<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16947
PEOPLES HERITAGE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Maine 01-0437984
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
One Portland Square, Portland, Maine 04112
(Address of principal executive offices (Zip Code)
(207) 761-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the Registrant's common stock as of August
1, 1999 is:
Common stock, par value $.01 per share 104,808,904
(Class) (Outstanding)
<PAGE> 2
INDEX
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income - Three and
Six Months ended June 30, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders'
Equity - Six months ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal proceedings 30
Item 2. Changes in securities 30
Item 3. Defaults upon senior securities 30
Item 4. Submission of matters to a vote of security holders 30
Item 5 Other information 30
Item 6 Exhibits and reports on Form 8-K 30
</TABLE>
2
<PAGE> 3
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 397,060 $ 415,435
Federal funds sold and other short term investments 45,194 283,878
Securities available for sale, at market value 5,044,822 2,986,131
Securities held to maturity (fair value of $612.5 million
at June 30, 1999) 601,151 245,233
Loans held for sale 132,325 517,754
Loans and leases:
Residential real estate mortgages 1,533,439 2,230,615
Commercial real estate mortgages 1,727,284 1,621,890
Commercial business loans and leases 1,267,105 1,146,242
Consumer loans and leases 2,088,700 2,089,284
------------ ------------
6,616,528 7,088,031
Less: Allowance for loan and lease losses 110,639 110,561
------------ ------------
Net loans and leases 6,505,889 6,977,470
Premises and equipment 139,541 144,574
Goodwill and other intangibles 117,144 124,363
Mortgage servicing rights 47,314 40,088
Bank-owned life insurance 222,262 66,944
Other assets 226,996 248,369
============ ============
$ 13,479,698 $ 12,050,239
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 1,285,715 $ 1,284,074
Money market and NOW accounts 2,112,302 2,073,793
Certificates of deposit 3,335,663 3,455,541
Brokered deposits 185,155 257,570
Demand deposits 1,285,492 1,305,737
------------ ------------
Total deposits 8,204,327 8,376,715
Federal funds purchased and securities sold under
repurchase agreements 568,413 591,970
Borrowings from the Federal Home Loan Bank of Boston 3,644,173 1,936,585
Other borrowings 33,441 25,659
Other liabilities 65,839 118,182
------------ ------------
Total liabilities 12,516,193 11,049,111
------------ ------------
Company obligated, mandatory redeemable securities of
subsidiary trust holding solely parent junior
subordinated debentures 68,775 100,000
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, 106,647,497 and 106,647,585
shares issued) 1,066 1,066
Paid-in capital 507,914 509,473
Retained earnings 471,582 447,438
Unearned compensation (1,970) (2,027)
Accumulated other comprehensive income (loss):
Net unrealized loss on securities available for sale (46,905) (1,651)
Treasury stock, at cost (2,547,693 shares and 2,845,731
shares) (36,957) (53,171)
------------ ------------
Total shareholders' equity 894,730 901,128
------------ ------------
$ 13,479,698 $ 12,050,239
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 139,935 $ 169,225 $ 294,406 $ 338,439
Interest and dividends on securities 80,415 39,389 136,192 79,854
------------ ------------ ------------ ------------
Total interest and dividend income 220,350 208,614 430,598 418,293
Interest expense:
Interest on deposits 63,428 72,072 128,404 142,945
Interest on borrowed funds 47,796 30,323 85,130 62,577
------------ ------------ ------------ ------------
Total interest expense 111,224 102,395 213,534 205,522
Net interest income 109,126 106,219 217,064 212,771
Provision for loan and lease losses 3,565 3,235 7,130 6,484
------------ ------------ ------------ ------------
Net interest income after provision for
loan and lease losses 105,561 102,984 209,934 206,287
Noninterest income:
Customer services 12,738 10,070 23,550 19,555
Mortgage banking services 6,576 9,517 10,781 16,884
Insurance commissions 4,314 2,790 9,596 5,688
Trust and investment advisory services 5,200 4,189 9,645 7,796
Bank-owned life insurance income 3,009 878 5,318 1,926
Net securities gains 260 2 278 2,052
Other noninterest income 1,683 2,828 4,046 5,089
------------ ------------ ------------ ------------
33,780 30,274 63,214 58,990
Noninterest expenses:
Salaries and employee benefits 39,170 40,183 79,340 82,995
Data processing 7,093 5,596 14,099 11,410
Occupancy 6,955 6,661 13,904 13,820
Equipment 5,407 4,811 10,214 10,736
Distributions on securities of subsidiary trust 1,585 2,286 3,571 4,530
Amortization of goodwill and other intangibles 2,933 2,914 5,901 5,776
Advertising and marketing 2,321 2,884 4,654 5,653
Special charges -- 34,474 33,235 35,374
Other noninterest expenses 13,848 14,538 25,398 29,041
------------ ------------ ------------ ------------
79,312 114,347 190,316 199,335
Income before income tax expense 60,029 18,911 82,832 65,942
Applicable income tax expense 19,263 6,375 28,572 22,290
------------ ------------ ------------ ------------
Net income $ 40,766 $ 12,536 $ 54,260 $ 43,652
============ ============ ============ ============
Weighted average shares outstanding:
Basic 103,957,104 103,404,866 103,708,421 103,391,860
Diluted 105,121,969 105,761,510 105,003,725 105,750,425
Earnings per share:
Basic $ 0.39 $ 0.12 $ 0.52 $ 0.42
Diluted 0.39 0.12 0.52 0.41
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Compen- Other
Par Paid-in Retained sation Comprehensive Treasury
Value Capital Earnings ESOP Income (Loss) Stock Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $1,066 $509,473 $447,438 ($2,027) ($1,651) ($53,171) $901,128
Net income - - 54,260 - - - 54,260
Unrealized losses on securities, net of
reclassification adjustment - - - - (45,254) - (45,254)
--------
Comprehensive income 9,006
--------
Common stock issued for employee benefit plans - - (6,057) - - 16,214 10,157
Decrease in unearned compensation - 244 - 57 - - 301
Premium on repurchase of trust preferred securities - (1,801) - - - - (1,801)
Payment of fractional shares - (2) - - - - (2)
Cash dividends - - (24,059) - - - (24,059)
---------------------------------------------------------------------------
Balances at June 30, 1999 $1,066 $507,914 $471,582 ($1,970) ($46,905) ($36,957) $894,730
===========================================================================
