment
advisory and insurance brokerage activities 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, insurance brokerage services and
mortgage banking operations and controlling the growth of noninterest expenses.
It is also part of the business strategy of the Company to supplement internal
growth with targeted acquisitions of other banking or thrift 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
Note 2 to the Supplemental Consolidated Financial Statements and "Acquisitions"
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 [Illegible]
any projections regarding future performance which may be made by others.
Acquisitions
On April 10, 1998, the Company completed the acquisition of CFX Corporation
("CFX"). The acquisition was effected by means of the merger of CFX with and
into the Company. Upon consummation of such Merger, each share of CFX common
stock outstanding immediately prior thereto, other than dissenting shares, was
converted into the right to receive 0.667 of a share of Common Stock of the
Company. Upon consummation of the acquisition, CFX's New Hampshire-based bank,
CFX Bank, was merged into BNH, and CFX's Massachusetts-based banks, Safety Fund
National Bank and Orange Savings Bank, were merged into Family.
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<PAGE> 5
On August 29, 1997, CFX acquired Portsmouth Bank Shares, Inc. ("Portsmouth")
and Community Bankshares, Inc. ("Community"). Upon acquisition, Portsmouth's
5,907,242 outstanding shares of common stock and Community's 2,510,314
outstanding shares of common stock were converted into an aggregate of
10,806,298 shares of CFX common stock. Portsmouth was a New Hampshire
corporation and its subsidiary, Portsmouth Savings Bank, was a New Hampshire
state-chartered savings bank headquartered in Portsmouth, New Hampshire.
Portsmouth Savings Bank was merged into CFX Bank as part of the transaction.
Community was a New Hampshire corporation and its bank subsidiaries, Concord
Savings Bank, a New Hampshire state-chartered savings bank, and Centerpoint
Bank, a New Hampshire state-chartered commercial bank, were merged into CFX Bank
as part of the transaction. The CFX, Portsmouth and Community mergers were
accounted for by the pooling-of-interests method of accounting and, accordingly,
the financial information for all periods presented has been restated to present
the combined financial condition and results of operations as if the mergers had
been in effect for all periods presented.
In the fourth quarter of 1997, the Company completed two acquisitions. The
Company purchased Atlantic Bancorp ("Atlantic"), the parent company of Atlantic
Bank N.A. 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, Noyes Insurance.
The transaction was effected through the exchange of MPN stock for 445,678
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 10,960,670 shares of the Company's Common Stock issued in connection with
the acquisition of Family Bancorp, including 5,000,000 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 Supplemental
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 Supplemental 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.
Special Charges
Merger expenses amounted to $11.4 million, $9.6 million and $5.0 million
during 1997, 1996, and 1995, respectively on a pre-tax basis.
CFX operated a small-ticket lease financing and securitization business
through CFX Funding. CFX Funding's strategy was to increase the availability of
credit to a select group of lease originators (lessors) while controlling the
risk inherent in lease portfolios through credit enhancements. Warehouse lines
of credit provided by CFX Bank to these originators are typically paid down
every 90 to 180 days through securitization or sales of the various lease
portfolios. In the fourth quarter of 1997, a $7.2 million pretax charge to
earnings was recorded in connection with the resolution of a dispute between CFX
Funding and a credit insurer regarding the origination and servicing by CFX
Funding of certain equipment leases held in four securitized leased pools, and
CFX decided to discontinue future operations of CFX Funding with respect to its
lease securitization business. See Note 9 to the Supplemental Consolidated
Financial Statements for further information.
Economic Conditions in Northern New England
The Company believes that Maine, New Hampshire, northern Massachusetts and
New England in general have witnessed steady 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.
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<PAGE> 6
OVERVIEW
The Company reported net income of $92 million or $1.04 per diluted share in
1997, as compared to $76 million or $0.92 per diluted share in 1996 and $66
million or $0.80 per diluted share in 1995. Return on average assets amounted to
1.09% in 1997, as compared to 1.15% in 1996 and 1.13% during 1995, and return on
average equity amounted to 13.29% in 1997, as compared to 12.69% in 1996 and
12.04% 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, which on a
fully-taxable equivalent basis amounted to $346 million, $281 million and $254
million for the years ended 1997, 1996 and 1995, respectively.
Excluding special charges, the Company earned $1.18 per diluted share in
1997 compared to $1.01 per diluted share during 1996 and $0.85 during 1995.
Return on average assets excluding special charges was 1.25% in 1997 compared to
1.27% during 1996 and 1.19% during 1995. Return on average equity excluding
special charges was 15.17%, 13.99%, and 12.71% for the years ended December 31,
1997, 1996, and 1995 respectively.
Total revenues increased 26% in 1997 and 12% in 1996. Net interest income
increased 23% 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 4.64% in 1995 to 4.56% in 1996, to 4.45% in 1997. The declines in net
interest margin were attributable to slight decreases in yields on loans and
leases compounded with increased borrowing costs. Noninterest income increased
39% during 1997 compared to an increase of 23% in 1996, primarily as a result of
increases in customer services and mortgage banking income.
Noninterest expenses, excluding distributions on the securities of a
subsidiary trust and special charges, increased 21% during 1997 as compared to
an 11% 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 using the purchase
accounting method. The increase in 1996 was attributable to salary and data
processing expenses from the acquisitions in those years.
EARNING ASSETS
Average earning assets increased $1.6 billion or 26% in 1997, mostly due to
the acquisition of Family in December 1996 and Atlantic in the fourth quarter of
1997. However, the increase also reflects internal growth in loans and loans
held for sale. Average loans increased $1.2 billion or 26%, including
acquisitions. See Table 1 for more information on loan growth. Average loans as
a percentage of average earning assets was 76% in 1997 and in 1996.
Loans
Residential real estate loans (which excludes loans held for sale) of $2.6
billion increased 29% from $2.1 billion at December 31, 1996. Mortgage
originations, particularly refinancings, are highly dependent upon interest
rates. Lower rates in 1997, coupled with an improving economy, significantly
impacted the Company's originations. The Company sells most of its products that
conform to agency standards into the secondary market.
Commercial real estate loans of $1.4 billion at December 31, 1997 grew 14%
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. These loans consist of loans secured by income-producing
commercial real estate, service industry real estate, multi-family residential
real estate and retail trade real estate, as well as loans for the acquisition,
development and construction of such commercial real estate.
Commercial loans of $786.6 million at December 31, 1997 increased 21% in
1997. Excluding the impact of acquisitions, commercial loans grew 9% in 1997.
The Company also originates commercial business leases through one of its
subsidiaries. These leases are direct equipment leases, primarily office
equipment.
Consumer loans of $1.7 billion at December 31, 1997 increased 29% in 1997.
The growth in consumer loans was primarily in home equity loans, indirect auto
loans and consumer lease financing. Mobile home loans continue to decline,
reflecting the Company's strategy to emphasize other types of consumer loans.
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.
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<PAGE> 7
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. For purposes of the table and the following discussion, (i)
income from interest-earning assets and net interest income is presented on a
fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) nonaccrual loans have not been included for purposes of determining
interest income. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and leases: (1) $5,923,445 $522,367 8.82% $4,692,204 $418,465 8.92% $3,986,530 $364,379 9.14%
Investment securities (2) 1,785,962 117,897 6.60 1,359,525 86,640 6.37 1,351,202 84,162 6.23
Federal funds sold 67,584 3,293 4.87 120,184 6,280 5.23 141,574 8,279 5.85
---------- -------- ---------- -------- ---------- --------
Total earning assets 7,776,991 643,557 8.28 6,171,913 511,385 8.29 5,479,306 456,820 8.34
---------- -------- ---------- -------- ---------- --------
Nonearning assets 662,654 446,779 385,192
---------- ---------- ----------
Total assets $8,439,645 $6,618,692 $5,864,498
========== ========== ==========
Interest-bearing deposits:
Other interest-bearing $2,450,692 62,283 2.54 $2,158,226 55,539 2.57 $2,046,352 55,294 2.70
Certificates of deposit 2,861,252 157,529 5.51 2,312,023 128,538 5.56 2,041,507 110,589 5.42
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits 5,311,944 219,812 4.14 4,470,249 184,077 4.12 4,087,859 165,883 4.06
Borrowed funds 1,407,391 77,463 5.50 865,581 46,105 5.33 645,841 36,877 5.71
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 6,719,335 297,275 4.42 5,335,830 230,182 4.31 4,733,700 202,760 4.28
---------- -------- ---------- -------- ---------- --------
Demand deposit accounts 826,943 624,577 516,816
Other liabilities (2) 111,299 59,270 65,651
Securities of subsidiary trust 87,488 0 0
Shareholders' equity (2) 694,580 599,015 548,331
---------- ---------- ----------
Total liabilities and
shareholders' equity $8,439,645 $6,618,692 $5,864,498
========== ========== ==========
Net earning assets $1,057,656 $ 836,083 $ 745,606
========== ========== ==========
Net interest income
(fully-taxable equivalent) $346,282 $281,203 $254,060
Less: fully-taxable equivalent
adjustments (1,806) (1,908) (2,163)
-------- -------- --------
Net interest income $344,476 $279,295 $251,897
======== ======== ========
Net interest rate spread
(fully-taxable equivalent) 3.86% 3.98% 4.06%
==== ==== ====
Net interest margin
(fully-taxable equivalent) 4.45% 4.56% 4.64%
==== ==== ====
</TABLE>
(1) 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.
(2) Excludes effect of unrealized gains or losses on securities available for
sale.
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<PAGE> 8
TABLE 2 - SCHEDULED CONTRACTUAL AMORTIZATION OF LOANS AT DECEMBER 31, 1997
The following table sets forth the scheduled contractual amortization of
the Company's loans at December 31, 1997, as well as the amount of loans which
are scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no 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
Loans Loans Leases Leases Total
----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 549,423 $ 527,277 $439,351 $ 450,253 $1,966,304
After one year
through five years 708,194 573,067 262,938 660,726 2,204,925
Beyond five years 1,378,046 305,013 84,289 585,644 2,352,992
---------- ---------- -------- ---------- ----------
Total $2,635,663 $1,405,357 $786,578 $1,696,623 $6,524,221
========== ========== ======== ========== ==========
Interest rate terms on
amounts due after one year
Fixed $ 890,478 $ 444,692 $144,641 $ 676,623 $2,156,434
Adjustable 1,195,762 433,388 202,586 569,747 2,401,483
- ------------------------------------------------------------------------------------------------
</TABLE>
Investment Securities and Other Earning Assets
The average balance of the securities portfolio increased 31% to $1.8
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. See Table 3 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 $9.1 million at December 31, 1997 as compared to a pre-tax
unrealized loss of $309 thousand 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 shareholder's equity. Securities held to maturity are
carried at amortized cost and had a pre-tax unrealized gain of $311 thousand at
December 31, 1997 as compared to a pre-tax unrealized gain of $101 thousand at
December 31, 1996.
DEPOSITS AND OTHER FUNDING SOURCES
Deposits
Average interest-bearing deposits increased 19% during 1997 to $5.3 billion,
primarily as a result of acquisitions accounted for using the purchase method of
accounting. This compares to a 9% increase in 1996. Average certificates of
deposit increased $549 million during 1997 to $2.9 billion. Excluding the impact
of acquisitions, average certificates of deposit increased $183 million in 1997
primarily due to increased brokered deposits. The average rate paid on
certificates of deposit decreased from 5.56% in 1996 to 5.51% during 1997, which
is comparable to the average rate paid in 1995 for certificates of deposit of
5.42%. See Table 5 for the scheduled maturities of certificates of deposits of
$100,000 or more. The Company had $249 million and $70 million in deposits
obtained through investment banking firms which obtain funds from their
customers for deposit with the Company ("brokered deposits") at December 31,
1997 and 1996. Average brokered deposits were $156 million and $64 million in
1997 and 1996, respectively.
Average other interest-bearing deposits (savings, NOW and money market
accounts) and demand deposits increased $495 million to $3.3 billion during
1997. Excluding the impact of acquisitions, average transaction accounts
increased $323 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 these interest-bearing deposits declined from 2.70% in
1995 to 2.57% in 1996 and to 2.54% in 1997.
-7-
<PAGE> 9
TABLE 3 - MATURITIES OF SECURITIES
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>
<CAPTION>
Amortized Cost Maturing in
-------------------------------------------------------------------------------------------------
One Year More than One More than Five More than
or Less to Five Years to Ten Years Ten Years Total
- ----------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and federal agencies $172,866 5.66% $261,200 6.22% $ 39,708 6.82% $ 33,360 7.36% $ 507,134 6.15%
Tax-exempt bonds
and notes 18,495 4.87 875 5.54 90 6.90 439 5.33 19,899 4.92
Other bonds and notes 71,042 6.24 11,719 10.10 19 6.50 -- -- 82,780 6.75
Mortgage-backed
securities 2,139 6.37 33,613 6.39 66,172 6.96 712,113 6.82 814,037 6.81
Collateralized
mortgage obligations 536 5.00 3,102 7.86 12,739 7.37 241,214 7.19 257,591 7.21
-------- -------- -------- -------- ----------
Total $265,078 5.76 $310,509 6.40 $118,728 6.96 $987,126 6.90 $1,681,441 6.63
======== ======== ======== ======== ==========
The following table sets forth the maturities and weighted average yields of the
Company's debt securities held to maturity at December 31, 1997
<CAPTION>
Amortized Cost Maturing in
-------------------------------------------------------------------------------------------------
One Year More than One More than Five More than
or Less to Five Years to Ten Years Ten Years Total
- ----------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and federal agencies -- -- $ 7,721 6.86% -- -- -- -- $ 7,721 6.86%
Tax-exempt bonds
and notes $2,415 4.77% 8,681 4.65 $2,374 4.75% -- -- 13,470 4.69
Other bonds and notes -- -- -- -- 400 7.40 -- -- 400 7.40
Mortgage-backed
securities 788 6.31 757 6.72 4,689 6.50 -- -- 6,234 6.50
Collateralized
mortgage obligations -- -- -- -- 359 6.75 -- -- 359 6.75
------ ------- ------ ------ -------
Total $3,203 5.15 $17,159 5.74 $7,822 6.03 -- -- $28,184 5.75
====== ======= ====== ====== =======
</TABLE>
TABLE 4 - 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>
Year Ended December 31, 1997-1996 Change 1996-1995 Change
---------------------------------- -------------------- ----------------------
1997 1996 1995 Amount Percent Amount Percent
---------------------------------- -------------------- ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 969,567 $ 798,559 $ 601,399 $171,008 21.4% $ 197,160 32.8%
Money market access/NOW accounts 1,522,252 1,390,714 1,211,692 131,538 9.5 179,022 14.8
Regular savings 1,084,158 1,059,751 870,435 24,407 2.2 189,316 21.7
Certificates of deposit 3,171,442 2,687,406 2,151,443 484,036 18.0 535,963 24.9
---------- ---------- ---------- -------- ----------
Total deposits $6,747,419 $5,936,430 $4,834,969 $810,989 13.7 $1,101,461 22.8
========== ========== ========== ======== ==========
</TABLE>
-8-
<PAGE> 10
TABLE 5 - MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT
DECEMBER 31, 1997
The following table sets forth the scheduled maturity of certificates of
deposit of $100,000 or more at December 31, 1997:
<TABLE>
<CAPTION>
Balance Percent
------- -------
(Dollars in Thousands)
<C> <C> <C>
3 months or less $188,781 25.79%
Over 3 to 6 months 134,176 18.33
Over 6 to 12 months 230,302 31.46
More than 12 months 178,796 24.42
-------- ------
$732,055 100.00%
======== ======
</TABLE>
OTHER FUNDING SOURCES
Average borrowed funds for 1997 was $1.4 billion compared with $866 million
in 1996. The Company's primary source of funding, other than deposits, are
securities sold under repurchase agreements and advances from the Federal Home
Loan Bank of Boston ("FHLB"). FHLB borrowings increased because growth in
earning assets, particularly mortgage loans held for sale, exceeded growth in
deposits. FHLB collateral consists primarily of first mortgage loans secured by
1-4 family properties, certain unencumbered securities and other qualified
assets. At December 31, 1997, FHLB borrowings amounted to $1.4 billion. The
Company's estimated additional borrowing capacity with the FHLB at December 31,
1997 was $1.1 billion.
At December 31, 1997 and 1996, securities sold under repurchase agreements
amounted to $453.7 million and $301.4 million, 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 a 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
loan rates are substantially higher than rates on existing loans and,
conversely, decrease when rates on existing loans are substantially lower than
current loan rates (due to refinancing of loans at lower rates), (iv) the value
of the institution's investment securities and 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 the Company's
interest rate sensitivity by use of a sophisticated simulation model which
analyzes 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 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, many of the Company's interest-bearing deposit
products (e.g. interest checking, 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 regarding rate changes are built into the model.
Another major assumption built into the model involves the right customers have
to prepay loans, generally without penalty. As a result, the Company's loan
portfolios are subject to prepayment risk. 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 uses market consensus prepayment
assumptions related to residential mortgages.