Balances at December 31, 1997 $1,053 $491,033 $379,017 ($3,123) $7,938 ($29,663) $846,255
Net income - - 43,652 - - - 43,652
Unrealized gains (losses) on securities net of
reclassification adjustment - - - - (2,196) - (2,196)
--------
Comprehensive income 41,456
--------
Cancellation of treasury shares at acquisition (1) (1,879) - - - 1,880 -
Common stock issued for employee benefit plans 8 6,486 (763) (567) - 5,511 10,675
Treasury stock purchased - - - - - (24,460) (24,460)
Decrease in unearned compensation - 666 - 747 - - 1,413
Cash dividends - - (20,345) - - - (20,345)
---------------------------------------------------------------------------
Balances at June 30, 1998 $1,060 $496,306 $401,561 ($2,943) $5,742 ($46,732) $854,994
===========================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,260 $ 43,652
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and lease losses 7,130 6,484
Depreciation 9,709 10,008
Amortization of goodwill and other intangibles 5,901 5,776
Net increase (decrease) in net deferred tax liabilities (1,675) 30,323
ESOP and restricted stock expense 301 1,413
Net (gains) losses realized from sales of securities
and consumer loans (278) (2,052)
Net (gains) losses realized from sales of loans held
for sale (a component of mortgage banking services) 1,561 13,857
Earnings from bank owned life insurance (5,318) (1,926)
Net (increase) in mortgage servicing rights (7,226) (35,418)
Proceeds from sales of loans held for sale 687,667 1,611,015
Residential loans originated and purchased for sale (303,799) (1,860,175)
Net decrease (increase) in interest and dividends
receivable and other assets (33,039) (4,082)
Net increase (decrease) in other liabilities 31,982 (30,049)
----------- -----------
Net cash provided (used) by operating activities $ 447,176 ($ 211,174)
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale $ 27,461 $ 304,920
Proceeds from maturities and principal repayments of
securities available for sale 821,397 567,701
Purchases of securities available for sale (2,734,212) (648,388)
Proceeds from maturities and principal repayments of
securities held to maturity 31,584 41,086
Purchase of securities held to maturity -- (81,846)
Net (increase) decrease in loans and leases (168,284) 83,257
Purchase of bank owned life insurance (150,000) --
Net additions to premises and equipment (4,676) (4,623)
----------- -----------
Net cash provided (used) by investing activities ($2,176,730) $ 262,107
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits ($ 172,388) $ 173,616
Net increase (decrease) in securities sold under
repurchase agreements (23,557) (26,787)
Proceeds from Federal Home Loan Bank of Boston
borrowings 2,155,000 2,306,769
Payments on Federal Home Loan Bank of Boston
borrowings (447,412) (2,149,067)
Net increase (decrease) in other borrowings 7,782 8,408
Repurchase of trust preferred securities (33,026) --
Issuance of stock 10,155 11,546
Purchase of treasury stock -- (24,460)
Dividends paid (24,059) (20,345)
----------- -----------
Net cash provided by financing activities $ 1,472,495 $ 279,680
----------- -----------
Increase (decrease) in cash and cash equivalents ($ 257,059) $ 330,613
Cash and cash equivalents at beginning of period 699,313 390,426
----------- -----------
Cash and cash equivalents at end of period $ 442,254 $ 721,039
=========== ===========
For the six months ended June 30, 1999 and 1998,
interest of $211,739 and $209,864 and income taxes
of $17,403 and $22,052 were paid, respectively
</TABLE>
6
<PAGE> 7
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 1998 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
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for any other interim period or the entire year ending
December 31, 1999. Certain amounts in the prior periods have been reclassified
to conform to the current presentation.
On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc.
("SIS"), which was accounted for under the pooling-of-interests method.
Accordingly, the consolidated financial statements of the Company have been
restated to reflect the acquisition at the beginning of each period presented.
At December 31, 1998, SIS had total assets of $2.0 billion and total
shareholders' equity of $139 million. Effective January 1, 1999, the Company
transferred all securities classified by SIS as "held to maturity" to "available
for sale." This transfer was done to be consistent with the Company's interest
rate risk management policies.
NOTE 2 - OTHER COMPREHENSIVE INCOME
The components of total comprehensive income for the Company are net income
and unrealized gains (losses) on securities available for sale, net of tax.
The following is a reconciliation of comprehensive income for the six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 54,260 $ 43,652
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period (45,073) (862)
Less: reclassification adjustment for gains
included in net income 181 1,334
-------- --------
Net (45,254) (2,196)
-------- --------
Comprehensive income $ 9,006 $ 41,456
======== ========
</TABLE>
NOTE 3 - OTHER MATTERS
In June 1999, the Company reached a definitive agreement to acquire Banknorth
Group, Inc. ("Banknorth"), a $4.4 billion bank holding company based in
Burlington, Vermont. Under the terms of the agreement, shareholders of Banknorth
will receive 1.825 shares of Peoples Heritage Common Stock for each whole share
of Banknorth Common stock, plus cash in lieu of any fractional share. The
exchange is expected to be tax-free and accounted for as a pooling-of-interests.
The transaction, which is subject to approval by shareholders of both Banknorth
and the Company and various regulatory agencies, is anticipated to be completed
by the end of 1999.
7
<PAGE> 8
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
The Company reported net income of $40.8 million, or $0.39 per diluted share,
for the second quarter of 1999. This compares with $12.5 million, or $0.12 per
diluted share, for the second quarter of 1998 and $13.5 million, or $0.13 per
diluted share, for the first quarter of 1999. Special charges were recorded in
the first quarter of 1999 and the second quarter of 1998. See Non-Interest
Expense and Table 5 for more information related to special charges.
The Company reported operating income (exclusive of special charges) of $40.8
million, or $0.39 per diluted share, for the second quarter of 1999 compared
with $36.6 million, or $0.35 per diluted share, for the second quarter of 1998
and $37.6 million, or $0.36 per diluted share, for the first quarter of 1999.