-9-
<PAGE> 11
The Company uses simulation analysis to measure the sensitivity of net
interest income over a specified time period (generally one year) under various
interest-rate scenarios using the assumptions discussed above. The Company's
limit on interest-rate risk specifies that if interest rates were to shift
immediately up or down 200 basis points, estimated net interest income should
decline by less than 10%. Management estimates, based on its simulation model,
that an instantaneous 2% increase in interest rates would have less than a $5.6
million decrease in net interest income over the next twelve months, while a 2%
decrease in rates would result in less than a $3.2 million decrease in net
interest income over the next 12 months. The Company also estimates 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. It should be emphasized that the
foregoing results are highly dependent on material assumptions such as those
discussed above.
The Company manages the interest-rate risk inherent in its core banking
operations using on-balance sheet instruments, mainly fixed-rate portfolio
securities, borrowed fund maturities and a variety of off-balance sheet
instruments. The most frequently used off-balance sheet instruments are
interest-rate swaps, forward-rate agreements and options. When appropriate,
options on swaps and exchange-traded futures and options are also used.
The Company, as a result of acquisitions, has acquired four interest rate
floors with a combined notional amount of $30 million, expiring from 1998-2000.
The Company has no direct or contingent liability as a result of these floors
which were purchased to protect certain rate sensitive assets against falling
interest rates.
The Company continues to utilize interest rate floors tied to the CMT index
and U.S. Treasury Options to mitigate the prepayment risk associated with
mortgage servicing rights (see "Non-Interest Income" for further details). The
value of both CMT floors and U.S. Treasury Options are inversely related to
movements in interest rates. In the event that interest rates fall, any
resulting increase in value of the derivative instruments are intended to
offset, in part, the prospective impairment of the servicing rights. At December
31, 1997, mortgage servicing rights amounted to $59.7 million, as compared to
$41 million at December 31, 1996. 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 23% during
1997, to $346 million. This increase reflects strong internal loan growth, as
well as the 12 month impact of the Family acquisition and an approximately three
month impact of the Atlantic acquisition in 1997. Both acquisitions were
accounted for as purchases. Net interest margin declined 11 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
primarily to loan growth. Table 6 shows the changes from 1996 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.
Noninterest Income
Noninterest income was $82.5 million, $60.7 million and $49.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Increases of
$8.0 million in customer services income and $8.1 million in mortgage banking
services income contributed to the $21.8 million or 36% increase during 1997.
Increases of $3.9 million in customer service income and $3.4 million in
mortgage banking income contributed to the $11.5 million increase in 1996.
Customer services income of $28.3 million in 1997 increased 39% from 1996
and was attributable to growth in the number of transaction accounts and related
fees and increases in ATM income.
Mortgage banking services income of $25.8 million increased $8.1 million or
46% during 1997 due to a $6.2 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 $5.4 billion serviced for investors
increased by $1.0 billion or 24% 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 market. 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 result of such activities.
-10-
<PAGE> 12
Trust and investment advisory services income of $11.8 million increased 23%
during 1997 and 18% during 1996 primarily due to increases in assets under
management. Assets under management were $2.7 billion, and $1.5 billion at
December 31, 1997 and 1996 respectively, representing an increase of 78.3% in
1997.
Insurance commissions of $1.9 million were generated through the Company's
subsidiary Morse, Payson, and Noyes and reflects gross revenues since the
acquisition date.
Noninterest Expense
Noninterest expense increased $61.2 million or 28% during 1997. The increase
was primarily attributable to the Family and Atlantic acquisitions, in addition
to the issuance of capital securities by a subsidiary trust and charges related
to mergers and CFX Funding (see Note 12 to the Supplemental Consolidated
Financial Statements). Excluding the distributions on the securities of the
subsidiary trust, merger expenses, and charges related to CFX Funding, the
efficiency ratio improved to 59.78% during 1997 from 62.28% in 1996 reflecting
the efficiencies created by the assimilation of recent acquisitions, as well as
operating improvements. Total noninterest expense increased $25.8 million or 13%
in 1996.
Salaries and benefits expense of $131.4 million increased 22% 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 3,281 at December 31, 1997. Average full-time equivalent
employees were 3,407 in 1997 compared to 2,885 in 1996, primarily due to the
expansion of the core banking franchise.
Data processing expense increased 19% to $15.0 million during 1997. The
increase in expense was attributable to the implementation of system upgrades to
accommodate increased volumes.
Equipment expense increased 33% to $18.2 million and advertising and
marketing increased 34% to $8.9 million during 1997. These increases were
primarily due to the acquisition of Family in December 1996.
Merger expense in 1997 consists primarily of $8.4 million of expenses
related to CFX's acquisition of Portsmouth and Community. Merger expenses that
related to those acquisitions consisted primarily of $2.0 million in severance
costs, $734 thousand in data processing fees, $4.0 million in professional
fees, $899 thousand in writedowns of assets and $739 thousand in other merger
expenses. CFX had incurred and deferred $1.4 million of expenses in 1997, $1.1
million relating to termination of employment contracts and severance
obligations, $200 thousand investment banking fees, and $107 thousand of other.
Merger expenses related to the combination with CFX are $24.0 million of
after-tax, one-time reorganization and restructuring costs net of an estimated
$8.1 million after-tax gain from the sale of five CFX branches in connection
with the transaction. The after-tax one-time reorganization and restructuring
costs consist of costs relating to termination of employment contracts and
severance obligations ($7.8 million), professional fees ($6.8 million),
writedowns of assets ($10.4 million), data processing/integration costs ($4.8
million) and charges related to CFX Funding ($2.3 million). Actual expenses will
reduce the Company's income during the three months ended June 30, 1998 by
approximately $24.0 million or $0.27 per diluted share.
Other noninterest expense, which is comprised primarily of general and
administrative expenses, increased $4.7 million or 10% during 1997.
-11-
<PAGE> 13
TABLE 6 - 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 and (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 Volume Rate/Volume Total Rate Volume Rate/Volume Total
--------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest-earning assets:
Loans and leases: (1) $(4,677) $109,806 $(1,227) $103,902 $(8,848) $64,500 $(1,566) $54,086
Investment securities 3,107 27,176 974 31,257 1,948 518 12 2,478
Federal funds sold (424) (2,749) 186 (2,987) (881) (1,251) 133 (1,999)
------- -------- ------- -------- ------- ------- ------- -------
Total earning assets (1,994) 134,233 (67) 132,172 (7,782) 63,768 (1,421) 54,565
------- -------- ------- -------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Regular savings and money (689) 7,526 (93) 6,744 (2,634) 3,023 (144) 245
market access accounts
Certificates of deposit (1,247) 30,535 (296) 28,991 2,910 14,654 386 17,949
Total interest-bearing
deposits (1,936) 38,061 (390) 35,735 276 17,677 242 18,194
Borrowed funds 1,537 28,859 962 31,358 (2,476) 12,547 (843) 9,228
------- -------- ------- -------- ------- ------- ------- -------
Total interest-bearing
liabilities (399) 66,920 572 67,093 (2,201) 30,224 (601) 27,422
------- -------- ------- -------- ------- ------- ------- -------
Net interest income
(fully taxable equivalent) $(1,595) $ 67,313 $ (639) $ 65,079 $(5,581) $33,544 $ (820) $27,143
======= ======== ======= ======== ======= ======= ======= =======
</TABLE>
(1) Loans and leases include portfolio loans and loans held for sale and
nonperforming loans.
-12-
<PAGE> 14
TABLE 7. MORTGAGE BANKING SERVICES INCOME
The following table sets forth certain information relating to the
Company's mortgage banking activities at the dates or for the periods ended.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Residential mortgages serviced for investors
at end of period $5,381,003 $4,343,659 $3,614,520
========== ========== ==========
Residential mortgage sales income(1) $ 15,607 $ 9,358 $ 5,373
Residential mortgage servicing income, net 10,160 8,298 8,873
---------- ---------- ----------
Mortgage banking services income $ 25,767 $ 17,656 $ 14,246
========== ========== ==========
(1) Includes gains on sales of mortgage servicing.
</TABLE>
Net occupancy expense increased 15% to $20.1 million during 1997. The
increase was primarily attributable to the acquisitions but also reflects the
cost associated with new supermarket branches.
Amortization of goodwill and deposit premiums increased by $3.2 million or
58% during 1997 due to goodwill associated with the recent acquisitions which
were accounted for as purchases.
Taxes
The Company recognized $49.5 million in income tax expense for the year
ended December 31, 1997 compared to $39.4 million for 1996 and $33.4 million for
1995. The increase in 1997 was a result of growth in pre-tax earnings. The
effective tax rate rose to 35% 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 implemented 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 expects to
incur approximately $1.7 million in expenses in 1998 in addition to redirecting
substantial internal resources to the issue. The costs to complete the Year 2000
modifications are based on management's estimates. However, actual results could
differ from these plans.
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
performance. See Table 8 for the detail of the Company's loan portfolio for the
last five years.
The Company's residential loan portfolio accounted for 40% of the total loan
portfolio at December 31, 1997, up from 39% 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, .58% of
the Company's residential loans were nonperforming, as compared to .53% at
December 31, 1996.
The Company's commercial real estate loan portfolio accounted for 22% of the
total loan portfolio at December 31, 1997, compared to 23% at December 31, 1996.
This portfolio consists primarily of loans secured by income-producing
commercial real estate (including office and industrial buildings), service
industry real estate (including hotels and health care facilities), multi-family
-13-
<PAGE> 15
(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 made to small to 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 northern Massachusetts. Commercial loans
consist primarily 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 12% of the total loan portfolio at December 31, 1997 and 1996.
Consumer loans accounted for 26% of the Company's total loan portfolio at
December 31, 1997 compared to 25% 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. The increase
over the prior year was 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 are short-term
and offer a higher yield than longer-term mortgage loans.
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 .72% at December 31, 1997 compared to .80% at December
31, 1996. In addition, total nonperforming assets as a percentage of total loans
and other nonperforming assets was 1.06% and 1.18% at December 31, 1997 and
1996, respectively. See Table 9 for a detail 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
charge-offs, 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. Residential real estate loans and
consumer loans and leases are placed on nonaccrual status generally 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.
Net Charge-offs
Net charge-offs were $9.7 million during 1997, as compared to $9.5 million
in 1996 and $12.3 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 $2.3 million compared to an increase in 1996 from 1995 of
$480 thousand.
Net charge-offs in 1997 represented .16% of average loans and leases
outstanding, as compared to .20% in 1996 and .31% in 1995. See Table 10 for the
details for the last five years of charge-offs and recoveries.
Provision and Allowance for Loan and Lease Losses
The Company recorded a provision for loan and lease losses in 1997 of $4.5
million, as compared to a $5.2 million provision in 1996 and $8.0 million in
1995. The ratio of the allowance to nonperforming loans at December 31, 1997 was
152%, as compared to 187% and 156% at December 31, 1996 and 1995, respectively.
The allowance for loan and lease losses represented 1.38% of loans
outstanding at December 31, 1997, as compared to 1.67% and 1.97% 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.
Management believes that this reduction is consistent with the improved asset
quality of the loan portfolio.
-14-
<PAGE> 16
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 noncollectable. 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 increase its 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 11 sets for information concerning
the allocation of the Company's allowance for loan and lease losses by loan
categories for the last five years.
-15-
<PAGE> 17
TABLE 8 - COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ---- ------ ---- ------ ---- ------ ---- ------ ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans $2,635,663 40.40% $2,050,484 39.06% $1,530,801 37.29% $1,497,142 39.17% $1,351,345 38.51%
Commercial real
estate loans:
Permanent first
mortgage loans 1,286,372 19.72 1,149,910 21.91 981,160 23.90 933,482 24.42 907,676 25.88
Construction and
development 118,985 1.82 79,864 1.52 57,607 1.40 37,794 0.99 35,946 1.02
------- ---- ------ ---- ------ ---- ------ ---- ------ ----
Total 1,405,357 21.54 1,229,774 23.43 1,038,767 25.30 971,276 25.41 943,622 26.90
Commercial loans
and leases 786,578 12.06 647,737 12.34 544,685 13.27 454,583 11.89 422,876 12.05
Consumer loans
and leases 1,696,623 26.00 1,321,004 25.17 990,872 24.14 899,638 23.53 791,038 22.54
------- ---- ------ ---- ------ ---- ------ ---- ------ ----
Total loans
receivable 6,524,221 100.00% 5,248,999 100.00% 4,105,125 100.00% 3,822,639 100.00% 3,508,881 100.00%
====== ====== ====== ====== ======
Allowance for loan
and lease losses 89,983 87,820 80,818 82,615 88,465
---------- ---------- ---------- ---------- ----------
Net loans receivable $6,434,238 $5,161,179 $4,024,307 $3,740,024 $3,420,416
========== ========== ========== ========== ==========
</TABLE>
-16-
<PAGE> 18
TABLE 9 - FIVE YEAR SCHEDULE OF NON-PERFORMING ASSETS
The following table sets forth information regarding nonperforming assets
at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $15,323 $10,811 $12,634 $13,435 $ 19,279
Troubled debt restructurings -- -- -- -- 111
------- ------- ------- ------- --------
Total 15,323 10,811 12,634 13,435 19,390
------- ------- ------- ------- --------
Commercial real estate loans:
Nonaccrual loans 19,582 17,174 19,746 26,978 30,780
Troubled debt restructurings 2,304 3,476 4,546 9,316 19,492
------- ------- ------- ------- --------
Total 21,886 20,650 24,292 36,294 50,272
------- ------- ------- ------- --------
Commercial business loans and leases:
Nonaccrual loans 13,255 9,650 8,866 9,082 19,692
Troubled debt restructurings 114 579 1,859 2,684 2,547
------- ------- ------- ------- --------
Total 13,369 10,229 10,725 11,766 22,239
------- ------- ------- ------- --------
Consumer loans:
Nonaccrual loans 8,473 5,398 4,040 3,903 3,852
Troubled debt restructurings -- -- -- -- 26
------- ------- ------- ------- --------
Total 8,473 5,398 4,040 3,903 3,878
------- ------- ------- ------- --------
Total nonperforming loans:
Nonaccrual loans 56,633 43,033 45,286 53,398 73,603
Troubled debt restructurings 2,418 4,055 6,405 12,000 22,176
------- ------- ------- ------- --------
Total 59,051 47,088 51,691 65,398 95,779
------- ------- ------- ------- --------
Other nonperforming assets:
Other real estate owned, net of related reserves 7,158 13,071 14,150 18,503 36,159
In-substance foreclosures, net of related reserves -- -- 3,391 11,752
Repossessions, net of related reserves 3,218 2,107 1,553 2,003 1,961
------- ------- ------- ------- --------
Total 10,376 15,178 15,703 23,897 49,872
------- ------- ------- ------- --------
Total nonperforming assets $69,427 $62,266 $67,394 $89,295 $145,651
======= ======= ======= ======= ========
Accruing loans 90 days overdue $ 8,355 $ 8,038 $ 4,412 $ 6,354 $ 9,498
======= ======= ======= ======= ========
Total nonperforming loans as a percentage of total loans 0.91% 0.90% 1.26% 1.71% 2.73%
Total nonperforming assets as a percentage of total assets 0.72 0.80 1.09 1.57 2.65
Total nonperforming assets as a percentage of total loans
and other nonperforming assets 1.06 1.18 1.64 2.32 4.09
</TABLE>
-17-
<PAGE> 19
The following sets forth information concerning the activity in the
Company's allowance for loan and lease losses during the periods indicated.
TABLE 10 - FIVE YEAR TABLE OF NET CHARGE-OFFS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $5,923,445 $4,692,204 $3,986,530 $3,661,200 $3,575,833
========== ========== ========== ========== ==========
Allowance at the beginning of period $ 87,820 $ 80,818 $ 82,615 $ 88,465 $ 88,810
Additions due to acquisitions 7,361 11,365 2,457 -- --
Charge-offs:
Real estate loans 3,950 13,671 15,543 15,080 22,223
Commercial business loans and leases 6,632 4,353 3,234 6,281 12,841
Consumer loans and leases 10,063 4,906 3,673 3,278 4,993
---------- ---------- ---------- ---------- ----------
Total loans charged off 20,645 22,930 22,450 24,639 40,057
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate loans 5,601 10,430 6,397 6,773 7,474
Commercial business loans and leases 3,373 1,856 2,673 3,925 2,252
Consumer loans and leases 1,925 1,096 1,082 1,095 1,909
---------- ---------- ---------- ---------- ----------
Total loans recovered 10,899 13,382 10,152 11,793 11,635
---------- ---------- ---------- ---------- ----------
Net charge-offs 9,746 9,548 12,298 12,846 28,422
Provisions charged to operating expenses 4,548 5,185 8,044 6,996 28,077
---------- ---------- ---------- ---------- ----------
Allowance at the end of the period $ 89,983 $ 87,820 $ 80,818 $ 82,615 $ 88,465
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.16% 0.20% 0.31% 0.35% 0.79%
Ratio of allowance to total portfolio loans
and leases at end of period 1.38 1.67 1.97 2.16 2.52
Ratio of allowance to nonperforming
loans at end of period 152.38 186.50 156.35 126.33 92.36
</TABLE>
TABLE 11 - 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.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1996
------------------ -------------------- ------------------- ------------------- -------------------
Allowance Allowance Allowance
to to Allowance Allowance to
Percent Percent to Percent to Percent Percent
of Total of Total of Total of Total of Total
Loans By Loans By Loans By Loans By Loans By
Amount Category Amount Category Amount Category Amount Category Amount Category
------ --------- ------ --------- ------ --------- ------ ---------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $51,553 1.28% $50,450 1.54% $49,416 1.92% $50,543 2.05% $54,818 2.39%
Commercial business
loans and leases 16,322 2.08 18,304 2.83 12,632 2.32 11,062 2.43 13,519 3.20
Consumer loans
and leases 14,866 0.88 12,809 0.97 11,795 1.19 12,163 1.35 12,172 1.54
Unallocated 7,242 6,257 6,975 8,847 7,956
------- ----- ------- ------- -------
$89,983 1.38 $87,820 1.67 $80,818 1.97 $82,615 2.16 $88,465 2.52
======= ======= ======= ======= =======
</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.