The second quarter results represent an 11% increase in operating earnings per
diluted share, compared to the same period last year.
Second quarter operating return on equity was 18.08%, which compared to 17.08%
in the second quarter of 1998 and 17.23% in the first quarter of 1999. The
operating return on assets was 1.25% for the second quarter of 1999, compared to
1.27% in the second quarter of 1998 and 1.25% in the first quarter of 1999.
The improved operating results for the second quarter of 1999, compared to the
second quarter of 1998, primarily reflect noninterest income growth coupled with
cost savings achieved as a result of the SIS acquisition. Noninterest income
increased 12% compared to the second quarter of 1998. The efficiency ratio
(noninterest expense excluding distributions on securities of subsidiary trust
and special charges, as a percentage of net interest income and noninterest
income, excluding net securities gains) was 54.49% for the second quarter of
1999 compared to 56.84% for the second quarter of 1998 and 55.17% for the first
quarter of 1999. Selected quarterly data and ratios and per share data, both as
reported and on an operating basis, are provided in Table 1.
8
<PAGE> 9
TABLE 1 - Selected Quarterly Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1999 1998 1998 1998 1998
Second First Fourth Third Second First
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $109,126 $107,938 $106,233 $107,469 $106,219 $106,552
Provision for loan and lease losses 3,565 3,565 3,973 3,973 3,235 3,249
--------------------------------------------------------------------
Net interest income after loan
and lease loss provision 105,561 104,373 102,260 103,496 102,984 103,303
Noninterest income (excluding
securities transactions) 33,520 29,416 28,350 27,499 30,272 26,666
Net securities gains 260 18 2,395 1,457 2 2,050
Noninterest expenses (excluding
special charges) 79,312 77,769 79,574 78,296 79,873 84,088
Special charges (1) -- 33,235 3,798 -- 34,474 900
--------------------------------------------------------------------
Income before income taxes 60,029 22,803 49,633 54,156 18,911 47,031
Income tax expense 19,263 9,309 17,703 16,914 6,375 15,915
--------------------------------------------------------------------
Net income $ 40,766 $ 13,494 $ 31,930 $ 37,242 $ 12,536 $ 31,116
====================================================================
Earnings per share:
Basic $ 0.39 $ 0.13 $ 0.31 $ 0.36 $ 0.12 $ 0.30
Diluted 0.39 0.13 0.30 0.35 0.12 0.29
Operating earnings per share
(excluding special charges):
Basic 0.39 0.36 0.35 0.36 0.35 0.31
Diluted 0.39 0.36 0.34 0.35 0.35 0.30
Return on average assets (2) 1.25% 0.45% 1.07% 1.27% 0.43% 1.10%
Return on average equity (2) 18.08% 6.19% 14.21% 17.23% 5.86% 14.79%
Operating ratios:
Return on average assets
(excluding special charges) (2) 1.25% 1.25% 1.22% 1.27% 1.27% 1.13%
Return on average equity
(excluding special charges) (2) 18.08% 17.23% 16.13% 17.23% 17.08% 15.06%
Efficiency ratio (3) 54.49% 55.17% 57.44% 56.33% 56.84% 61.44%
</TABLE>
(1) Special charges consists of merger-related expenses and one-time charges
related to the discontinuance of the Company's correspondent mortgage
business.
(2) Annualized
(3) Represents operating expenses, excluding distributions on securities of
subsidiary trust and special charges, as a percentage of net interest
income and noninterest income, excluding net securities gains.
9
<PAGE> 10
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's fully-taxable-equivalent net interest income in the second quarter
of 1999 increased $1.2 million compared to the first quarter of 1999 and $2.6
million compared to the second quarter of 1998. The favorable effect of
increased levels of average earning assets was substantially offset by lower
margins as certain higher rate assets prepaid and new loan refinancings and
investments were recorded at lower market rates. Table 2 shows the 1999 and 1998
quarterly average balances and 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 net interest margin for the second quarter of 1999 was
3.62% compared to 3.86% for the first quarter of 1999 and 4.03% in the second
quarter of 1998. The decline in the net interest margin reflects the decrease in
average loan yields due to the repricing and mix of interest earning assets and
an increase in average borrowings as a percent of total average fundings. See
"Interest Rate Risk and Asset Liability Management" below.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income 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 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. Average balances are based on average
daily balances during the indicated periods.
10
<PAGE> 11
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 Second Quarter 1999 First Quarter
-------------------------------------- --------------------------------------
Yield/ Yield/
Average Balance Interest Rate(1) Average Balance Interest Rate(1)
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 1,801,616 32,589 7.24% $ 2,556,325 $ 47,050 7.36%
Commercial real estate mortgages 1,689,588 36,952 8.77 1,653,097 36,880 9.05
Commercial loans and leases 1,232,071 26,029 8.47 1,139,847 25,784 9.17
Consumer loans and leases 2,081,520 44,796 8.63 2,127,014 45,073 8.59
------------------------ ------------------------
Total loans and leases 6,804,795 140,366 8.27 7,476,283 154,787 8.36
Securities (3) 5,103,801 78,130 6.12 3,583,507 54,105 6.05
Federal funds sold and other short
term investments 189,798 2,331 4.93 186,465 1,820 3.96
------------------------ ------------------------
Total earning assets 12,098,394 220,827 7.31 11,246,255 210,712 7.55
-------- --------
Nonearning assets 950,405 912,961
------------ -----------
Total assets $ 13,048,799 $12,159,216
============ ===========
Interest-bearing deposits:
Regular savings $ 1,268,159 6,428 2.03 $ 1,283,505 6,445 2.04
NOW and money market accounts 2,078,200 12,464 2.41 2,036,837 12,006 2.39
Certificates of deposit 3,391,976 41,725 4.93 3,449,865 43,893 5.16
Brokered deposits 201,244 2,811 5.60 211,412 2,632 5.05