-18-
<PAGE> 20
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 14 to the Supplemental Consolidated Financial
Statements.
CAPITAL
At December 31, 1997, shareholders' equity totaled $721 million or 7.46% of
total assets, as compared to $677 million or 8.71% at December 31, 1996. The 6%
increase was primarily due to the Company's net income during 1997, which more
than offset a $35.9 million stock repurchase and $40.3 million in dividends to
shareholders.
During 1997, the Company completed a stock repurchase of 2,245,600 shares
for $35.9 million. The stock repurchase authorization was rescinded by the
Company's Board of Directors in October 1997 in connection with the execution of
an agreement to acquire CFX. In January 1997, a trust subsidiary of the Company
issued $100 million of Capital Securities which mature in 2027 and which qualify
as Tier 1 Capital. See Note 12 to the Supplemental 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 the
Federal Reserve Board, was $687.4 million at December 31, 1997 compared to
$596.9 million at December 31, 1996. The Company's regulatory capital currently
exceeds all applicable requirements. See Note 13 to the Supplemental
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.
IMPACT ON 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. Net income is a component of comprehensive income, with all other
components referred to in the aggregate as other comprehensive income. This
statement will be effective for 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 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.
-19-
<PAGE> 21
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In Thousands, Except Number of Shares and Per Share Data) December 31,
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 424,567 $ 354,405
Federal funds sold 13,091 136,983
Securities available for sale, at market value 1,802,758 1,459,965
Securities held to maturity, market value $28,495 and $104,783 in 1997 and 1996, respectively 28,184 104,682
Loans held for sale, market value $400,363 and $120,868 in 1997 and 1996, respectively 398,369 120,237
Loans and leases 6,524,221 5,248,999
Less: Allowance for loan and lease losses 89,983 87,820
---------- ----------
Net loans and leases 6,434,238 5,161,179
---------- ----------
Premises and equipment 114,729 112,151
Goodwill and other intangibles 127,416 80,884
Mortgage servicing rights 59,702 40,958
Other assets 265,188 196,211
---------- ----------
Total assets $9,668,242 $7,767,655
========== ==========
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Deposits:
Regular savings $ 1,084,158 $1,059,751
Money market access and NOW accounts 1,522,252 1,390,714
Certificates of deposit (including certificates of $100 or more
of $732,055 and $298,069 in 1997 and 1996, respectively) 3,171,442 2,687,406
Demand deposits 969,567 798,559
---------- ----------
6,747,419 5,936,430
---------- ----------
Federal funds purchased and securities sold under repurchase agreements 568,535 301,432
Borrowings from the Federal Home Loan Bank of Boston 1,394,746 716,673
Other borrowings 18,909 24,207
Other liabilities 117,850 112,066
---------- ----------
Total liabilities 8,847,459 7,090,808
---------- ----------
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; 200,000,000 shares authorized, 89,324,737
issued in 1997 and 88,508,106 in 1996 893 885
Paid-in capital 436,367 429,760
Retained earnings 303,864 252,053
Net unrealized gain (loss) on securities available for sale, net of applicable income taxes 5,805 (93)
Treasury stock at cost (1,739,347 shares and 748,195 shares in 1997 and 1996, respectively) (26,146) (5,758)
---------- ----------
Total shareholders' equity 720,783 676,847
---------- ----------
$9,668,242 $7,767,655
========== ==========
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
-20-
<PAGE> 22
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In Thousands, Except
Number of Shares and Per Share Data) Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans and leases $521,509 $417,532 $363,388
Interest and dividends on securities 117,961 88,015 88,056
Other 2,281 3,930 3,213
-------- -------- --------
Total interest and dividend income 641,751 509,477 454,657
-------- -------- --------
Interest expense:
Interest on deposits 219,812 184,077 165,883
Interest on borrowed funds 77,463 46,105 36,877
-------- -------- --------
Total interest expense 297,275 230,182 202,760
-------- -------- --------
Net interest income 344,476 279,295 251,897
-------- -------- --------
Provision for loan and lease losses 4,548 5,185 8,044
-------- -------- --------
Net interest income after provision for
loan and lease losses 339,928 274,110 243,853
-------- -------- --------
Noninterest income:
Customer services 28,304 20,305 16,382
Mortgage banking services 25,767 17,656 14,246
Trust and investment advisory services 11,824 9,584 8,096
Net securities gains 2,697 3,287 2,499
Insurance commissions 1,899 - -
Other noninterest income 11,989 9,878 7,932
-------- -------- --------
82,480 60,710 49,155
-------- -------- --------
Noninterest expenses:
Salaries and employee benefits 131,433 107,378 99,413
Data processing 14,962 12,528 8,924
Occupancy 20,143 17,452 15,115
Equipment 18,164 13,653 11,421
Distributions on securities of subsidiary trust 8,351 - -
Amortization of goodwill and deposit premiums 8,743 5,527 2,925
Advertising and marketing 8,946 6,693 6,614
Merger related expenses 11,385 9,627 4,958
Charges related to CFX Funding 7,206 - -
Other noninterest expenses 51,223 46,485 44,161
-------- -------- --------
280,556 219,343 193,531
-------- -------- --------
Income before income tax expense 141,852 115,477 99,477
Applicable income tax expense 49,517 39,444 33,437
-------- -------- --------
Net income $ 92,335 $ 76,033 $ 66,040
======== ======== ========
Basic weighted average shares outstanding 87,449,885 81,263,004 80,314,906
Diluted weighted average shares outstanding 89,180,826 82,729,714 82,105,692
Earnings per share:
Basic $1.06 $ 0.94 $0.82
Diluted 1.04 0.92 0.80
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
-21-
<PAGE> 23
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In Thousands, Except Number of Shares and Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Net
Par Paid-in Retained Compensation Unrealized Treasury
Value Capital Earnings ESOP Gain(Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $814 $ 368,178 $ 178,517 $(429) $(13,499) $(18,158) $ 515,423
Issuance of 264,000 shares of common stock under
stock option and purchase plans 2 1,244 -- -- -- -- 1,246
Treasury stock issued (264,044 shares at an average
price of $5.71) -- -- (401) -- -- 1,908 1,507
Treasury stock purchased (1,294,714 shares at an
average price of $6.43) -- -- -- -- -- (8,317) (8,317)
Treasury stock purchased and retired (1,367,350 at
an average price of $4.16) (14) (8,683) -- -- -- 7,198 (1,499)
Reissuance of treasury stock pursuant to acquisition
(1,503,200 shares at $7.50) -- -- 1,710 -- -- 9,564 11,274
Decrease in unearned compensation - ESOP -- -- -- 311 -- -- 311
Issuance of common stock under dividend reinvestment plan 2 325 -- -- -- -- 327
Change in unrealized gains (losses) on securities
available for sale -- -- -- -- 22,008 -- 22,008
Compensation cost of employee stock plan -- 57 -- -- -- -- 57
Activity applicable to change in fiscal year (Community) -- -- 1,774 -- -- -- 1,774
Net income -- -- 66,040 -- -- -- 66,040
Cash dividends paid -- -- (23,108) -- -- -- (23,108)
Common stock dividends declared (Community) 5 7,058 (7,606) -- -- -- (543)
---- --------- --------- ----- -------- -------- ---------
Balances at December 31, 1995 809 368,179 216,926 (118) 8,509 (7,805) 586,500
Issuance of 658,996 shares of common stock under
stock option and purchase plans and related tax effects 7 3,285 -- -- -- -- 3,292
Treasury stock issued (337,354 shares at an average
price of $7.31) -- -- (134) -- -- 2,466 2,332
Purchase of 5,000,000 shares of treasury stock pursuant
to acquisition of Family Bancorp -- -- -- -- -- (60,342) (60,342)
Treasury stock purchased and retired (56,000 at an
average price of $7.48) -- (609) -- -- -- (419) (1,028)
Issuance of 5,960,670 shares of common stock and
5,000,000 shares from treasury stock pursuant to
acquisition of Family Bancorp 60 47,492 -- -- 344 60,342 108,238
Decrease in unearned compensation - ESOP -- -- -- 118 -- -- 118
Change in unrealized gains (losses) on securities
available for sale -- -- -- -- (8,946) -- (8,946)
Net income 76,033 -- -- -- 76,033
Cash dividends paid -- -- (29,350) -- -- -- (29,350)
Common stock dividends declared 10 11,412 (11,422) -- -- -- --
---- --------- --------- ----- -------- -------- ---------
Balances at December 31, 1996 885 429,760 252,053 -- (93) (5,758) 676,847
</TABLE>
-22-
<PAGE> 24
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net
Par Paid-in Retained Compensation Unrealized Treasury
Value Capital Earnings ESOP Gain(Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 885 429,760 252,053 -- (93) (5,758) 676,847
Issuance of 651,000 shares of common stock under
stock option and purchase plans and related tax effects 6 4,411 -- -- -- -- 4,417
Treasury stock issued for employee benefit plans
(809,520 shares at an average price of $ 9.58) -- -- (1,042) -- -- 8,798 7,756
Treasury stock purchased ( 2,245,600 shares at an
average price of $15.99) -- -- -- -- -- (35,917) (35,917)
Reissuance of treasury stock pursuant to acquisition
(445,678 shares at $20.88) -- -- 2,572 -- -- 6,731 9,303
Issuance of common stock under dividend reinvestment plan -- 436 -- -- -- -- 436
Change in unrealized gains(losses) on securities
available for sale, net of tax -- -- -- -- 5,898 -- 5,898
Net income -- -- 92,335 -- -- -- 92,335
Cash dividends paid -- -- (40,285) -- -- -- (40,285)
Common stock dividends declared 1 1,761 (1,769) -- -- -- (7)
---- -------- -------- --- ------ -------- --------
Balances at December 31, 1997 $893 $436,367 $303,864 $-- $5,805 $(26,146) $720,783
==== ======== ======== === ====== ======== ========
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
-23-
<PAGE> 25
<TABLE>
<CAPTION>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 92,335 $ 76,033 $ 66,040
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan and lease losses 4,548 5,185 8,044
Provision for depreciation 14,866 12,018 10,592
Amortization of goodwill and other intangibles 8,657 5,388 4,627
Net (increase) decrease in net deferred tax assets 8,837 5,742 6,824
Net (gains) losses realized from sales of securities and consumer loans (2,610) (2,723) (1,407)
Net (gains) losses realized from sales of loans held for sale (11,257) (7,364) 650
Net decrease in trading securities -- -- 236
Net decrease (increase) in mortgage servicing rights (18,744) (9,305) (3,034)
Proceeds from sales of loans held for sale 3,156,388 1,204,155 677,107
Residential loans originated and purchased for sale (3,349,645) (1,236,280) (734,068)
Net decrease (increase) in interest and dividends receivable and other assets (58,782) (7,789) (8,927)
Net increase (decrease) in other liabilities (17,346) 29,473 (6,053)
----------- ---------- ---------
Net cash provided (used) by operating activities $ (172,753) $ 74,533 $ 38,485
----------- ---------- ---------
Cash flows from investing activities:
Proceeds from maturities and principal repayments of investment securities $ 53,328 $ 89,755 $ 200,034
Purchase of investment securities (37,905) (87,253) (200,301)
Proceeds from sales of securities available for sale 298,779 120,283 70,449
Proceeds from maturities and principal repayments of securities
available for sale 735,940 694,466 193,991
Purchases of securities available for sale (1,250,168) (698,146) (264,275)
Net (increase) decrease in loans and leases (1,033,785) (710,543) (347,274)
Proceeds from sales of loans 36,358 16,356 41,452
Premiums paid on deposits purchased -- (18,230) (4,290)
Net additions to premises and equipment (13,000) (19,903) (18,659)
Payment of acquisition, net of cash acquired (28,261) 72,835 --
----------- ---------- ---------
Net cash provided (used) by investing activities $(1,238,714) $ (540,380) $(328,873)
----------- ---------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 456,813 $ 326,882 $ 401,696
Net increase (decrease) in securities sold under repurchase agreements 144,100 87,396 20,722
Proceeds from Federal Home Loan Bank of Boston borrowings 1,440,445 717,498 579,881
Payments on Federal Home Loan Bank of Boston borrowings (825,000) (507,147) (583,805)
Proceeds from issuance of securities of subsidiary trust 98,361 -- --
Net increase (decrease) in other borrowings (8,228) 1,737 10,823
Issuance of treasury stock 12,609 5,355 3,016
Purchase and retirement of treasury stock (35,917) (61,370) (9,816)
Reissuance of treasury stock pursuant to acquisition -- -- 11,274
Cash dividends paid to shareholders (40,285) (29,350) (23,108)
Other shareholders' equity, net (7) -- --
----------- ---------- ---------
Net cash provided by financing activities $ 1,242,891 $ 541,001 $ 412,354
----------- ---------- ---------
Increase (decrease) in cash and cash equivalents $ (168,576) $ 75,154 $ 121,966
Change in fiscal year of acquired bank -- -- 1,858
Cash and cash equivalents at beginning of period 491,388 416,234 292,410
----------- ---------- ---------
Cash and cash equivalents at end of period $ 322,812 $ 491,388 $ 416,234
=========== ========== =========
===================================================================================================================================
In 1996, the Company purchased Family Bancorp whereby each share of Family Bancorp was exchanged for 2.52 shares of the Company's
stock. In 1997, the Company purchased MPN Holdings whereby 445,678 shares of PHFG stock were issued. In conjunction with the
acquisitions, assets were acquired and liabilities were assumed as follows:
</TABLE>
<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
======== =======
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 $290,358, $225,491 and $198,746 and income taxes of $39,305,
$28,835 and $25,934 were paid, respectively.
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 1997, $73,859 of portfolio loans were transferred to loans held for sale. During 1997, 1996 and 1995, $61,170, $76,849 and
$286,914, respectively, of investment securities were transferred to securities available for sale.
</TABLE>
See accompanying notes to Supplemental Consolidated Financial Statements.
-24-
<PAGE> 26
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(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, investment advisory and insurance brokerage services,
and are conducted through the Company's direct and indirect wholly-owned
subsidiaries located in Maine, New Hampshire and northern and central
Massachusetts, consisting of Peoples Heritage Bank, Bank of New Hampshire and
Family Bank, FSB, respectively (collectively, the "Banks"), as well as wholly-
owned subsidiaries of the Banks. In addition, one of the Banks' subsidiaries has
a 51% ownership interest in CFX Funding. L.L.C., which engaged in the
facilitation of lease financing and securitization. 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 Supplemental 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.
The Supplemental Consolidated Financial Statements have been restated to
reflect the Company's acquisition of CFX Corporation on April 10, 1998, which
includes CFX's acquisition of Portsmouth Bank Shares Inc. ("Portsmouth") and
Community Bankshares, Inc. ("Community") on August 29, 1997. See Note 2 -
"Mergers and Acquisitions."
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 affect 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,
deferred tax assets 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. Generally, federal funds are sold for
one-day periods.
Securities.
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost.
Investments not classified as "held to maturity" are classified as
"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 supplemental 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.
-25-
<PAGE> 27
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.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount is amortized as an adjustment of the related
loan's yield using the interest method over the contractual life of the related
loans.
Consumer lease financing loans are carried at the amount of minimum lease
payments plus residual values, less unearned income which is amortized into
interest income using the interest method.
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.
Bank Owned Life Insurance.
During 1996 and 1997, the Company invested an aggregate of $60 million in
bank-owned life insurance ("BOLI") to help finance the cost of certain employee
benefit plan expenses, which is included in other assets. BOLI represents life
insurance on the lives of certain employees through insurance companies with a
Standard & Poor's rating of AA+ or better. The Company is the beneficiary of the
insurance policies. Increases in the cash value of the policies, as well as
insurance proceeds received, are recorded in other income, and are not subject
to income taxes.
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 is amortized on a straight-line basis over various periods not
exceeding twenty years; core deposit premiums are amortized on a level-yield
basis over the estimated life of the associated deposits. 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 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.
-26-
<PAGE> 28
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.
Investments in Leasehold Residuals and Limited Partnerships
Assets acquired in connection with leasehold residual positions have been
accounted for using the purchase method of accounting. Resultant deferred
credits are amortized to leasing activities income over the period of, and in
proportion to, the related tax benefits expected to be realized. At December 31,
1997 and 1996, the leasehold residual positions of $510 thousand and $1.9
million, respectively, are included in other assets and deferred credits of $1.1
million and $3.2 million, respectively, are included in other liabilities in the
supplemental consolidated balance sheets.
Investments in real estate development limited partnerships are accounted
for using the equity method.
Pension and 401(k) Plans
The Company and its subsidiaries have defined benefit and defined
contribution pension plans which cover substantially all full-time employees.
The benefits are based on years of service and the employee's compensation
during the years immediately preceding retirement. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
The Company maintains Section 401(k) savings plans for substantially
employees of the Company, and its subsidiaries. Under the plans, the Company
makes a matching contribution of a portion of the amount contributed by each
participating employee, up to 6% of the employee's annual salary. The plans
allow for supplementary profit sharing contributions by the Company, at its
discretion, for the benefit of participating employees.
Stock Compensation Plans
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. The Company has elected to
continue with the accounting methodology in Opinion No. 25 and, as a result,
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied. The pro forma
disclosures include the effects of all awards granted on or after January 1,
1995. See Note 15 - Stock Based Compensation Plans.
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. Income taxes are allocated to each
entity in the consolidated group based on its share of taxable income.
-27-
<PAGE> 29
Tax credits generated from limited partnerships are reflected in earnings
when realized for federal income tax purposes.
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 common stock equivalents were converted into common stock
using the treasury stock method.
On April 28, 1998, stockholders of the Company approved an amendment to the
Company's articles of incorporation to increase the number of authorized shares
of common stock from 100,000,000 to 200,000,000 and the Board of Directors of
the Company approved a 2 for 1 split of the outstanding common stock effective
as of May 8, 1998. References to authorized common stock and outstanding shares
in the Supplemental Consolidated Financial Statements have been adjusted to
reflect these actions.
2. MERGERS AND ACQUISITIONS
On April 10, 1998, the Company completed the acquisition of CFX Corporation
("CFX"). The acquisition was effected by means of the merger of CFX with and
into the Company. Upon consummation of such merger, each share of common stock
of CFX outstanding immediately prior thereto other than dissenting shares was
converted into the right to receive 0.667 of a share of common stock of the
Company.
On August 29, 1997, CFX acquired Portsmouth and Community. Upon
acquisition, Portsmouth's 5,907,242 outstanding shares of common stock and
Community's 2,510,314 outstanding shares of common stock were converted into an
aggregate of 10,806,298 shares of CFX common stock. Portsmouth was a New
Hamshire corporation and its subsidiary, Portsmouth Savings Bank, was a New
Hamshire state-chartered savings bank headquartered in Portsmouth, New
Hampshire. Portsmouth Savings Bank was merged into CFX Bank as part of the
transaction. Community was a New Hampshire corporation and its bank
subsidiaries, Concord Savings Bank, a New Hamshire state-chartered savings bank,
and Centerpoint Bank, a New Hampshire state-chartered commercial bank, were
merged into CFX Bank as part of the transaction.
The CFX, Portsmouth and Community mergers were accounted for by the
pooling-of-interests method of accounting, and, accordingly, the financial
information for all periods presented has been restated to present the combined
financial condition and results of operations as if the combination had been in
effect for all periods presented. Expenses directly attributable to the mergers
amounted to $32.4 million after taxes and were charged to earnings at the date
of combination.
In October 1997, the Company completed its purchase of Atlantic Bancorp
("Atlantic"), the parent company of Atlantic Bank N.A. 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. 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
Insurance. The transaction, which was accounted for as a purchase, was effected
through an exchange of MPN stock for 445,678 shares of the Company's common
stock. The Company recorded $10.2 million in goodwill in connection with the
transaction.
On December 6, 1996, the Company completed its purchase of Family Bancorp,
the holding company for Family Bank, FSB, which conducts business in northern
Massachusetts and southern New Hampshire. The purchase included 22 branch
offices and $473.8 million in loans and total deposits of $774.6 million. 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 10,960,670 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 Supplemental Consolidated
Financial Statements of the Company have been restated to reflect the
acquisition at the beginning of each of the periods presented. At December 31,
1995, BNHC had total assets of $977.8 million and total shareholders' equity of
$84.5 million.
-28-
<PAGE> 30
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
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:
Available for sale:
U.S. Government obligations and obligations
of U.S. Government agencies and corporations $ 507,134 $ 1,859 $ (702) $ 508,291
Tax-exempt bonds and notes 19,899 46 -- 19,945
Other bonds and notes 82,780 15 (33) 82,762
Mortgage-backed securities 814,037 6,271 (1,499) 818,809
Collateralized mortgage obligations 257,591 1,551 (168) 258,974
---------- ------- ------- ----------
Total debt securities 1,681,441 9,742 (2,402) 1,688,781
Federal Home Loan Bank of Boston stock 88,309 -- -- 88,309
Other equity securities 23,944 1,728 (4) 25,668
---------- ------- ------- ----------
Total equity securities 112,253 1,728 (4) 113,977
---------- ------- ------- ----------
Total securities available for sale $1,793,694 $11,470 $(2,406) $1,802,758
========== ======= ======= ==========
</TABLE>
The excess of market value over amortized cost of $ 9.1 million, net of tax
effect of $3.3 million, is recorded as a separate component of shareholders'
equity.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1996:
Available for Sale:
U.S. Government obligations and obligations
of U.S.Government agencies and corporations $ 658,075 $3,021 $(2,740) $ 658,356
Tax-exempt bonds and notes 19,792 41 0 19,833
Other bonds and notes 30,085 360 (66) 30,379
Mortgage-backed securities 551,092 2,651 (4,224) 549,519
Collateralized mortgage obligations 123,036 301 (912) 122,425
---------- ------ ------- ----------
Total debt securities 1,382,080 6,374 (7,942) 1,380,512
Federal Home Loan Bank of Boston stock 55,528 0 0 55,528
Other equity securities 22,666 1,473 (214) 23,925
---------- ------ ------- ----------
Total equity securities 78,194 1,473 (214) 79,453
---------- ------ ------- ----------
Total securities available for sale $1,460,274 $7,847 $(8,156) $1,459,965
========== ====== ======= ==========
</TABLE>
The excess of amortized cost over market value of $309 thousand, net of tax
effect of $216 thousand, is recorded as a separate component of shareholders'
equity.
-29-
<PAGE> 31
A summary of the cost and market values of securities held to maturity
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
Held to maturity:
U.S. Government obligations and obligations
of U.S.Government agencies and corporations $ 7,721 $ 76 $ (6) $ 7,791
Tax-exempt bonds and notes 13,470 177 (1) 13,646
Other bonds and notes 400 -- -- 400
Mortgage-backed securities 6,234 75 (9) 6,300
Collateralized mortgage obligations 359 -- (1) 358
-------- ---- ----- --------
Total securities held to maturity $ 28,184 $328 $ (17) $ 28,495
======== ==== ===== ========
December 31, 1996:
Held to maturity:
U.S. Government obligations and obligations
of U.S.Government agencies and corporations $ 45,883 $ 70 $(193) $ 45,760
Tax-exempt bonds and notes 13,986 118 (21) 14,083
Other bonds and notes 15,291 2 (8) 15,285
Mortgage-backed securities 28,338 206 (74) 28,470
Collateralized mortgage obligations 1,184 1 -- 1,185
-------- ---- ----- --------
Total securities held to maturity $104,682 $397 $(296) $104,783
======== ==== ===== ========
</TABLE>
The amortized cost and market values of debt securities available for sale
and held to maturity 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 $153.6 million of
securities available for sale with call provisions.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
DUE IN ONE YEAR OR LESS $ 265,078 $ 265,255 $ 3,203 $ 3,205
DUE AFTER ONE YEAR THROUGH FIVE YEARS 310,509 311,427 17,159 17,337
DUE AFTER FIVE YEARS THROUGH TEN YEARS 118,728 118,902 7,822 7,953
DUE AFTER TEN YEARS 987,126 993,197 0 0
---------- ---------- ------- -------
TOTAL DEBT SECURITIES $1,681,441 $1,688,781 $28,184 $28,495
========== ========== ======= =======
</TABLE>
A summary of realized gains and losses on securities available for sale for
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Gross Realized Gross Realized
Gains Losses
----- ------
<S> <C> <C>
1997 $5,244 $2,634
1996 2,281 109
1995 1,082 311
</TABLE>
4. LOANS AND LEASES
The Company's lending activities are conducted principally in Maine, New
Hampshire and northern and central 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.
-30-
<PAGE> 32
A summary of loans and leases follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
Residential real estate mortgages $2,635,663 $2,050,484
Commercial real estate mortgages:
Commercial real estate 1,286,372 1,149,910
Construction and development 118,985 79,864
---------- ----------
1,405,357 1,229,774
Commercial business loans and leases 786,578 647,737
Consumer loans and leases 1,696,623 1,321,004
---------- ----------
Total loans and leases $6,524,221 $5,248,999
========== ==========
</TABLE>
Loan and lease balances are stated net of deferred loan fees totaling $13,372
and $10,087 at December 31, 1997 and 1996, respectively.
Nonperforming loans
The following table sets forth information regarding nonperforming loans
and accruing loans 90 days or more overdue at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
<S> <C> <C>
Residential real estate mortgages
Nonaccrual loans $15,323 $10,811
Commercial real estate loans:
Nonaccrual loans 19,582 17,174
Troubled debt restructurings 2,304 3,476
------- -------
Total 21,886 20,650
Commercial business loans and leases:
Nonaccrual loans 13,255 9,650
Troubled debt restructurings 114 579
------- -------
Total 13,369 10,229
Consumer loans:
Nonaccrual loans 8,473 5,398
Total nonperforming loans:
Nonaccrual loans 56,633 43,033
Troubled debt restructurings 2,418 4,055
------- -------
Total $59,051 $47,088
======= =======
Accruing loans which are 90 days overdue $ 8,355 $ 8,038
======= =======
</TABLE>
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.
Interest income that would have been recognized for 1997 if nonperforming
loans at December 31, 1997 had been performing in accordance with their original
terms approximated $5.3 million.
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
-31-
<PAGE> 33
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 $39.0 million and
$34.2 million, of which $24.8 million and $25.5 million had related allowances
of $7.0 million and $5.1 million, respectively. During the years ended December
31, 1997 and 1996, the income recognized related to impaired loans was $2.3
million and $2.2 million respectively, and the average balance of outstanding
impaired loans was $36.6 million and $33.1 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 loan.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses follow:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 87,820 $ 80,818 $ 82,615
Allowance on acquired loans 7,361 11,365 2,457
Provisions charged to operations 4,548 5,185 8,044
Loans and leases charged off (20,645) (22,930) (22,450)
Recoveries 10,899 13,382 10,152
-------- -------- --------
Balance at end of period $ 89,983 $ 87,820 $ 80,818
======== ======== ========
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
<S> <C> <C>
Land $ 18,960 $ 15,628
Buildings and leasehold improvements 110,997 109,549
Furniture, fixtures and equipment 106,115 92,097
-------- --------
236,072 217,274
Less accumulated depreciation and amortization 121,343 105,123
-------- --------
$114,729 $112,151
======== ========
</TABLE>
7. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31,
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31 ,
-------------------------------------------
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 40,958 $27,195 $21,482
Mortgage servicing rights capitalized 55,845 19,620 12,305
Mortgage servicing rights acquired through acquisition -- 3,700 --
Amortization charged against mortgage servicing fee income (7,924) (5,938) (4,008)
Mortgage servicing rights sold (29,177) (3,619) (2,584)
-------- ------- -------
Balance at end of period $ 59,702 $40,958 $27,195
======== ======= =======
</TABLE>
The Company generally continues to service 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 $5.4 billion, $4.3 billion and $3.6 billion,
respectively.
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<PAGE> 34
8. INCOME TAXES
The current and deferred components of income tax expense (benefit)
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Current (including $2,439, $1,942, and $1,271, respectively,
of state income tax) $37,517 $32,874 $26,637
Deferred 12,000 6,570 6,800
------- ------- -------
$49,517 $39,444 $33,437
======= ======= =======
</TABLE>
The following table reconciles the expected income tax expense (computed by
applying the federal statutory tax rate to income before taxes) to recorded
income tax expense:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Computed federal tax expense $49,648 $40,417 $34,817
State income tax, net of federal benefits 2,240 1,888 1,202
Benefit of tax-exempt income (1,245) (1,268) (1,141)
Merger expenses 1,409 1,495 455
Amortization of goodwill and other
intangibles 2,131 1,115 1,051
Low income/rehabilitation credits (2,890) (1,670) (1,442)
Other, net (1,776) (2,533) (1,505)
------- ------- -------
Recorded income tax expense $49,517 $39,444 $33,437
======= ======= =======
</TABLE>
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
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $33,062 $31,892
Reserve for mobile home dealers 1,812 2,000
Accrued pension expense 3,570 2,453
Difference of tax and book basis of other real estate owned 623 666
Interest accrued and payments received on
non-performing loans for tax purposes 1,444 1,032
Unrealized depreciation on securities 0 519
Investment in leasehold residual 3,266 4,354
Alternative minimum tax credit carry forward 1,079 1,079
Other 1,939 5,327
------- -------
Total gross deferred tax assets 46,795 49,322
------- -------
Deferred tax liabilities
Difference of tax and book basis of leases 13,311 6,299
Difference of tax and book basis of premises
and equipment 1,907 2,520
Difference of tax and book basis of securities 27 256
Difference of tax and book basis of partnership
investments 4,296 2,606
Tax bad debt reserve 7,761 6,143
Unrealized appreciation of securities 3,054 303
Other 3,700 4,442
------- -------
Total gross deferred tax liabilities 34,056 22,569
------- -------
Net deferred tax asset $12,739 $26,753
======= =======
</TABLE>
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
-34-
<PAGE> 35
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 $36.4 million. Pre-tax book income for the year ended December 31,
1997 was $142 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. CHARGES RELATED TO CFX FUNDING
In the fourth quarter of 1997, the Company recorded a $7.2 million charge
to earnings related to the resolution of a dispute between the CFX Funding and a
credit insurer regarding the origination and servicing by CFX Funding of certain
equipment leases held in four securitized leased pools, and the decision to
discontinue future operations of CFX Funding with respect to its lease
securitization business.
The charge of $7.2 million includes $1.2 million of advances on third-party
letters of credit that were guaranteed by the Company, $2.5 million to settle a
dispute with a credit insurer, and $2.8 million applicable to a loss reserve
established by the Company for future credit losses in the insured lease pools.
In conjunction with the settlement with the credit insurer, the Company has
agreed to reimburse the credit insurer for payments made to investors in four
securitized lease pools on claims made after December 18, 1997, and the Company
is entitled to all recoveries on defaulted leases held in such pools after such
date. The reserve, included in other liabilities in the Supplemental
Consolidated Balance Sheets, is an estimate based on historical and projected
performance of the leases. Future changes in the estimate, if any, will be
reflected in earnings as identified. At December 31, 1997, lease balances
aggregating $19.2 million were held in the four securitized lease pools.
10. FEDERAL FUNDS AND PURCHASED SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The details of federal funds purchased and securities sold under repurchase
agreements were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Federal funds purchased $ 114,846 $ --
Securities sold under repurchases agreements: Short term 443,784 301,432
Long term 9,905 --
--------- --------
$568,535 $301,432
======== ========
</TABLE>
A summary of securities sold under short term repurchase agreements
follows:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
Balance outstanding at end of period $453,689 $301,432
Market value of collateral at end of period 497,603 381,398
Amortized cost of collateral at end
of period 526,031 380,174
Average balance outstanding 387,607 233,591
Maximum outstanding at any month end
during the period 477,536 330,731
Average interest rate during the period 4.45% 4.62%
Average interest rate at end of period 4.91% 4.30%
</TABLE>
Securities sold under repurchase agreements generally have maturities of
270 days or less and are collateralized by mortgage-backed securities and U.S.
Government obligations. The long term agreement is a wholesale agreement
maturing June 26, 2000 and bears interest at 6.39%.
-35-
<PAGE> 36
11. 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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
PRINCIPAL MATURITY
AMOUNTS INTEREST RATES DATES
------- -------------- -----
<S> <C> <C> <C>
$ 367,048 5.19% - 7.04% 1998
315,207 5.02% - 6.38% 1999
701,406 4.70% - 6.49% 2000
2,079 5.20% - 6.14% 2001
2,327 5.20% - 6.97% 2002
6,679 3.75% - 7.72% 2003-2017
----------
$1,394,746
==========
<CAPTION>
December 31, 1996
-------------------------------------------------------------
Principal Maturity
Amounts Interest Rates Dates
------- -------------- -----
<S> <C> <C> <C>
$310,718 4.56% - 7.32% 1997
88,300 5.19% - 5.87% 1998
225,075 5.30% - 8.13% 1999
75,025 4.70% - 6.05% 2000
17,555 3.75% - 7.72% 2003-2014
--------
$716,673
========
</TABLE>
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 one to four 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 Boston of
$184 million, none of which was outstanding at December 31, 1997.
12. 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. On January 31, 1997, the Trust issued $100 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.