------------------------ ------------------------
Total interest-bearing deposits 6,939,579 63,428 3.67 6,981,619 64,976 3.77
Borrowed funds 3,769,847 47,796 5.09 2,923,476 37,334 5.18
------------------------ ------------------------
Total interest-bearing liabilities 10,709,426 111,224 4.17 9,905,095 102,310 4.19
-------- --------
Non-interest bearing deposits 1,284,420 1,235,688
Other liabilities (3) 80,378 46,166
Securities of subsidiary trust 69,987 88,000
Shareholders' equity (3) 904,588 884,267
============ ===========
Total liabilities and shareholders'
equity $ 13,048,799 $12,159,216
============ ===========
Net earning assets $ 1,388,968 $ 1,341,160
============ ===========
Net interest income (fully-taxable
equivalent) 109,603 108,402
Less: fully-taxable equivalent
adjustments (477) (464)
-------- --------
Net interest income $109,126 $107,938
======== ========
Net interest rate spread (fully-taxable
equivalent) 3.14% 3.36%
Net interest margin (fully-taxable
equivalent) 3.62% 3.86%
</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> 12
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 Fourth Quarter 1998 Third Quarter
-------------------------------------- --------------------------------------
Yield/ Yield/
Average Balance Interest Rate(1) Average Balance Interest Rate(1)
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 2,919,838 $ 53,662 7.35% $ 3,272,641 $ 61,006 7.46%
Commercial real estate mortgages 1,611,739 38,667 9.52 1,594,023 38,186 9.50
Commercial loans and leases 1,126,061 24,598 8.67 1,122,187 25,828 9.13
Consumer loans and leases 2,092,081 45,308 8.59 2,006,297 45,011 8.90
------------------------ ------------------------
Total loans and leases 7,749,719 162,235 8.33 7,995,148 170,031 8.46
Securities (3) 3,010,073 45,319 5.97 2,583,739 39,833 6.12
Federal funds sold and other short
term investments 167,001 2,233 5.30 97,657 1,295 5.26
------------------------ ------------------------
Total earning assets 10,926,793 209,787 7.63 10,676,544 211,159 7.87
-------- --------
Nonearning assets 898,969 924,025
------------ ------------
Total assets $11,825,762 $11,600,569
============ ============
Interest-bearing deposits:
Regular savings $ 1,283,063 7,198 2.23 $ 1,306,657 7,960 2.42
NOW and money market accounts 2,017,616 13,018 2.56 1,938,800 11,989 2.45
Certificates of deposit 3,484,536 46,997 5.35 3,437,848 47,046 5.43
Brokered deposits 249,110 3,635 5.79 280,012 4,147 5.88
------------------------ ------------------------
Total interest-bearing deposits 7,034,325 70,848 4.00 6,963,317 71,142 4.05
Borrowed funds 2,387,353 31,874 5.30 2,285,054 31,600 5.49
------------------------ ------------------------
Total interest-bearing liabilities 9,421,678 102,722 4.33 9,248,371 102,742 4.41
-------- --------
Non-interest bearing deposits 1,308,902 1,260,212
Other liabilities (3) 103,862 134,455
Securities of subsidiary trust 100,000 100,000
Shareholders' equity (3) 891,320 857,531
----------- -----------
Total liabilities and shareholders'
equity $11,825,762 $11,600,569
=========== ===========
Net earning assets $ 1,505,115 $ 1,428,173
=========== ===========
Net interest income (fully-taxable
equivalent) 107,065 108,417
Less: fully-taxable equivalent
adjustments (832) (948)
-------- --------
Net interest income $106,233 $107,469
======== ========
Net interest rate spread (fully-taxable
equivalent) 3.30% 3.46%
Net interest margin (fully-taxable
equivalent) 3.90% 4.05%
</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.
12
<PAGE> 13
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 Second Quarter 1998 First Quarter
--------------------------------------- --------------------------------------
Yield/ Yield/
Average Balance Interest Rate(1) Average Balance Interest Rate(1)
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 3,363,259 $ 62,583 7.44% $ 3,388,356 $ 64,971 7.75%
Commercial real estate mortgages 1,600,841 37,693 9.44 1,596,801 37,644 9.56
Commercial loans and leases 1,090,450 25,418 9.35 1,015,809 23,143 9.25
Consumer loans and leases 2,017,090 44,618 8.87 1,972,781 43,671 8.98
------------------------ ------------------------
Total loans and leases 8,071,640 170,312 8.45 7,973,747 169,429 8.61
Securities (3) 2,462,955 38,478 6.27 2,439,674 39,521 6.57
Federal funds sold and other short
term investments 96,298 634 2.64 90,671 1,290 5.77
------------------------ ------------------------
Total earning assets 10,630,893 209,424 7.90 10,504,092 210,240 8.11
-------- --------
Nonearning assets 948,706 918,811
----------- -----------
Total assets $11,579,599 $11,422,903
=========== ===========
Interest-bearing deposits:
Regular savings $ 1,361,919 8,094 2.38 $ 1,372,469 8,470 2.50
NOW and money market accounts 1,915,109 12,239 2.56 1,809,653 11,524 2.58
Certificates of deposit 3,472,084 47,232 5.46 3,452,992 46,633 5.48
Brokered deposits 315,289 4,507 5.73 290,177 4,246 5.93
------------------------ ------------------------
Total interest-bearing
deposits 7,064,401 72,072 4.09 6,925,291 70,873 4.15
Borrowed funds 2,215,643 30,323 5.49 2,334,920 32,254 5.60
------------------------ ------------------------
Total interest-bearing
liabilities 9,280,044 102,395 4.43 9,260,211 103,127 4.52
-------- --------
Non-interest bearing deposits 1,220,460 1,123,814
Other liabilities (3) 120,338 85,381
Securities of subsidiary trust 100,000 100,000
Shareholders' equity (3) 858,757 853,497
----------- -----------
Total liabilities and
shareholders' equity $11,579,599 $11,422,903
=========== ===========
Net earning assets $ 1,350,849 $ 1,243,881
=========== ===========
Net interest income (fully-taxable
equivalent) 107,029 107,113
Less: fully-taxable equivalent
adjustments (810) (561)
-------- --------
Net interest income $106,219 $106,552
======== ========
Net interest rate spread
(fully-taxable equivalent) 3.47% 3.59%
Net interest margin
(fully-taxable equivalent) 4.03% 4.13%
</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.
13
<PAGE> 14
The following table presents certain information on a fully-taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).