13. SHAREHOLDERS' EQUITY
In April 1998, the stockholders of the Company approved an increase in the
authorized number of shares of Common Stock from 100,000,000 to 200,000,000, and
in May 1998, the Company declared a two-for-one split for each share of Common
Stock then outstanding and for all then outstanding options to purchase shares
of Common Stock. All references in the Supplemental Consolidated Financial
Statements to the number of shares and per share amounts have been adjusted
retroactively for the recapitalization and the stock split.
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 level of risk by assigning different weightings to
assets and certain off-balance sheet activity. The Company must maintain a
minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth
in the table below.
-36-
<PAGE> 37
<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) $762,391 12.65% $482,056 8.00% $280,243 4.65%
TIER 1 CAPITAL
(TO RISK WEIGHTED ASSETS) 687,421 11.41 241,028 4.00 446,347 7.40
TIER 1 LEVERAGE CAPITAL
RATIO (TO AVERAGE ASSETS) 687,421 7.51 366,124 4.00 321,402 3.51
As of December 31, 1996:
Total capital
(to risk weighted assets) $655,169 13.74% $381,596 8.00% 273,573 5.74%
Tier I capital
(to risk weighted assets) 596,879 12.51 190,798 4.00 406,081 8.51
Tier I leverage capital
ratio (to average assets) 596,879 8.56 279,050 4.00 317,829 4.56
</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.
Dividend Limitations.
Dividends paid by subsidiaries are the primary source of funds available to
the Company for payment of dividends to its shareholders. The 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
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.
14. 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.
-37-
<PAGE> 38
Financial instruments with off-balance sheet risk at December 31, 1997 and
1996 follow:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
-------------------------------
<S> <C> <C>
Financial instruments with notional or contract amounts which represent credit risk $1,461,747 $1,080,683
Loans serviced with recourse 32,603 38,286
Loans sold with credit enhancements 8,713 17,147
Leases serviced with credit enhancements 19,200 0
Financial instruments with notional or
contract amounts which exceed the amount of credit risk:
Forward commitments to sell loans 717,650 248,701
Interest rate floors (fair value at December 31, 1997 of $145) 30,000 25,000
Treasury put options (fair value at December 31, 1997 of $156) 50,000 4,000
Treasury call options (fair value at December 31, 1997 of $371) 12,500 10,000
CMT floors (fair value at December 31, 1997 of $736) 60,000 60,000
Interest rate swaps - 5,000
</TABLE>
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 periodically sold automobile loans with credit enhancements
that obligate the Company to assume a certain portion of credit losses should
they occur.
In connection with CFX Funding, the Company has agreed to reimburse a
credit insurer for payments made to investors in four securitized lease pools on
claims made after December 18, 1997. See Note 9 Charges Related to CFX Funding.
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.
At December 31, 1997, the Company was committed to invest $4 million in
eight real estate development limited partnerships. At December 31, 1997 and
1996, the Company had $8.0 million and $3.0 million, respectively, invested in
such partnerships, which are included in other assets.
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, based 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.
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 $6.5 million, $5.5 million, and $4.2 million for the years
ended 1997, 1996 and 1995, respectively.
-38-
<PAGE> 39
Approximate minimum lease payments over the remaining terms of the leases
at December 31, 1997 follow:
1998 $ 7,478
1999 7,060
2000 6,686
2001 5,965
2002 4,662
2003 and after 18,921
-------
$50,772
=======
15. 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 to participate in 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 Company contributed
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
530,000 shares, of which 59,000 were granted in 1997 at $15.82 per share, 40,000
were granted in 1996 at $10.44 per share and 36,000 granted in 1995 at $ 6.82
per share. 7,000 shares had been issued upon exercise of the stock options
cumulatively through December 31, 1997.
Both incentive stock options and nonqualified stock options may be granted
pursuant to the option plans. A total of 1,316,000 shares of authorized but
unissued common stock of the Company has been reserved for issuance pursuant to
incentive stock options granted under the option plans, and 886,000 shares of
authorized but unissued common stock have been reserved for issuance pursuant to
nonqualified stock options granted. The options are exercisable over a period
not to exceed ten years from the date of grant.
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
3,340,000 shares of common stock, substantially all of which have been issued.
The 1996 Option Plan, as amended, authorizes grants of options to purchase up to
2,500,000 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 1,252,950
additional shares available for grant under the 1996 Option Plan. The Company
issued no stock appreciation rights in 1997 or 1996.
Prior to its combination with the Company, CFX had issued options to
acquire its common stock pursuant to its stock option plans and in connection
with acquisitions by CFX. These shares were converted into options to purchase
shares of common stock of the Company upon the combination of CFX and the
Company.
The per share weighted-average fair value of stock options granted by the
Company during 1997, 1996 and 1995 was $11.16, $5.34 and $6.44 on the date of
the grants using the Black Scholes option-pricing model with the following
average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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 32.90% 34.50% 36.60%
</TABLE>
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 pro forma amounts indicated below:
-39-
<PAGE> 40
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income
As reported $92,335 $76,033 $66,040
Pro forma $89,581 $74,769 $65,098
Basic Earnings per share
As reported: $1.06 $0.94 $0.82
Proforma $1.02 $0.92 $0.81
Diluted Earnings per share
As reported: $1.04 $0.92 $0.80
Proforma $1.00 $0.90 $0.79
</TABLE>
Pro forma net income reflects only stock options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating the cost for stock options under
SFAS No. 123 is not reflected in the pro forma 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:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Balance at December 31, 1995 5,193,402 $5.37
Granted 868,634 11.06
Exercised 925,906 3.39
Forfeited 67,262 8.88
Expired --
Assumed in acquisitions 183,330 3.67
---------
Balance at December 31, 1996 5,252,198 $6.57
Granted 1,013,538 16.20
Exercised 1,374,606 4.79
Forfeited 65,856 9.50
Expired --
---------
Balance at December 31, 1997 4,825,274 $9.02
=========
</TABLE>
The range of per share prices for outstanding and exercisable stock options
at December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Options Options
Range Outstanding Exercisable
----------- -----------
<S> <C> <C>
$ 1.38 to $5.00 1,205,800 1,194,376
$5.01 to $10.00 1,322,248 1,078,228
$10.01 to $15.00 1,641,426 1,028,070
$15.01 to $19.63 655,800 58,550
--------- ---------
Total Options 4,825,274 3,359,224
========= =========
Weighted average price $9.02 $6.85
</TABLE>
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 1,352,000 shares. Employees
have the right to authorize payroll deductions up to 10% of their salary. As of
December 31, 1997, 732,518 shares had been purchased under this plan.
Restricted Stock Plan.
In 1990, the Company adopted a Restricted Stock Plan under which up to
$10,000 of the annual fee payable to each non-employee Director of the Company
and participating subsidiaries is payable solely in shares of Common Stock.
Directors of the company and certain participating subsidiaries who are not
full-time employees of the Company or any of its subsidiaries are eligible to
participate. Shares issued were 3,840, 6,360 and 7,324 in 1997, 1996 and 1995,
respectively.
-40-
<PAGE> 41
16. 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.
Multi-Employer Pension Plan.
During 1996, CFX Corporation and certain subsidiaries terminated their
defined benefit pension plans, and transferred plan assets to a multi-employer
plan in amounts that would effectively settle the plans' accumulated benefit
obligations as of January 1, 1996. As a result, the Company recognized
settlement and curtailment gains totaling $877,000 in 1996. The multi-employer
plan is a defined benefit pension plan that covered all former eligible
employees of CFX Corporation, CFX Bank (excluding former employees of Community
and Portsmouth) and Safety Fund National Bank. Pension and expense attributable
to the plan for the years ended December 31, 1997 and 1996 was $396,000 and
$479,000, respectively.
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.
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $38,277 and $36,904 $ 41,779 $ 38,920
======== ========
Projected benefit obligation for service
rendered to date 45,727 47,296
Plan assets at fair value, primarily listed
stocks and corporate bonds (53,533) (48,148)
-------- --------
Plan assets (greater) less than projected
benefit obligation (7,806) (852)
-------- --------
Unrecognized net gain (loss) from past experience
different from that assumed and effects of changes in assumptions 8,582 456
Unrecognized prior service cost (80) 44
Unrecognized net asset at adoption of SFAS No. 87, net of amortization 2,199 2,518
-------- --------
Accrued pension cost included in other liabilities $ 2,895 $ 2,166
======== ========
</TABLE>
Net pension cost for 1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost during the period $ 2,683 $ 2,054 $ 2,500
Interest cost on projected benefit obligation 3,199 2,822 2,962
Actual return on plan assets (8,284) (4,321) (5,743)
Net amortization and deferral 3,782 857 2,574
------- ------- -------
Net periodic pension cost $ 1,380 $ 1,412 $ 2,293
======= ======= =======
</TABLE>
Assumptions used to determine actuarial present value of benefit
obligations were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Weighted average
Discount rate 7.00 - 7.50% 7.50% 7.25 - 8.00%
Increase in compensation levels 4.50 - 6.00% 4.50% - 6.00% 4.50% - 6.00%
Expected long-term return on assets 7.50 - 8.50% 7.50 - 8.25% 7.50 - 8.25%
</TABLE>
-41-
<PAGE> 42
Thrift Incentive Plan.
The Company has a contributory Thrift Incentive Plan and a 401(k) 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 $2.2 million, $1.7 million, and $1.4 million,
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.
The Company makes payments to certain current and retired officers with
supplemental retirement and a deferred compensation agreements. The cost of
these agreements is accrued but not funded. The Company purchased
corporate-owned life insurance policies on the lives of the retirees. The death
benefits are payable to the Company and will assist in the funding of the
deferred compensation liability. The Company will recover the costs of premium
payments from the cash value of these policies.
Post Retirement Benefits Other Than Pensions.
The Company and its subsidiaries sponsor post-retirement 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:
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
Accumulated post-retirement 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 post-retirement 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 post-retirement benefit cost included
in other liabilities $ 2,560 $ 2,352
======= =======
</TABLE>
Net post-retirement benefit cost for the year ended December 31, 1997, 1996
and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 58 $127 $100
Interest cost 418 417 469
Amortization of accumulated post-retirement obligation 258 263 313
---- ---- ----
Net periodic post-retirement benefit cost $734 $807 $882
==== ==== ====
</TABLE>
-42-
<PAGE> 43
17. 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
certain 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.
-43-
<PAGE> 44
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 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.
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 arrangements. 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 excess
servicing recognizable upon sale of loans net of any cost to the Company if it
fails to meet its sale obligation. Of the $717.7 million of forward sales
commitments at December 31, 1997, the Company had $398.3 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.
-44-
<PAGE> 45
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 $ 437,658 $ 437,658 $ 491,388 $ 491,388
Securities - available for sale 1,802,758 1,802,758 1,459,965 1,459,965
Securities - held to maturity 28,184 28,495 104,682 104,783
Loans held for sale 398,369 400,363 120,237 120,868
Loans and leases, net 6,434,238 6,494,632 5,161,179 5,337,139
Mortgage servicing rights 59,702 71,172 40,958 46,087
Liabilities:
Deposit (with no stated maturity) 3,575,977 3,575,977 3,249,024 3,249,024
Time deposits 3,171,442 3,196,199 2,687,406 2,717,552
Borrowings 1,982,190 1,981,973 1,042,312 1,040,321
</TABLE>
18. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
<TABLE>
<CAPTION>
December 31,
-------------------------------
BALANCE SEETS 1997 1996
Assets: -------- ---------
<S> <C> <C>
Cash and due from banks $ 38,304 $ 4,201
Interest bearing deposits with bank subsidiaries 31,227 21,409
Securities available for sale 55 130
Securities held to maturity -- 320
Investment in bank subsidiaries 737,831 623,037
Goodwill and other intangibles 11,383 13,206
Amounts receivable from subsidiaries 6,994 14,323
Other assets 14,577 9,944
-------- --------
Total assets $840,371 $686,570
======== ========
Liabilities and shareholders' equity
Amounts payable to subsidiaries $ 25 $ 188
Subordinated debentures supporting mandatory redeemable trust securities 107,446 6,530
Other liabilities 12,117 3,005
Shareholders' equity 720,783 676,847
-------- --------
Total liabilities and shareholders' equity $840,371 $686,570
======== ========
<CAPTION>
Year Ended December 31,
---------------------------------------
STATEMENTS OF INCOME 1997 1996 1995
Operating income: -------- -------- -------
<S> <C> <C> <C>
Dividends from banking subsidiaries $62,296 $84,873 $32,855
Other operating income 4,336 1,885 1,675
------- ------- -------
Total operating income 66,632 86,758 34,530
Operating expenses:
Interest on borrowings 9,070 609 363
Amortization of intangibles 1,864 1,864 1,864
Merger expenses 354 37 4,958
Other operating expenses 7,432 3,504 1,984
------- ------- -------
Total operating expenses 18,720 6,014 9,169
Income before income taxes and equity in undistributed net income of subsidiaries 47,912 80,744 25,361
Income tax expense (benefit) (3,097) 85 (1,519)
------- ------- -------
Income before equity in undistributed net income of subsidiaries 51,009 80,659 26,880
Equity in undistributed net income of subsidiaries (1) 41,326 (4,626) 39,160
------- ------- -------
Net income $92,335 $76,033 $66,040
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Amounts in parenthesis represent the excess of dividends over net income
from subsidiaries.
-45-
<PAGE> 46
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 92,335 $ 76,033 $ 66,040
Adjustments to reconcile net income to net
Cash (used) provided by operating activities:
Undistributed net income from subsidiaries (41,326) 4,626 (39,160)
Amortization of goodwill and other intangibles 1,864 1,864 1,864
Securities losses (gains) (113) (1) (27)
(Increase) decrease in amounts receivable from subsidiaries 7,330 3,273 (15,913)
Decrease (increase) in other assets (3,822) (2,701) (119)
Increase (decrease) in amounts payable to subsidiaries (163) 56 47
Increase (decrease) in other liabilities 6,617 (3,309) (1,634)
Other, net (3,309) (2,080) (1,012)
-------- -------- --------
Net cash provided by operating activities $ 59,413 $ 77,761 $ 10,086
-------- -------- --------
Cash flows from investing activities:
Reissuance of treasury stock pursuant to acquisition $ -- $ -- $ 11,274
Net decrease (increase) in interest bearing deposits with bank subsidiaries (9,818) 223 8,740
Sales of available for sale securities 185 1,047 1,697
Purchase of available for sale securities (7) -- (677)
Sales of held to maturity securities 4,337 16,857 6,483
Purchase of held to maturity securities (4,017) (16,601) (6,002)
Capital contribution to subsidiary (55,000) (13,200) (200)
-------- -------- --------
Net cash (used) provided by investing activities $(64,320) $(11,674) $ 21,315
-------- -------- --------
Cash flows from financing activities:
Issuance of notes payable (net) 103,093 -- 7,836
Payment of notes payable (2,177) (1,306) --
Other shareholders' equity, net 1,687 (226) 1,671
Dividends paid to shareholders (40,285) (29,350) (23,108)
Treasury stock acquired (35,917) (61,370) (9,816)
Treasury stock sold 12,609 5,355 3,016
-------- -------- --------
Net cash provided (used) by financing activities $ 39,010 $(86,897) $(20,401)
-------- -------- --------
Net increase (decrease) in cash due from banks $ 34,103 $(20,810) $ 11,000
-------- -------- --------
Change in fiscal year - Community -- -- (338)
Cash and due from banks at beginning of year 4,201 25,011 14,349
-------- -------- --------
Cash and due from banks at end of year $ 38,304 $ 4,201 $ 25,011
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure information:
Interest paid on borrowings $5,156 $609 $363
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-46-
<PAGE> 47
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 $177,504 $163,402 $153,889 $146,956 $135,010 $128,093 $125,739 $120,635
Interest expense 85,893 76,067 69,460 65,855 61,357 57,637 56,784 54,404
Provision for loan & lease losses 1,163 1,423 1,020 942 1,075 980 1,500 1,630
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan & lease losses 90,448 85,912 83,409 80,159 72,578 69,476 67,455 64,601
Noninterest income 26,179 20,493 17,931 18,065 16,140 15,423 14,394 14,753
Special charges 7,560 11,031 0 0 0 4,522 4,652 453
Noninterest expenses 72,714 66,093 62,674 60,672 54,909 53,260 51,160 50,387
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes 36,353 29,281 38,666 37,552 33,809 27,117 26,037 28,514
Income tax expense 12,412 10,848 13,214 13,043 10,751 9,759 9,196 9,738
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 23,941 $ 18,433 $ 25,452 $ 24,509 $ 23,058 $ 17,358 $ 16,841 $ 18,776
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share
Basic $.27 $.22 $.29 $.28 $.29 $.21 $.21 $.23
Diluted $.27 .21 .29 .27 .28 .21 .20 .23
Cash earnings per share (1)
Basic $.30 .24 .32 .30 .30 .23 .23 .24
Diluted .30 .23 .31 .29 .30 .23 .23 .23
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings before the amortization of goodwill and core deposit premiums.
-47-
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Peoples Heritage Financial Group, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Peoples Heritage Financial Group, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related supplemental 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 supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental 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.