TABLE 3 - RATE VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 vs. 1998
Increase (decrease) due to
--------------------------------------------
Rate & Total
Volume Rate Volume (1) Change
--------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases ($26,689) ($3,622) $ 365 ($29,946)
Securities 41,282 (921) (709) 39,652
Federal funds sold and other
short term investments 615 550 532 1,697
--------------------------------------------
Total interest income 15,208 (3,993) 188 11,403
--------------------------------------------
Interest expense:
Interest-bearing deposits
Regular savings (450) (1,188) (28) (1,666)
NOW and money market accts 1,041 (716) (100) 225
Certificates of deposit (1,090) (4,588) 171 (5,507)
Brokered deposits (1,629) (102) 35 (1,696)
--------------------------------------------
Total interest-bearing deposits (2,128) (6,594) 78 (8,644)
Borrowed funds 21,273 (2,210) (1,590) 17,473
--------------------------------------------
Total interest expense 19,145 (8,804) (1,512) 8,829
Net interest income (fully
taxable equivalent) ($ 3,937) $ 4,811 $ 1,700 $ 2,574
============================================
</TABLE>
(1) Includes changes in interest income and expense not due solely to volume or
rate changes.
14
<PAGE> 15
NON-INTEREST INCOME
Second quarter non-interest income of $33.8 million increased 12% from the
second quarter of 1998, and increased 15% from the first quarter of 1999. The
increase over the second quarter of 1998 related to insurance agency commissions
($1.5 million or 55%), customer service income ($2.7 million or 26%),
trust/investment advisory service fees ($1.0 million or 24%) and bank owned life
insurance income ($2.1 million or 243%.) These increases were partially offset
by a $2.9 million decline in mortgage banking income due primarily to
discontinuance of the correspondent lending business in the first quarter of
1999. Second quarter non-interest income increased by $4.3 million (or 15%) over
the first quarter of 1999 due to a $2.4 million increase in mortgage banking
income and a $1.9 million increase in customer service income.
Customer services income in the second quarter of 1999 increased 26% from the
second quarter of 1998 and 18% from the first quarter of 1999. The increases
were primarily attributable to growth in the number of transaction accounts and
increased ATM fees.
Insurance commission revenue was $4.3 million for the second quarter of 1999,
compared to $2.8 million for the same period in 1998. The increase primarily
relates to the acquisition of insurance agencies in Massachusetts and New
Hampshire in the fourth quarter of 1998, which were accounted for using the
purchase method.
Trust and investment advisory services income reflects the continued growth in
trust assets under management and increased commissions earned on sales of third
party mutual funds and annuities. Assets under management were $3.1 billion,
$3.0 billion and $2.9 billion at June 30, 1999, December 31, 1998 and June 30,
1998, respectively.
Bank-owned life insurance ("BOLI") income was $3.0 million for the second
quarter of 1999, compared to $878 thousand for the same period in 1998. The
increase relates to higher levels of BOLI. At June 30, 1999, the cash surrender
value of BOLI was $222 million compared to $65 million at June 30, 1998. BOLI
covers certain officers of the Company's bank subsidiaries. Most of the
Company's BOLI is invested in the "general account" of quality insurance
companies. All such companies were rated AA or better by Standard and Poors at
June 30, 1999.
Mortgage banking services income of $6.6 million, $4.2 million and $9.5 million
provided 19%, 14% and 31% of noninterest income for the quarters ended June 30,
1999, March 31, 1999 and June 30, 1998, respectively. Mortgage banking services
income increased from the first quarter due to increased gains on sales of
mortgage servicing of $2.9 million and a $900 thousand valuation net gain on the
mortgage servicing rights asset and hedging instruments, offset by a $1.9
million lower of cost or market adjustment on loans held for sale. The decline
in the first quarter was largely due to discontinuing the correspondent mortgage
lending business in January 1999. Also, the second quarter of 1998 included a
$1.7 million gain on sales of mortgage servicing compared to a $17 thousand loss
in the first quarter of 1999. See "Special Charges" below for a discussion of
the costs to discontinue the correspondent mortgage lending business. The amount
of loans serviced for others was $3.9 billion, $4.3 billion and $7.4 billion at
June 30, 1999, March 31, 1999 and June 30, 1998, respectively. The Company
recorded $1.9 million in mortgage servicing income in the second quarter of 1999
compared to $1.6 million in the first quarter of 1999 and $3.6 million in the
second quarter of 1998. See Table 4 for a summary of mortgage banking services
income by quarter for 1999 and 1998.
Capitalized mortgage servicing rights amounted to $47.3 million at June 30,
1999, compared to $45.3 million at March 31, 1999 and $96.1 million at June 30,
1998. The decrease from the second quarter last year was due to the sale of
mortgage servicing rights totaling $59.2 million in the third and fourth
quarters of 1998. See Table 4 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 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 capitalized mortgage servicing
rights and effects on mortgage banking income, the Company has established a
hedge program against a portion of its capitalized mortgage servicing rights to
help 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.
15
<PAGE> 16
TABLE 4 - MORTGAGE BANKING SERVICES
(Dollars in thousands)
<TABLE>
<CAPTION>
At or for the Three Months Ended
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $3,913,525 $4,328,668 $4,243,181 $5,289,015 $7,374,982 $6,974,292
=================================================================================
MORTGAGE BANKING SERVICES INCOME:
Residential mortgage sales income $2,799 $3,313 $7,123 $8,124 $4,596 $3,280
Lower of cost or market adjustment -
loans held for sale (1,934) -- -- -- -- --
Residential mortgage servicing income, net 1,880 1,559 1,137 2,320 3,599 4,087
Change in impairment reserve 2,382 950 (4,545) (6,182) (359) --
Valuation adjustments - interest rate floor (1,475) (1,600) 200 2,180 -- --
Gain (loss) on sale of capitalized mortgage
servicing rights 2,924 (17) 958 (997) 1,681 --
---------------------------------------------------------------------------------
Total $6,576 $4,205 $4,873 $5,445 $9,517 $7,367
=================================================================================
MORTGAGE SERVICING RIGHTS:
Balance at beginning of period $45,266 $40,088 $57,640 $96,056 $80,278 $60,638
Mortgage servicing rights capitalized
and purchased 2,747 7,535 6,803 13,940 24,364 35,709
Amortization charged against
mortgage servicing fee income (2,736) (2,828) (3,644) (3,161) (3,647) (3,918)
Change in impairment reserve 2,382 950 (4,545) (6,182) (359) --
Mortgage servicing rights sold (345) (479) (16,166) (43,013) (4,580) (12,151)
---------------------------------------------------------------------------------
Balance at end of period $47,314 $45,266 $40,088 $57,640 $96,056 $80,278
=================================================================================
</TABLE>
16
<PAGE> 17
NON-INTEREST EXPENSE
Excluding special charges, amortization of intangibles and distribution on
securities of subsidiary trust, non-interest expense was $74.8 million, $72.8
million and $74.7 million for the quarters ended June 30, 1999, March 31, 1999,
and June 30, 1998, respectively. The efficiency ratio was 54.49%, 56.84% and
55.17% for the quarters ended June 30, 1999, June 30, 1998 and March 31, 1999,
respectively, excluding special charges, distributions on securities of
subsidiary trust and net securities gains.
Salaries and benefits expense of $39.2 million decreased $1.0 million from both
the second quarter of last year and from the first quarter of 1999. Staff
reductions related to the SIS acquisition was the primary reason for this
decline.
Data processing expense increased $1.5 million from the second quarter of last
year and increased $87 thousand from the first quarter of 1999. The increase
from last year was due to new systems initiatives, the costs of year 2000
testing (see "Impact of the Year 2000" section) and increased transaction
volumes.
Occupancy expense increased $294 thousand from the second quarter of 1998 and $6
thousand from the first quarter of 1999. The increase from the second quarter of
1998 was primarily due to a $206 thousand loss on the disposition of a branch in
the second quarter of 1999. The Company had 220 branch offices at June 30, 1999
as compared to 227 branch offices at June 30, 1998.
Equipment expense increased $596 thousand from the second quarter of last year
and $600 thousand from the first quarter of 1999, while advertising and
marketing expense decreased $563 thousand and $12 thousand from the second
quarter of 1998 and the first quarter of 1999, respectively. The increase in
equipment expense was due to increased amounts of depreciation on new equipment.
The decreases in advertising and marketing expenses were primarily due to cost
savings and efficiencies related to the SIS acquisition.
Amortization of goodwill and other intangibles during the first quarter of 1999
increased $19 thousand from the second quarter of 1998 due to the goodwill
associated with the fourth quarter 1998 purchase acquisitions of two insurance
agencies.
There were no special charges in the second quarter of 1999. Special charges of
$34.5 million pre-tax were incurred during the second quarter of 1998 related to
the acquisition of CFX on April 10, 1998. Special charges of $33.2 million
pre-tax were incurred during the first quarter of 1999, which included
merger-related expenses of $25.9 million incurred in connection with the
acquisition of SIS and $7.4 million related to the discontinuance of the
Company's correspondent mortgage lending business. On an after-tax basis,
special charges amounted to $24.0 million and $24.1 million for the quarters
ended June 30, 1998 and March 31, 1999, respectively.
The following table summarizes activity related to special charges recorded
since December 31, 1998 and shows the balance as of June 30, 1999.
17
<PAGE> 18
TABLE 5 - SPECIAL CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Special Charges in First Six Months of 1999
-------------------------------------------
Discontinuing Plus:
Correspondent Accrual Less: Less: Accrual
Mortgage Balance at Cash Write- Balance at
Merger Business Total 12/31/98 Transactions downs 6/30/99
------ -------- ----- -------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Severance costs $11,345 $1,986 $13,331 $32 ($9,995) $0 $3,368
Data processing/systems integration 5,176 -- 5,176 -- (4,386) -- 790
Professional fees 3,314 1,793 5,107 -- (4,511) -- 596
Asset write-downs and lease terminations 4,067 1,293 5,360 -- (478) (2,905) 1,977
Customer communications 1,148 -- 1,148 -- (1,703) -- (555)
Fund charitable foundation 3,000 -- 3,000 -- (3,000) -- --
Correspondent losses -- 957 957 -- (1,945) -- (988)
Pension curtailment gain (4,000) -- (4,000) -- -- -- (4,000)
Other costs 1,821 1,335 3,156 1,131 (2,342) -- 1,945
------------------------------------- ------ -------- ------- ------
$25,871 (1) $7,364 (2) $33,235 $1,163 ($28,360) ($2,905) $3,133
===================================== ====== ======== ======= ======
</TABLE>
(1) On an after-tax basis merger charges amounted to $18,779.
(2) On an after-tax basis charges for discontinuing the correspondent
mortgage business amounted to $5,300.
Other noninterest expenses for the second quarter of 1999 decreased $690
thousand from the second quarter of 1998 and increased $2.3 million from the
first quarter of 1999. The following table summarizes the principal components
of other non-interest expenses by quarter.
TABLE 6 - OTHER NON-INTEREST EXPENSES
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1999 1998 1998 1998 1998
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Miscellaneous loan costs $1,952 $1,934 $1,457 $2,035 $2,612 $1,264
Telephone 2,566 2,561 2,306 2,315 1,951 1,973
Postage and freight 1,771 2,103 1,893 1,542 1,884 1,887
Office supplies 1,805 1,471 1,706 1,664 2,017 1,773
Deposits and other assessments 727 668 651 657 675 705
Collection and carrying costs
of non-performing assets 313 701 666 (583) 268 737
Other 4,714 2,112 2,615 4,666 5,131 6,164
---------------------------------------------------------
Total $13,848 $11,550 $11,294 $12,296 $14,538 $14,503
=========================================================
</TABLE>
TAXES
The effective tax rate for the second quarter of 1999, excluding the effect of
special charges, was 32% compared to 31% for the second quarter of 1998 and 33%
for the first quarter of 1999.
18
<PAGE> 19
OTHER COMPREHENSIVE INCOME
FASB Statement No. 130 requires disclosure of "Other comprehensive income."