The supplemental consolidated financial statements give retroactive effect to
the merger of Peoples Heritage Financial Group, Inc. and CFX Corporation on
April 10, 1998, which has been accounted for as a pooling-of-interests as
described in Note 2 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
However, they will become the historical consolidated financial statements of
Peoples Heritage Financial Group, Inc. and subsidiaries after financial
statemtents covering the date of consummation of the business combination are
issued.
In our opinion, the supplemental 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 applicable after financial statements
are issued for a period which includes the date of consummation of the business
combination.
Boston, Massachusetts /s/ KPMG Peat Marwick LLP
July 3, 1998
-48-
<PAGE> 1
EXHIBIT 99(b)
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
PAGE
----
Consolidated Financial Statements 1
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
<PAGE> 2
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 452,116 $ 424,567
Federal funds sold 106,057 13,091
Securities available for sale, at market value 1,614,529 1,802,758
Securities held to maturity, market value $27,851 and $28,495 27,594 28,184
Loans held for sale, market value $918,786 and $400,363 913,688 398,369
Loans and leases:
Residential real estate mortgages 2,338,831 2,635,663
Commercial real estate mortgages 1,409,598 1,405,357
Commercial business loans and leases 837,682 786,578
Consumer loans and leases 1,818,626 1,696,623
----------- ----------
6,404,737 6,524,221
Less: Allowance for loan and lease losses 89,454 89,983
----------- ----------
Net loans and leases 6,315,283 6,434,238
----------- ----------
Premises and equipment 116,200 114,729
Goodwill and other intangibles 125,900 127,416
Mortgage servicing rights 79,365 59,702
Other assets 280,215 265,188
----------- ----------
$10,030,947 $9,668,242
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 1,105,641 $1,084,158
Money Market and NOW accounts 1,641,719 1,522,252
Certificates of deposit (including certificates of $100 or more of
$507,399 and $732,055) 3,141,749 3,171,442
Demand deposits 1,073,944 969,567
----------- ----------
Total deposits 6,963,053 6,747,419
Federal funds purchased and securities sold under repurchase
agreements 532,005 568,535
Borrowings from the Federal Home Loan Bank of Boston 1,565,805 1,394,746
Other borrowings 18,791 18,909
Other liabilities 106,683 117,850
----------- ----------
Total liabilities 9,186,337 8,847,459
----------- ----------
Company obligated, mandatory redeemable securities of subsidiary
trust holding solely parent junior subordinated debentures 100,000 100,000
Shareholders' Equity:
Preferred stock (par value $0.01 per share, 5,000,000 shares
authorized, none issued) -- --
Common stock (par value $0.01 per share, 200,000,000 shares
authorized, 89,960,286 and 89,324,737 shares issued) 899 893
Paid in capital 443,274 436,367
Retained earnings 321,558 303,864
Accumulated other comprehensive income:
Net unrealized gain (loss) on securities available for sale 3,286 5,805
Treasury stock at cost (1,602,138 shares and 1,739,347 shares) (24,407) (26,146)
----------- ----------
Total shareholders' equity 744,610 720,783
----------- ----------
$10,030,947 $9,668,242
=========== ==========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
1
<PAGE> 3
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 151,985 $ 118,945
Interest and dividends on securities 27,942 28,011
----------- -----------
Total interest and dividend income 179,927 146,956
----------- -----------
Interest expense:
Interest on deposits 60,325 51,681
Interest on borrowed funds 27,781 14,174
----------- -----------
Total interest expense 88,106 65,855
----------- -----------
Net interest income 91,821 81,101
Provision for loan and lease losses 2,998 942
----------- -----------
Net interest income after provision for loan and lease losses 88,823 80,159
----------- -----------
Noninterest income:
Customer services 7,820 6,964
Mortgage banking services 5,839 5,507
Insurance commissions 2,898 --
Trust and investment advisory services 3,374 2,611
Net securities gains 1,913 302
Other noninterest income 3,061 2,681
----------- -----------
24,905 18,065
----------- -----------
Noninterest expenses:
Salaries and employee benefits 36,591 30,595
Occupancy 6,021 5,262
Data processing 4,575 4,294
Equipment 4,907 4,355
Distributions on securities of subsidiary trust 2,244 1,510
Amortization of goodwill and deposit premiums 2,862 2,030
Advertising and marketing 2,189 1,991
Merger-related charges 900 --
Other noninterest expenses 12,967 10,635
----------- -----------
73,256 60,672
----------- -----------
Income before income tax expense 40,472 37,552
Applicable income tax expense 13,432 13,043
----------- -----------
Net income $ 27,040 $ 24,509
=========== ===========
Basic weighted average shares outstanding 88,028,650 88,271,716
Diluted weighted average shares outstanding 89,727,760 89,975,843
Earnings per share:
Basic $ 0.31 $ 0.28
Diluted 0.30 0.27
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
2
<PAGE> 4
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Net
Par Paid in Retained Unrealized Treasury
Value Capital Earnings Gain (Loss) Stock Total
----- ------- -------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $885 $429,760 $252,053 $ (93) $ (5,758) $676,847
Issuance of 177,142 shares of common stock
under stock option and purchase plan and
related tax effects 2 1,275 - - - 1,277
Treasury stock issued for employee benefit plans
(414,444 shares at an average price of $5.76) - - 494 - 3,086 3,580
Treasury stock purchased 3,832 shares at an
average price of $13.05 - - - - (50) (50)
Common stock dividend declared - 1,749 (1,749) - - -
Change in unrealized gains (losses) on securities
available for sale, net of tax - - (9,150) - (9,150)
Net Income 24,509 - - 24,509
Cash dividends $0.09 - - (9,204) - - (9,204)
---- -------- -------- ------- -------- --------
Balances at March 31, 1997 $887 $432,784 $266,103 $(9,243) $ (2,722) $687,809
==== ======== ======== ======= ========= ========
Balances at December 31, 1997 $893 $436,367 $303,864 $ 5,805 $ (26,146) $720,783
Issuance of 635,550 shares of common stock
under stock option and purchase plans and
related tax effects 6 6,907 6,913
Treasury stock issued for employee benefit plans
(187,620 shares at an average price of $12.19) (545) 2,833 2,288
Treasury stock purchased (50,410 shares at an
average price of $21.70) (1,094) (1,094)
Change in unrealized gains (losses) on securities
available for sale, net of tax (2,519) (2,519)
Net Income 27,040 27,040
Cash dividends $0.11 - - (8,801) - - (8,801)
---- -------- -------- ------- --------- --------
Balances at March 31, 1998 $899 $443,274 $321,558 $ 3,286 $ (24,407) $744,610
==== ======== ======== ======= ========= ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
3
<PAGE> 5
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 27,040 $ 24,509
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 2,998 942
Provision for depreciation 4,011 3,707
Amortization of goodwill and other intangibles 2,865 2,017
Net increase (decrease) in net deferred tax liabilities (6,824) 5,195
Net (gains) losses realized from sales of securities and consumer loans (2,127) (264)
Net (gains) realized from sales of loans held for sale (a component of
mortgage banking services) (2,323) (2,887)
Net decrease (increase) in mortgage servicing rights (19,864) 6,025
Proceeds from sales of loans held for sale 1,976,270 380,221
Residential loans originated and purchased for sale (2,489,266) (401,488)
Net decrease (increase) in interest and dividends receivable and other assets ( 9,351) (13,701)
Net increase (decrease) in other liabilities (10,713) (17,802)
---------- --------
Net cash provided (used) by operating activities $ (527,284) $(13,526)
---------- --------
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal repayments of investment securities $ 3,739 $ 10,329
Purchase of investment securities (3,156) (15,098)
Proceeds from sales of securities available for sale 225,083 121,267
Proceeds from maturities and principal repayments of securities available for sale 247,925 137,686
Purchases of securities available for sale (285,618) (517,421)
Net (increase) decrease in loans and leases 77,707 (60,995)
Proceeds from sales of loans 38,250 20,029
Net additions to premises and equipment (5,482) (3,070)
Net cash provided (used) by investing activities $ 298,448 $(307,273)
---------- ---------
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 215,634 $ 37,911
Net increase (decrease) in securities sold under repurchase agreements (31,684) 33,448
Proceeds from Federal Home Loan Bank of Boston borrowings 925,000 274,448
Payments on Federal Home Loan Bank of Boston borrowings (753,941) (204,084)
Net increase (decrease) in other borrowings (118) (6,274)
Proceeds from issuance of subsidiary trust -- 98,406
Proceeds from issuance of common stock 6,568 1,277
Issuance of treasury stock 2,633 3,580
Purchase of treasury stock (1,094) (50)
Cash dividends paid to shareholders ( 8,801) (9,204)
---------- ---------
Net cash provided by financing activities $ 354,197 $ 229,458
---------- ---------
Increase (decrease) in cash and cash equivalents 125,361 (91,341)
Cash and cash equivalents at beginning of period 322,812 491,388
---------- ---------
Cash and cash equivalents at end of period $ 448,173 $ 400,047
========== =========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the three months ended March 31, 1998 and 1997, interest of $88,632 and
$65,537 and income taxes of $1,296 and $3,292 were paid, respectively.
See accompanying Notes to Supplemental Consolidated Financial Statements.
4
<PAGE> 6
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and predominant
practices within the banking industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 1997 Annual Report
on Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations and other data for the
three months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for any other interim period or the entire year ending
December 31, 1998. Certain amounts in the prior periods have been reclassified
to conform to the current presentation.
On April 10, 1998, the Company acquired CFX Corporation ("CFX"). The acquisition
was accounted for as a pooling of interests and, accordingly, the financial
information for all prior periods presented has been restated to present the
combined financial condition and results of operations as if the combination had
been in effect for all prior periods presented.
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisition of CFX on April 10, 1998.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
NOTE 2: OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130. "Reporting
Comprehensive Income," was issued in July 1997. The Company adopted SFAS No. 130
on January 1, 1998, as required. SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components. The main
objective of the statement is to report a measure of all changes in equity that
result from transactions and other economic events of the period other than
transactions with owners. Such components of total comprehensive income for the
Company are net income and unrealized gains on securities available for sale,
net of tax.
The following is a reconciliation of comprehensive income for the quarter ended
March 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income $27,040 $24,509
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding losses arising during the period (3,762) (9,347)
Less: reclassification adjustment for gains included in net
income (net of tax of $670 and $105) 1,243 197
------- -------
Net (2,519) (9,150)
------- -------
Comprehensive Income $24,421 $15,359
======= =======
Accumulated Other comprehensive income Unrealized Gains
on Securities
---------------
Balance at December 31, 1997 $ 5,805
Change, net of tax (2,519)
-------
Balance at March 31, 1998 $ 3,286
=======
</TABLE>
5
<PAGE> 7
NOTE 3: SHAREHOLDERS' EQUITY
On April 28, 1998, stockholders of the Company approved an amendment to the
Company's articles of incorporation to increase the number of authorized shares
of common stock from 100,000,000 to 200,000,000 and the Board of Directors of
the Company approved a 2 for 1 split of the outstanding common stock effective
as of May 8, 1998. The shares herein have been restated as if the split had
occurred during the earliest period shown. References to authorized common stock
and outstanding shares in the Supplemental Consolidated Financial Statements
have been adjusted to reflect these actions.
6
<PAGE> 8
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The results of Atlantic Bancorp ("Atlantic"), the parent company of Atlantic
Bank N.A., and Morse, Payson and Noyes, an insurance brokerage firm, which were
acquired in transactions accounted for as purchases, are included from the date
of acquisition, October 1, 1997 and October 10, 1997, respectively. CFX
Corporation has been included in all financial data as if it were pooled for the
periods presented.
SUMMARY
Peoples Heritage Financial Group, Inc. the ("Company") reported net income of
$27.0 million, $0.30 per diluted share for the first quarter of 1998. This
compares with $24.5 million, or $0.27 per diluted share, for the first quarter
of 1997.
First quarter return on equity was 14.83%, which compared to 14.25% in the first
quarter of 1997. The first quarter return on assets was 1.12%, which compared to
1.25% for the same period in 1997. The increase in return on equity and decrease
in return on assets were primarily attributable to increases in securities and
residential mortgages which were funded with wholesale liabilities.
Earnings per basic and diluted share growth of 11%, when compared with the same
period last year, was driven by an 11% growth in net interest income, primarily
as a result of strong loan growth, which was generated both through acquisitions
and internally and by a 38% growth in non-interest income. This was partially
offset by a $3 million provision for loan and lease losses compared to a
provision of $942 thousand in 1997 and an increase of 19% in non-interest
expenses (exclusive of special charges). Selected quarterly data is provided in
Table 1.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - SELECTED QUARTERLY DATA
1998 1997 1997 1997 1997
First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $91,821 $91,611 $87,335 $84,429 $81,101
Provision for loan and lease losses 2,998 1,163 1,423 1,020 942
------- ------- ------- ------- -------
Net interest income after loan and lease loss provision 88,823 90,448 85,912 83,409 80,159
------- ------- ------- ------- -------
Noninterest income (excluding securities transactions) 22,992 24,983 19,899 17,456 17,763
Securities gains 1,913 1,196 594 475 302
Noninterest expenses (excluding special charges) 72,356 72,714 66,093 62,674 60,672
Special charges (1) 900 7,560 11,031 - -
------- ------ ------- ------- -------
Income before income taxes 40,472 36,353 29,281 38,666 37,552
Income tax expense 13,432 12,412 10,848 13,214 13,043
------- ------- ------- ------- ------
Net income $27,040 $23,941 $18,433 $25,452 $24,509
======= ======= ======= ======= =======
Basic earnings per share $ 0.31 $0.27 $0.22 $0.29 $ 0.28
Diluted earnings per share 0.30 0.27 0.21 0.28 0.27
Return on average assets (2) 1.13% 1.03% 0.86% 1.27% 1.27%
Return on average equity (2) 15.04% 13.61% 10.60% 14.86% 14.45%
Return on average assets (excluding special charges) (2) 1.16% 1.24% 1.19% 1.26% 1.27%
Return on average equity (excluding special charges) (2) 15.36% 16.41% 14.72% 14.86% 14.45%
Efficiency ratio (3) 61.06% 60.44% 59.51% 59.28% 61.30%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Special charges consists of merger-related expenses and charges related to
CFX Funding, discussed below.
(2) Annualized.
(3) Excludes distribution on securities subsidiary trust, special charges and
net securities gains.
7
<PAGE> 9
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following tables set forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. For purposes of the tables and the following discussion, (i)
income from interest-earning assets and net interest income is presented on a
fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) nonaccrual loans have been included in the appropriate average balance
loan category, but unpaid interest on nonaccrual loans has not been included for
purposes of determining interest income. Information is based on average daily
balances during the indicated periods.
The Company's taxable-equivalent net interest income increased 13% from the
first quarter of 1997 due to loan growth and the impact of the acquisition of
Atlantic in the fourth quarter of 1997. Table 2 shows the quarterly amounts of
net interest income by category and Table 3 shows the changes in tax equivalent
net interest income by category due to changes in rate and volume. The first
quarter of 1998 net interest margin was 4.18% compared to 4.55% for the first
quarter of 1997. The decline in the margin primarily reflects the significant
increase in mortgage loans, relatively low yielding assets, which were funded by
FHLB borrowings, relatively expensive funding, as well as a slight increase in
deposit rates in 1998 compared to 1997. It is expected that the average balance
of mortgage loans held for sale will decline somewhat in the second quarter, but
that competitive pressure on pricing of loans and deposits will continue. See
"Interest Rate Risk and Asset Liability Management" below.
8
<PAGE> 10
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1998 1997
First Fourth
-------------------------------------- --------------------------------------
Average Yield/(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 3,116,182 $ 60,224 7.73% $ 2,784,525 $ 54,524 7.83%
Commercial real estate mortgages 1,408,203 33,421 9.63 1,391,087 34,059 9.71
Commercial loans and leases 798,535 18,529 9.41 771,305 18,724 9.63
Consumer loans and leases 1,800,883 40,052 9.02 1,724,577 39,598 9.11
----------- --------- ----------- --------
Total loans and leases 7,123,803 152,226 8.62 6,671,494 146,905 8.76
----------- --------- ----------- --------
Securities (3) 1,683,576 27,389 6.55 1,833,909 30,668 6.66
Federal funds sold 47,054 675 5.82 42,689 644 5.99
----------- --------- 8.21 ----------- --------
Total earning assets 8,854,433 180,290 8,548,092 178,217 8.30
----------- --------- --------
Nonearning assets 821,175 769,988
----------- -----------
Total assets $ 9,675,608 $ 9,318,080
=========== ===========
Interest-bearing deposits:
Regular savings $ 1,084,150 $ 6,995 2.62% $ 1,080,708 7,219 2.65%
NOW and money market accounts 1,541,061 10,015 2.64 1,458,878 9,387 2.55
Certificates of deposits 3,148,063 43,314 5.58 3,105,400 43,683 5.58
----------- --------- ----------- --------
Total interest-bearing deposits 5,773,274 60,324 4.24 5,644,986 60,289 4.24
Borrowed funds 2,024,437 27,781 5.57 1,812,396 26,106 5.71
----------- --------- ----------- --------
Total interest-bearing liabilities 7,797,711 88,105 4.58 7,457,382 86,395 4.60
----------- --------- ----------- --------
Demand deposits 963,234 923,978
Other liabilities (3) 85,381 128,147
Securities of subsidiary trust 100,000 103,093
Shareholders' equity (3) 729,282 705,481
----------- -----------
Total liabilities and Shareholders' equity $ 9,675,608 $ 9,318,081
=========== ===========
Net earning assets $ 1,056,722 $ 1,090,710
=========== ===========
Net interest income (fully-taxable equivalent) 92,185 91,822
Less: fully-taxable equivalent adjustments (364) (211)
--------- --------
Net interest income $ 91,821 $ 91,611
========= ========
Net interest rate spread (fully-taxable equivalent) 3.63% 3.70%
===== ====
Net interest margin (fully-taxable equivalent) 4.18% 4.29%
===== ====
</TABLE>
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for
sale.