Unlike net income, "other comprehensive income" includes the after-tax change in
unrealized gains and losses on securities. As a result of an increase in
interest rates in the first six months of 1999, the unrealized loss on the
Company's securities portfolio increased $45.3 million, net of taxes and gains
and losses realized on sales of securities. At June 30, 1999, unrealized losses,
net of tax, represented less than 1% of securities available for sale. The
Company attempts to balance the Interest Rate Risk of its assets with its
liabilities (see "Interest Rate Risk and Asset Liability Management"). However,
the change in value of its liabilities, which tends to improve in rising
interest rate environments, is not included in "other comprehensive income." The
Company has no current intention to sell any of its available for sale assets.
FINANCIAL CONDITION
LOANS AND LEASES
Average loans of $6.8 billion during the second quarter of 1999 decreased $671
thousand or 9% from the first quarter of 1999 and $1.3 million or 16% from the
second quarter of 1998. The decreases were primarily in residential real estate
mortgages resulting from declines in loans held for sale, prepayments on
residential real estate loans, and the April 1999 securitization of $633 million
of 1-4 family residential loans into a real estate mortgage investment conduit
("REMIC") which is classified as securities held to maturity. Loans as a
percent of average earning assets were 56% at June 30, 1999 compared to 66% at
March 31, 1999 and 76% at June 30, 1998.
Average residential real estate loans (which includes mortgage loans held for
sale) of $1.8 billion during the second quarter of 1999 declined $1.6 billion
from the second quarter of last year. As a result of declining interest rates
during the period, prepayments on residential real estate loans accelerated,
particularly in adjustable rate mortgages which had previously been retained in
portfolio. Mortgage loans held for sale amounted to $132 million at June 30,
1999 and $653 million at June 30, 1998. The decline in loans held for sale was
due primarily to discontinuance of the correspondent mortgage business in the
first quarter of 1999.
Average commercial real estate loans of $1.7 billion increased 6% from the
second quarter of last year. The average yield on commercial real estate loans
during the second quarter of 1999 was 8.77% as compared to 9.44% in the second
quarter of 1998, which is indicative of increased competition and lower
prevailing interest rates. Market forces have also influenced the term of new
commercial real estate loans as customers are frequently requesting fixed rates
and longer terms.
Commercial loans averaged $1.2 billion during the second quarter of 1999, an
increase of 13% over the second quarter of 1998. The yield on commercial loans
decreased to 8.47% in the second quarter of 1999 from 9.35% in the second
quarter of 1998.
Average consumer loans of $2.1 billion during the second quarter of 1999
increased 3% from the second quarter of 1998. The increase was primarily in
indirect automobile, student and home equity loans. The average yield on
consumer loans declined from 8.87% in the second quarter of 1998 to 8.63% in the
second quarter of 1999.
SECURITIES AND OTHER EARNING ASSETS
The Company's securities portfolio averaged $5.1 billion during the second
quarter of 1999, as compared to $3.6 billion in the first quarter of 1999 and
$2.5 billion in the second quarter of 1998, and consisted primarily of
mortgage-backed securities, most of which are seasoned 15 year agency
securities, and U.S. Treasury securities. Other securities consisted of
collateralized mortgage obligations, asset-backed securities and securitized
portfolio loans held in a REMIC and classified as held to maturity.
Substantially all securities are rated AAA or equivalently rated. A significant
portion of the increase in securities was to replace the decline in residential
real estate loans. The average yield on securities was 6.12%, 6.05% and 6.27%
for the quarters ended June 30, 1999, March 31, 1999 and June 30, 1998,
respectively. The fluctuations in yields was due to reinvestment of maturing
securities at lower yields during a declining interest rate environment and
increased amortization of premiums as prepayments on mortgage backed securities
have accelerated. The REMIC securities have a weighted average yield of 7.53%
and increased the portfolio yield by 16 basis points in the second quarter of
1999 compared to the first quarter of 1999. Securities available for sale are
carried at fair value and had an after-tax unrealized loss of $45.3 million and
$50 thousand at June 30, 1999 and March 31, 1999, respectively. The unrealized
loss was 0.9% of total securities available for sale at June 30, 1999.
19
<PAGE> 20
ASSET QUALITY
As shown in Table 7, nonperforming assets were $62.3 million at June 30, 1999,
or 0.46% of total assets, compared to $60.1 million at March 31, 1999 and $71.7
million at June 30, 1998. The Company continues to monitor asset quality with
regular reviews of its portfolio in accordance with its lending and credit
policies.
The Company's residential loan portfolio accounted for 23% of the total loan
portfolio at June 30, 1999, as compared with 30% at March 31, 1999. 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 June 30, 1999, 0.76% of the Company's residential loans were
nonperforming, as compared with 0.48% at March 31, 1999. The increase from the
first quarter was due mainly to the securitization of $633 million of 1-4 family
loans now classified as securities held to maturity.
The Company's commercial real estate loan portfolio accounted for 26% of the
total loan portfolio at June 30, 1999 compared to 23% at March 31, 1999. At June
30, 1999, 0.92% of the Company's commercial real estate loans were
nonperforming, as compared with 1.08% at March 31, 1999.
The Company's commercial business loan portfolio accounted for 19% of the total
loan portfolio at June 30, 1999 and 17% at March 31, 1999. Commercial business
loans are not concentrated in any particular industry, but reflect the
broad-based economies of Maine, New Hampshire, Massachusetts, and to a lesser
extent, Connecticut. The Company's commercial business loans are generally to
small and medium size businesses located within its geographic market area. At
June 30, 1999, 1.47% of the Company's commercial business loans were
non-performing, as compared with 1.06% at March 31, 1999. The increase was
primarily related to one relationship which is believed to be adequately
secured.
The Company's consumer loan portfolio accounted for 32% of the total loan
portfolio at June 30, 1999 and 30% at March 31, 1999. The Company has a
diversified consumer loan portfolio consisting of home equity, automobile,
mobile home, boat and recreational vehicles and education loans. At June 30,
1999, 0.26% of the Company's consumer loans were nonperforming, as compared with
0.36% at March 31, 1999.
At June 30, 1999, the Company had $18.0 million of accruing loans which were 90
days or more delinquent, as compared to $25.0 million of such loans at March 31,
1999 and $10.1 million at June 30, 1998. The increase in the first quarter was
primarily attributable to an increase in residential real estate loans over 90
days delinquent, which the Company believes are well secured and in the process
of collection. As noted, accruing loans 90 days or more delinquent declined
during the second quarter of 1999.