9
<PAGE> 11
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1997 1997
Third Second
-------------------------------------- -----------------------------------
Average Yield/(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $2,425,850 $ 47,896 7.90% $2,207,376 $ 43,951 7.96%
Commercial real estate mortgages 1,259,455 30,589 9.64 1,219,730 29,217 9.61
Commercial loans and leases 763,083 18,359 9.55 738,777 17,653 9.58
Consumer loans and leases 1,532,816 35,573 9.21 1,416,075 32,450 9.19
---------- -------- ---------- --------
Total loans and leases 5,981,204 132,417 8.81 5,581,958 123,271 8.85
---------- -------- ---------- --------
Securities (3) 1,868,673 30,288 6.43 1,856,902 30,731 6.63
Federal funds sold 22,905 163 4.83 18,185 210 4.63
---------- -------- ---------- --------
Total earning assets 7,872,787 162,868 8.23 7,457,045 154,212 8.29
---------- -------- ---------- --------
Nonearning assets 628,148 605,015
---------- ----------
Total assets $8,500,930 $8,062,060
========== ==========
Interest-bearing deposits:
Regular savings $ 1,047,442 $ 6,982 2.64% $1,053,675 $ 6,929 2.64%
NOW and money market accounts 1,379,506 7,817 2.25 1,377,839 8,338 2.43
Certificates of deposits 2,851,787 39,691 5.52 2,762,321 37,852 5.50
----------- -------- ---------- --------
Total interest-bearing deposits 5,278,735 54,490 4.10 5,193,835 53,119 4.10
Borrowed funds 1,512,913 20,827 5.46 1,193,979 16,481 5.54
----------- -------- ---------- --------
Total interest-bearing liabilities 6,791,648 75,317 4.40 6,387,814 69,600 4.37
----------- -------- ---------- --------
Demand deposits 841,667 797,533
Other liabilities (3) 77,740 89,887
Securities of subsidiary trust 100,000 100,000
Shareholders' equity (3) 689,875 686,826
---------- ----------
Total liabilities and shareholders' equity $ 8,500,930 $8,062,060
=========== ==========
Net earning assets $ 1,081,134 $1,069,231
=========== ==========
Net interest income (fully-taxable equivalent) 87,551 84,612
Less: fully-taxable equivalent adjustments (216) (183)
-------- --------
Net interest income $ 87,335 $ 84,429
======== ========
Net interest rate spread (fully-taxable
equivalent) 3.83% 3.92%
==== ====
Net interest margin (fully-taxable equivalent) 4.44% 4.54%
==== ====
</TABLE>
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for
sale.
10
<PAGE> 12
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1997
First
---------------------------------------------
Average Yield/(1)
Balance Interest Rate
------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $2,185,645 $ 43,355 7.93%
Commercial real estate mortgages 1,208,268 28,616 9.60
Commercial loans and leases 706,154 16,750 9.62
Consumer loans and leases 1,352,888 30,396 9.11
---------- --------
Total loans and leases 5,452,955 119,117 8.81
---------- --------
Securities (3) 1,693,222 27,640 6.57
Federal funds sold 30,517 494 6.57
---------- --------
Total earning assets 7,176,694 147,251 8.28
---------- --------
Nonearning assets 656,784
----------
Total assets $7,833,478
==========
Interest-bearing deposits:
Regular savings $1,059,471 6,866 2.63%
NOW and money market accounts 1,354,440 8,275 2.48
Certificates of deposits 2,711,567 36,540 5.47
---------- --------
Total interest-bearing deposits 5,125,478 51,681 4.09
Borrowed funds 1,097,988 14,330 5.29
---------- --------
Total interest bearing liabilities 6,223,466 66,011 4.30
---------- --------
Demand deposits 740,847
Other liabilities (3) 130,339
Securities of subsidiary trust 50,806
Shareholders' equity (3) 688,020
----------
Total liabilities and shareholders' equity $7,833,478
==========
Net earning assets $ 953,228
==========
Net interest income (fully-taxable equivalent) 81,240
Less: fully-taxable equivalent adjustments (139)
--------
Net interest income $ 81,101
========
Net interest rate spread (fully-taxable equivalent) 3.98%
====
Net interest margin (fully-taxable equivalent) 4.55%
====
</TABLE>
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for
sale.
11
<PAGE> 13
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 3 - RATE VOLUME ANALYSIS
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Quarterly
Change from Previous year due to changes in:
--------------------------------------------------------------
Total
Volume Rate (1) Change
------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans and leases $36,508 $(3,399) $33,109
Securities available for sale 2,360 (2,611) (251)
Federal funds sold 268 (87) 181
------- ------- -------
Total interest income 39,136 (6,097) 33,039
------- ------- -------
Interest expense:
Deposits
Regular savings 160 (31) 129
NOW and money market accounts 1,138 602 1,740
Certificates of deposit 5,882 892 6,774
------- ------- -------
Total deposits 7,180 1,463 8,643
Borrowed funds 12,090 1,361 13,451
------- ------- ------
Total interest expense 19,270 2,824 22,094
------- ------- ------
Net interest income (fully taxable equivalent) $19,866 $(8,921) $10,945
======= ======= =======
</TABLE>
(1) Includes changes in interest income and expense not due solely to volume or
rate changes.
NON-INTEREST INCOME
First quarter non-interest income of $24.9 million increased 38% from the first
quarter of 1997. The 1998 quarter included $2.9 million of insurance agency
commissions from the fourth quarter acquisition of Morse, Payson and Noyes,
which was accounted for as a purchase. Consequently, its income and expenses is
not reflected in the first quarter of 1997. Other significant increases from the
first quarter were a $856 thousand increase in customer service income, a $763
thousand increase in trust and investment advisory services income, a $332
thousand increase in mortgages banking services income and a $1.6 million
increase in net securities gains.
Customer services income of $7.8 million increased 12% from the first quarter of
1997. The increases was primarily attributable to increased fees due to growth
in transaction accounts and increases in ATM fees.
Trust and investment advisory services income increased 29% from the first
quarter of 1997. The increase in income reflects the continued growth in trust
assets under management. Assets under management were $3.0 billion, $2.7
billion and $1.6 billion at March 31, 1998, December 31, 1997 and March 31,
1997, respectively.
Mortgage banking services income of $5.8 million and $5.5 million provided 23%
and 30% of noninterest income for the quarters ended March 31, 1998 and March
31, 1997, respectively. The Company did not record a gain on sale of servicing
rights during the first quarter of 1998 while the quarters ended December 31,
1997 and March 31, 1997 included $325 thousand and $1.3 million of such gains,
respectively. The Company expects to continue to sell servicing rights
periodically in the future. The Company had $3.5 million in mortgage servicing
income in the first quarter compared to $2.3 million in the first quarter of
1997. The significant increase was due to the increase in residential mortgages
serviced for investors to $6.2 billion at March 31, 1998 from $4.6 billion at
March 31, 1997.
Capitalized mortgage servicing rights amounted to $79.4 million at March 31,
1998, which compared to $35 million at March 31, 1997. Loan origination volumes
increased significantly in the first quarter of 1998 as well as in the third and
fourth quarters of 1997. Consequently, capitalized mortgage servicing rights
increased $19 million in the first quarter of 1998 compared to the fourth
quarter of 1997 and increased $44 million when compared to the first quarter of
1997. See Tables 4 and 5 for details. Because mortgage servicing rights are an
interest-rate sensitive asset, the value of the Company's mortgage servicing
rights and the related mortgage
12
<PAGE> 14
banking income may be adversely impacted if mortgage interest rates decline and
actual or expected loan prepayments increase. To mitigate the prepayment risk
associated with adverse changes in interest rates and the resultant impairment
to mortgage servicing rights and effects on mortgage banking income, the Company
has established a hedge program against a portion of its mortgage servicing
rights to protect its value and mortgage banking income notwithstanding the
foregoing, there can be no assurance that significant declines in interest rates
will not have a material impact on the Company's mortgage servicing rights and
mortgage banking income or that the hedge program will be successful in
mitigating the effects of such a decline.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 4 - MORTGAGE BANKING SERVICES
At or for the Three Months Ended
March 31, December 31, September 30, June 30, March 31,
1998 1997 1997 1997 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential mortgages serviced for
investors at end of period $6,242,085 $5,381,003 $4,637,704 $4,107,607 $4,627,562
========== ========== ========== ========== ==========
Residential mortgage sales income $ 2,301 $ 4,970 $ 2,978 $ 2,625 $ 1,920
Residential mortgage servicing income, net 3,538 2,650 2,712 2,337 2,334
Gain on sale of mortgage servicing - 325 802 - 1,253
---------- ---------- ---------- ---------- ----------
Total $ 5,839 $ 7,945 $ 6,492 $ 4,962 $ 5,507
========== ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS
Balance at beginning of period $ 59,702 $ 44,814 $ 42,038 $ 35,288 $ 40,958
Mortgage servicing rights capitalized and purchased 35,679 25,111 15,278 9,840 8,226
Amortization charged against mortgage (3,865) (2,517) (2,011) (1,702) (1,695)
servicing fee income
Mortgage servicing rights sold (12,151) (7,706) (10,491) (1,388) (12,201)
---------- ---------- ---------- ------- ----------
Balance at end of period $ 79,365 $ 59,702 $ 44,814 $ 42,038 $ 35,288
========== ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense increased $10.1 million from the first quarter of 1997,
excluding special charges, amortization of intangibles and distribution on
securities of subsidiary trust. The increases were primarily related to the
acquisitions of Atlantic and Morse Payson and Noyes in the fourth quarter of
1997. Since both were accounted for as purchases, the amortization of goodwill
increased $832 thousand when compared to the first quarter of last year and $253
thousand when compared with the fourth quarter. The efficiency ratio was 61.06%
and 61.30% for the quarters ended March 31, 1998 and March 31, 1997,
respectively.
Salaries and benefits expense of $36.6 million increased $6.0 million from the
first quarter of last year. First quarter full-time equivalent employees were
3,509 at March 31, 1998 compared to 3,092 at March 31, 1997. The increase is
reflective of the recent acquisitions. It is anticipated that salary and
benefits expenses and the number of employees will decrease in coming quarters
as savings from the CFX merger are realized.
Occupancy expense increased $759 thousand from last year and $730 thousand from
the fourth quarter. The increased expenses were to accommodate the expansion of
operations as the recent acquisitions were assimilated. The Company had 197
branch offices and 3 loan production offices at March 31, 1998 compared to 188
and 3 loan production offices at March 31, 1997.
Data processing expense increased $281 thousand from the first quarter of last
year. The increase from the first quarter of last year was primarily due to
increased volume from the acquisition of Atlantic.
13
<PAGE> 15
Equipment expense increased $552 thousand from the first quarter of last year
and advertising and marketing expense increased $198 thousand. These increases
were primarily due to the effect of the acquisitions in the fourth quarter of
1997.
Amortization of goodwill and other intangibles increased $832 thousand from last
year and $253 thousand from the fourth quarter due to the goodwill associated
with the recent acquisitions which were accounted for as purchases.
Other noninterest expenses, which consist of general and administrative
expenses, increased $2.3 million from last year and decreased $1.7 million from
the fourth quarter. See Table 5 for details.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TABLE 5 - OTHER NON-INTEREST EXPENSES
1998 1997 1997 1997 1997
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C>
Miscellaneous loan costs $ 1,116 $ 1,385 $ 1,266 $ 1,440 $ 1,113
Telephone 1,758 1,838 1,527 1,443 1,395
Postage and freight 1,574 1,367 1,198 1,336 1,373
Office supplies 1,518 1,690 1,305 1,360 1,323
Deposits and other assessments 663 510 579 584 493
Collection and carrying costs of
non-performing assets 668 893 508 228 391
Other 5,670 6,945 5,628 7,558 4,547
------- ------- ------- ------- -------
Total $12,967 $14,628 $12,011 $13,949 $10,635
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
TAXES
The first quarter effective tax rate was 33% compared to 35% for the first
quarter of 1997. The lower rate for 1998 was due to the reorganization of
certain corporate entities and increased levels of bank-owned life insurance
(BOLI).
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 and conversion to
new software by its outside computer services, 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. Management
utilizes internal resources to implement Year 2000 compliance. However, the
Company expects to incur approximately $1.7 million in expenses associated with
the implementation in 1998. The costs to complete the Year 2000 modifications
are based on management's estimates. However, actual results could differ from
these plans.
14
<PAGE> 16
FINANCIAL CONDITION
BALANCE SHEET
The discussion and analysis that follows is based upon information set forth in
Table 2 regarding average balances, yields and rates.
SECURITIES AND OTHER EARNING ASSETS
The Company's securities portfolio averaged $1.7 billion during the first
quarter of 1998, $1.8 billion in the fourth quarter of 1997 and $1.7 billion in
the first quarter of 1997 and consisted primarily of U. S. Treasury securities
and mortgage-backed securities, most of which are seasoned 15 year agency
securities. Other securities consisted of collateralized mortgage obligations
and asset-backed securities. Substantially all securities are AAA or
equivalently rated. The average yield on securities was 6.55% and 6.57% for the
quarters ended March 31, 1998 and March 31, 1997, respectively. The decline in
yields was due to reinvestment of maturing securities at lower yields during a
declining interest rate environment. Securities available for sale are carried
at fair value and had a pretax unrealized gain of $5.8 million and $9.1 million
at March 31, 1998 and December 31, 1997, respectively, and a $12.9 million
unrealized loss at March 31, 1997.
LOANS AND LEASES
Average loans of $7.1 billion during the first quarter of 1998 increased 31%
from the first quarter of 1997. The increase from the first quarter of 1997 was
primarily a result of the acquisition of Atlantic and internal growth in
residential and consumer loans. Loans as a percent of average earning assets
increased from 78% at the end of 1997 to 80% at March 31, 1998.
Average residential real estate loans (which includes loans held for sale) of
$3.1 billion grew 43% from last year. Excluding the Atlantic acquisition of $156
million in loans, residential real estate loans increased 35% from the first
quarter of 1997. Large volume increases in mortgages held for sale accounted for
the growth as lower long-term interest rates spurred an increase in the retail
and correspondent originations. It is anticipated that loans held for sale,
which amounted to $914 million at March 31, 1998, will decline somewhat in the
second quarter.
Average commercial real estate loans of $1.4 billion increased 16.5% from the
first quarter of last year. Excluding the Atlantic acquisition of $102.0 million
in loans, commercial real estate loans grew 16%. The growth is consistent with
the Company's focus on lending to small and medium size business customers
within its geographic market. The average yield on commercial real estate loans
during the first quarter of 1998 was 9.63% as compared to 9.60% in the first
quarter of 1997.
Average commercial loans of $799 million during the first quarter of 1998
increased 13% from the first quarter of 1997. Excluding the Atlantic
acquisition, commercial loans increased 17% from the first quarter of 1997. The
yield on commercial loans decreased to 9.41% in the first quarter of 1998 from
9.62% in the first quarter of 1997. This decrease is reflective of increased
competition.
Average consumer loans grew 33% from last year. Excluding the Atlantic
acquisition, consumer loans increased 31%. The increase was primarily in
indirect auto loans, student loans and home equity loans. Mobile home loans
continue to decline as the Company has emphasized other types of consumer loan
products.
ASSET QUALITY
As shown in Table 6, nonperforming assets were $72.6 million at March 31, 1998,
which represented 0.72% of total assets. This compares to $61.0 million at March
31, 1997. The increase from the first quarter of 1997 was primarily due to the
Atlantic acquisition. The Company continues to monitor the asset quality with
regular reviews of its portfolio in accordance with its lending and credit
policies.
The Company's residential loan portfolio accounted for 37% of the total loan
portfolio at March 31, 1998, as compared with 38% at March 31, 1997. 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 March 31, 1998, 0.54% of the Company's residential loans were
nonperforming, as compared with 0.52% at March 31, 1997.
The Company's commercial real estate loan portfolio accounted for 22% of the
total loan portfolio at March 31, 1998, and 23% at March 31, 1997. It is the
intention of the Company to maintain commercial real estate loans as a
percentage of the overall loan portfolio at the same or lower levels in the
future. At March 31, 1998, 1.62% of the Company's commercial real estate loans
were nonperforming, as compared with 1.87% at March 31, 1997.
15
<PAGE> 17
The Company's commercial business loan portfolio accounted for 13% of the total
loan portfolio at March 31, 1998 and 13% at March 31, 1997. Commercial business
loans are not concentrated in any particular industry, but reflect the
broad-based economies of Maine, New Hampshire and northern Massachusetts. The
Company's commercial business loans are generally to small and medium size
businesses located within its geographic market area. At March 31, 1998, 2.1% of
the Company's commercial business loans were non-performing, as compared with
1.2% at March 31, 1997 and 1.1% at December 31, 1997.
The Company's consumer loan portfolio accounted for 28% of the total loan
portfolio at March 31, 1998, as compared with 27% at December 31, 1997 and 26%
at March 31, 1997. At March 31, 1998, 0.54% of the Company's consumer loans were
nonperforming, as compared with 0.49% at March 31, 1997.
<TABLE>
<CAPTION>
TABLE 6 - NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
March 31 December 31, September 30, June 30, March 31,
1998 1997 1997 1997 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $12,688 $15,323 $13,259 $ 9,735 $10,540
Commercial real estate loans:
Nonaccrual loans 20,700 19,582 19,314 20,127 19,717
Troubled debt restructurings 2,178 2,304 2,285 2,520 2,637
------- ------- ------- ------- -------
Total 22,878 21,886 21,599 22,647 22,354
------- ------- ------- ------- -------
Commercial business loans and leases:
Nonaccrual loans 17,442 13,255 9,880 9,326 8,573
Troubled debt restructurings 207 114 118 193 199
------- ------- ------- ------- -------
Total 17,649 13,369 9,998 9,519 8,772
------- ------- ------- ------- -------
Consumer loans and leases:
Nonaccrual loans 9,771 8,473 7,020 6,966 6,737
------- ------- ------- ------- -------
Total nonperforming loans:
Nonaccrual loans 60,601 56,633 49,473 46,154 45,567
Troubled debt restructurings 2,384 2,418 2,403 2,713 2,836
------- ------- ------- ------- -------
Total 62,985 59,051 51,876 48,867 48,403
------- ------- ------- ------- -------
Other nonperforming assets:
Other real estate owned, net of related reserves 5,453 7,158 8,671 12,380 10,408
In substance foreclosure, net of allowance 0 0 0 0 1,964
Repossessions, net of related reserves 4,158 3,218 1,837 2,843 199
------- ------- ------- ------- -------
Total other nonperforming assets 9,611 10,376 10,508 15,223 12,571
------- ------- ------- ------- -------
Total nonperforming assets $72,596 $69,427 $62,384 $64,090 $60,974
======= ======= ======= ======= =======
Accruing loans which are 90 days overdue $ 8,953 $ 8,355 $ 6,324 $ 5,866 $ 6,398
======= ======= ======= ======== ========
Total nonperforming loans as a percentage of total loans (1) 0.98% 0.91% 0.89% 0.88% 0.91%
Total nonperforming assets as a percentage of total assets 0.72% 0.72% 0.70% 0.77% 0.76%
Total nonperforming assets as a percentage of total loans
(1) and total other nonperforming assets 1.13% 1.06% 1.07% 1.15% 1.15%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Exclusive of loans held for sale.
16
<PAGE> 18
PROVISION/ALLOWANCE FOR LOAN LOSSES
The Company provided $3 million for loan and lease losses in the first quarter
of 1998, compared to $942 thousand in the first quarter of 1997. As shown in
Table 7, net charge-offs for the first quarter of 1998 were $3.5 million, or 20
basis points of average loans outstanding, compared to $1.7 million, or 13 basis
points of average loans outstanding, for the first quarter of 1997.
At March 31, 1998, the allowance for loan and lease losses amounted to $89.5
million or 1.40% of total portfolio loans, as compared to 1.64% at March 31,
1997. The ratio of the allowance for loan and lease losses to nonperforming
loans was 142% at March 31, 1998 and 182% at March 31, 1997. Management
considers the allowance appropriate and adequate to cover potential losses
inherent in the loan portfolio based on the current economic environment.
Provisions for loan losses are attributable to management's ongoing evaluation
of the adequacy of the allowance for loan and lease losses, which includes,
among other procedures, consideration of the character and size of the loan
portfolio, monitoring trends in nonperforming loans, delinquent loans and net
charge-offs, as well as new loan originations and other asset quality factors.
Although management utilizes its best judgment in providing for possible losses,
there can be no assurance that the Company will not have to change its
provisions for loan losses in subsequent periods. Changing economic and business
conditions in northern New England, fluctuations in local markets for real
estate, future changes in nonperforming asset trends, large upward movements in
market-based interest rates or other reasons could affect the Company's future
provisions for loans losses. Based on anticipated growth in assets, it is likely
that the Company will continue providing for loan losses in 1998.
<TABLE>
<CAPTION>
TABLE 7 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1997 1997
First Fourth Third Second
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average loans and leases outstanding during the period (1) $7,123,803 $6,671,494 $5,981,204 $5,581,958
========== ========== ========== ==========
Allowance at beginning of period $ 89,983 $ 84,370 $ 85,736 $ 87,038
Additions due to acquisitions and purchases 0 7,361 0 0
Charge-offs:
Residential real estate mortgages 1,116 821 486 562
Commercial real estate mortgages 371 713 305 237
Commercial business loans and leases 519 2,827 1,787 1,295
Consumer loans and leases 3,651 2,784 3,794 1,620
---------- ---------- ---------- ----------
Total loans charged off 5,657 7,145 6,372 3,714
---------- ---------- ---------- ----------
Recoveries:
Residential real estate mortgages 140 278 101 255
Commercial real estate mortgages 603 2,142 1,497 302
Commercial business loans and leases 709 958 1,454 574
Consumer loans and leases 678 856 541 251
---------- ---------- --------- ----------
Total loans recovered 2,130 4,234 3,593 1,382
---------- ---------- --------- ----------
Net charge-offs 3,527 2,911 2,779 2,332
Additions charged to operating expenses 2,998 1,163 1,413 1,030
---------- ---------- --------- ----------
Allowance at end of period $ 89,454 $ 89,983 $ 84,370 $ 85,736
========== ========== ========= ==========
Ratio of net charge-offs to average loans and leases
outstanding during the period-annualized (1) 0.20% 0.17% 0.19% 0.17%
Ratio of allowance to total loans and leases at end of period (2) 1.40% 1.38% 1.45% 1.54%
Ratio of allowance to nonperforming loans at end of period 142% 152% 166% 176%
Ratio of net chargeoffs as a percent of average
outstanding loans-annualized (1):
Residential real estate mortgages 0.13% 0.08% 0.06% 0.06%
Commercial real estate mortgages (0.07%) (0.41%) (0.38%) (0.02%)
Commercial business loans and leases (0.10%) 0.97% 0.17% 0.39%
Consumer loans and leases 0.66% 0.45% 0.85% 0.39%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
TABLE 7 - ALLOWANCE FOR LOAN AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------
1997
First
Quarter
<S> <C>
Average loans and leases outstanding during the period (1) $5,452,955
==========
Allowance at beginning of period $ 87,820
Additions due to acquisitions and purchases 0
Charge-offs:
Residential real estate mortgages 768
Commercial real estate mortgages 854
Commercial business loans and leases 482
Consumer loans and leases 1,866
----------
Total loans charged off 3,970
----------
Recoveries:
Residential real estate mortgages 195
Commercial real estate mortgages 1,053
Commercial business loans and leases 721
Consumer loans and leases 277
----------
Total loans recovered 2,246
----------
Net charge-offs 1,724
Additions charged to operating expenses 942
----------
Allowance at end of period $ 87,038
==========
Ratio of net charge-offs to average loans and leases
outstanding during the period-annualized (1) 0.13%
Ratio of allowance to total loans and leases at end of period (2) 1.64%
Ratio of allowance to nonperforming loans at end of period 182%
Ratio of net chargeoffs as a percent of average
outstanding loans-annualized (1):
Residential real estate mortgages 0.10%
Commercial real estate mortgages (-0.07%)
Commercial business loans and leases (-0.14%)
Consumer loans and leases 0.47%
- -------------------------------------------------------------------------------------------------
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Excludes loans held for sale.
</TABLE>
18
<PAGE> 20
DEPOSITS
Average deposits of $6.7 billion during the first quarter of 1998 increased 15%
from the first quarter of 1997 primarily as a result of the assumption of $354.4
million of Atlantic deposits in the fourth quarter of 1997 and increased
brokered deposits. The loan to deposit ratio was 92% and 97% at March 31, 1998,
1997 and December 31, 1997, respectively.
Average transaction accounts (demand deposit, NOW and money market accounts) of
$2.5 billion during the first quarter of 1998 increased 20% from the first
quarter of 1997. The increase was primarily a result of the acquisition of $126
million in brokered money market deposits in the first quarter of 1998, as well
as the result of the acquisition of Atlantic's $98 million of transaction
deposits. The average rates paid on NOW and money market accounts during the
first quarter of 1998 was 2.64%, as compared to 2.48% in the first quarter of
1997. The increase in the 1998 quarter is reflective of the rates paid on the
brokered money market deposits of 5.5% and growth in tiered money market
accounts.
Average savings and time deposit balances of $4.2 billion increased 12.2% from
the first quarter of 1997. Excluding the acquisition of Atlantic's deposits, the
increase from the first quarter was 10.5%. The average rates paid on savings
deposits remained relatively unchanged. Time deposit rates increased slightly
due to the higher rates paid on brokered deposits.
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 the first quarter of 1998 was $1.5
billion, as compared to $741 million for the first quarter of 1997. FHLB
borrowings increased because growth in earning assets, particularly mortgages
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 March 31, 1998, FHLB
borrowings amounted to $1.6 billion and the additional borrowing capacity was
$1.4 million.
Average balances for securities sold under repurchase agreements were $490
million and $357 million for the quarters ended March 31, 1998 and March 31,
1997, respectively. These borrowings are secured by mortgage backed securities
and U.S. Government obligations.
LIQUIDITY
For banks, liquidity represents the ability to meet both loan commitments and
deposit withdrawals. Funds to meet these needs generally can be obtained by
converting liquid assets to cash or by attracting new deposits or other sources
of funding. Many factors affect a bank's ability to meet liquidity needs,
including variations in the markets served, its asset-liability mix, its
reputation and credit standing in the market and general economic conditions.
In addition to traditional in-market deposit sources, the Company has many other
sources of liquidity, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and other non-relationship funding
sources, such as FHLB borrowings, senior or subordinated debt, commercial paper
and wholesale purchased funds. Management believes that the high proportion of
residential and installment consumer loans in the Company's loan portfolio
provides it with an additional amount of contingent liquidity through the
conventional securitization programs that exist today. Management believes that
the level of liquidity is sufficient to meet current and future funding
requirements.
CAPITAL
At March 31, 1998, shareholders' equity amounted to $745 million. In addition,
through a subsidiary trust, the Company has issued $100 million of Capital
Securities which mature in 2027 and qualify as Tier 1 Capital. The Company paid
a $0.11 per share dividend during the first quarter of 1998, representing a
32.55% dividend payout ratio.
Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 8. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.
The Company's banking subsidiaries are also subject to federal, and in certain
cases state, regulatory capital requirements. At March 31, 1998, each of the
Company's banking subsidiaries was deemed to be "well capitalized" under the
regulations of the applicable federal banking agency.
19
<PAGE> 21
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 8 - REGULATORY CAPITAL REQUIREMENTS
For Capital
Actual Adequacy Excess
Purposes
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Total capital (to risk weighted assets) $794,085 12.70% $500,242 8.00% $293,843 4.70%
Tier 1 capital (to risk weighted assets) 715,783 11.45 250,121 4.00 465,662 7.45
Tier 1 leverage capital ratio (to average 715,783 7.48 383,000 4.00 332,783 3.48
assets)
As of December 31, 1997:
Total capital (to risk weighted assets) 762,391 12.65 482,056 8.00 280,335 4.65
Tier 1 capital (to risk weighted assets) 687,421 11.41 241,028 4.00 446,393 7.41
Tier 1 leverage capital (to average assets) 687,421 7.51 366,124 4.00 321,297 3.51
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INTEREST RATE RISK AND ASSET-LIABILITY MANAGEMENT
The Company's interest rate risk and asset and liability management are the
responsibility of the Company's a Liquidity and Funds Management Committee,
which reports to the Liquidity and Funds Management Committee of 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 by far 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 loan
rates are substantially higher than rates on existing loans and, conversely,
decrease when rates on existing loans are substantially lower than current loan
rates (due to refinancing of loans at lower rates), (iv) the value of the
institution's investment securities and mortgage loans and the resultant ability
to realize gains on the sale of such assets, (v) the carrying value of
investment securities classified as available for sale and the resultant
adjustments to shareholders' equity and (vi) the value of mortgage servicing
rights.
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 the Company's 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 the maturity, repricing and/or runoff characteristics
of some of the Company's assets and liabilities.
20
<PAGE> 22
To cope with these uncertainties, management gives careful attention to its
assumptions. For example, many of the Company's interest-bearing deposit
products (NOW accounts, savings and money market deposits) have no contractual
maturity and based on historical experience generally have limited 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 right 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 various assumptions such as those discussed above.
The Company's policy on interest rate risk specifies that if interest rates were
to shift immediately up or down 200 basis points, estimated net interest income
should change by less than 10%. Management estimates, based on its simulation
model, that an instantaneous 2% increase in interest rates at March 31, 1998
would result in less than a 2% decrease in net interest income over the next 12
months while a 2% decrease in rates would result in approximately a 2% decrease
in net interest income over the next 12 months. The Company estimates 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 scenario. It should be emphasized that the foregoing
results are highly dependent on material assumptions such as those discussed
above.
COMPLETED ACQUISITION
On April 10, 1998, the Company completed the acquisition of CFX Corporation. The
acquisition was effected by means of the merger of CFX with and into the
Company. Each share of common stock of CFX outstanding prior to the merger
(other than dissenting shares) was converted into the right to receive 0.667 of
a share of the Company's common stock, which approximated 16,393,709 shares of
common stock. The merger was accounted for as a pooling-of-interests.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits", which revises the required
disclosures for employee benefit plans. This Statement will become 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 those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of events or circumstances
after the date of such statements.
21
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 452,116
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 106,057
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,614,529
<INVESTMENTS-CARRYING> 27,594
<INVESTMENTS-MARKET> 27,851
<LOANS> 6,404,737
<ALLOWANCE> 89,454
<TOTAL-ASSETS> 10,030,947
<DEPOSITS> 6,963,053
<SHORT-TERM> 2,116,601
<LIABILITIES-OTHER> 106,683
<LONG-TERM> 0
100,000
0
<COMMON> 899
<OTHER-SE> 743,711
<TOTAL-LIABILITIES-AND-EQUITY> 10,030,947
<INTEREST-LOAN> 151,985
<INTEREST-INVEST> 27,942
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 179,927
<INTEREST-DEPOSIT> 60,325
<INTEREST-EXPENSE> 27,781
<INTEREST-INCOME-NET> 91,821
<LOAN-LOSSES> 2,998
<SECURITIES-GAINS> 1,913
<EXPENSE-OTHER> 73,256
<INCOME-PRETAX> 40,472
<INCOME-PRE-EXTRAORDINARY> 40,472
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,040
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
<YIELD-ACTUAL> 4.16
<LOANS-NON> 60,601
<LOANS-PAST> 8,953
<LOANS-TROUBLED> 2,384
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 89,983
<CHARGE-OFFS> 5,657
<RECOVERIES> 2,130
<ALLOWANCE-CLOSE> 89,454
<ALLOWANCE-DOMESTIC> 89,454
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,242
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 424,567
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,091
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,802,758
<INVESTMENTS-CARRYING> 28,184
<INVESTMENTS-MARKET> 28,495
<LOANS> 6,524,221
<ALLOWANCE> 89,983
<TOTAL-ASSETS> 9,668,242
<DEPOSITS> 6,747,419
<SHORT-TERM> 1,982,190
<LIABILITIES-OTHER> 117,850
<LONG-TERM> 0
100,000
0
<COMMON> 893
<OTHER-SE> 719,890
<TOTAL-LIABILITIES-AND-EQUITY> 9,668,242
<INTEREST-LOAN> 521,509
<INTEREST-INVEST> 117,961
<INTEREST-OTHER> 2,281
<INTEREST-TOTAL> 641,751
<INTEREST-DEPOSIT> 219,812
<INTEREST-EXPENSE> 77,463
<INTEREST-INCOME-NET> 344,476
<LOAN-LOSSES> 4,548
<SECURITIES-GAINS> 2,697
<EXPENSE-OTHER> 280,556
<INCOME-PRETAX> 141,852
<INCOME-PRE-EXTRAORDINARY> 141,852
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,335
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 4.45
<LOANS-NON> 56,633
<LOANS-PAST> 8,355
<LOANS-TROUBLED> 2,418
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 87,820
<CHARGE-OFFS> 20,645
<RECOVERIES> 10,899
<ALLOWANCE-CLOSE> 89,983
<ALLOWANCE-DOMESTIC> 89,983
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,242
</TABLE>