20
<PAGE> 21
TABLE 7 - NONPERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $11,643 $10,124 $9,917 $13,976 $10,802 $14,134
-------------------------------------------------------------
Commercial real estate loans:
Nonaccrual loans 14,494 16,657 19,944 20,521 20,398 22,239
Troubled debt restructurings 1,391 1,110 6 475 1,477 3,298
-------------------------------------------------------------
Total 15,885 17,767 19,950 20,996 21,875 25,537
-------------------------------------------------------------
Commercial business loans and leases:
Nonaccrual loans 18,600 12,694 14,920 15,174 18,409 19,833
Troubled debt restructurings 80 40 874 70 71 207
-------------------------------------------------------------
Total 18,680 12,734 15,794 15,244 18,480 20,040
-------------------------------------------------------------
Consumer loans and leases:
Nonaccrual loans 5,531 7,566 10,865 8,887 8,323 10,000
-------------------------------------------------------------
Total nonperforming loans:
Nonaccrual loans 50,268 47,041 55,646 58,558 57,932 66,206
Troubled debt restructurings 1,471 1,150 880 545 1,548 3,505
-------------------------------------------------------------
Total 51,739 48,191 56,526 59,103 59,480 69,711
-------------------------------------------------------------
Other nonperforming assets:
Other real estate owned, net of related reserves 7,170 7,468 7,030 7,435 7,790 6,270
Repossessions, net of related reserves 3,411 4,446 3,624 3,786 4,380 4,158
-------------------------------------------------------------
Total other nonperforming assets 10,581 11,914 10,654 11,221 12,170 10,428
-------------------------------------------------------------
Total nonperforming assets $62,320 $60,105 $67,180 $70,324 $71,650 $80,139
=============================================================
Accruing loans which are 90 days overdue $17,990 $24,967 $21,962 $7,933 $10,078 $9,136
=============================================================
Total nonperforming loans as a percentage of total loans (1) 0.78% 0.68% 0.80% 0.81% 0.82% 0.96%
Total nonperforming assets as a percentage of total assets 0.46% 0.48% 0.56% 0.60% 0.62% 0.68%
Total nonperforming assets as a percentage of total loans
and leases (1) and total other nonperforming assets 0.94% 0.85% 0.95% 0.96% 0.98% 1.10%
(1) Total loans and leases are exclusive of loans held for sale.
</TABLE>
PROVISION/ALLOWANCE FOR LOAN LOSSES
The Company provided $3.6 million for loan and lease losses in the second
quarter of 1999, compared to $3.2 million in the second quarter of 1998. As
shown in Table 8, net charge-offs for the second quarter of 1999 were $3.5
million, or 21 basis points of average loans outstanding, compared to $4.4
million, or 22 basis points of average loans outstanding, for the second quarter
of 1998.
At June 30, 1999, the allowance for loan and lease losses amounted to $110.6
million or 1.67% of total portfolio loans and leases, as compared to $110.4
million or 1.52% at June 30, 1998. The ratio of the allowance for loan and lease
losses to nonperforming loans was 214% at June 30, 1999 and 186% at June 30,
1998. 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 such as internal risk ratings and credit concentrations, trends in
nonperforming loans, delinquent loans and net charge-offs, the volume of new
loan originations and other asset quality factors. Although management utilizes
its best judgment in providing for possible losses, there can be no
21
<PAGE> 22
assurance that the Company will not have to change its provisions for loan and
lease 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 movements in market-based
interest rates or other reasons could affect the Company's future provisions for
loans losses.
TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 Second 1999 First 1998 Fourth 1998 Third 1998 Second 1998 First
Quarter Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average loans and leases outstanding
during the period (1) $6,804,795 $7,476,283 $7,744,371 $7,990,408 $8,068,140 $7,973,747
===========================================================================
Allowance at beginning of period $110,573 $110,561 $111,413 $110,371 $111,507 $112,064
Charge-offs:
Real estate mortgages 1,982 530 1,169 2,929 2,426 1,518
Commercial business loans and leases 346 1,137 2,634 717 1,304 601
Consumer loans and leases 3,904 3,550 3,822 2,868 2,966 3,727
---------------------------------------------------------------------------
Total loans charged off 6,232 5,217 7,625 6,514 6,696 5,846
---------------------------------------------------------------------------
Recoveries:
Real estate mortgages 1,402 550 1,142 1,991 1,431 1,186
Commercial business loans and leases 688 627 932 889 501 166
Consumer loans and leases 643 487 726 703 393 688
---------------------------------------------------------------------------
Total loans recovered 2,733 1,664 2,800 3,583 2,325 2,040
---------------------------------------------------------------------------
Net charge-offs 3,499 3,553 4,825 2,931 4,371 3,806
Additions charged to operating expenses 3,565 3,565 3,973 3,973 3,235 3,249
---------------------------------------------------------------------------
Allowance at end of period $110,639 $110,573 $110,561 $111,413 $110,371 $111,507
===========================================================================
Ratio of net charge-offs to average loans and
leases outstanding during the period,
annualized (1) 0.21% 0.19% 0.25% 0.15% 0.22% 0.19%
Ratio of allowance to total loans and leases
at end of period (2) 1.67% 1.56% 1.56% 1.52% 1.52% 1.54%
Ratio of allowance to nonperforming loans at end
of period 214% 229% 196% 189% 186% 161%
Ratio of net charge-offs as a percent of average
outstanding loans, annualized (1):
Real estate mortgages 0.067% -0.002% 0.002% 0.076% 0.080% 0.027%
Commercial business loans and leases -0.111% 0.181% 0.603% -0.061% 0.296% 0.174%
Consumer loans and leases 0.628% 0.584% 0.587% 0.428% 0.512% 0.625%
</TABLE>
(1) Average loans and leases include portfolio loans and loans held for
sale.
(2) Total loans and leases are exclusive of loans held for sale.
22
<PAGE> 23
DEPOSITS
Average deposits of $8.2 billion during the second quarter of 1999 remained
relatively unchanged from the second quarter of 1998. Excluding brokered
deposits, average total deposits increased $53 million compared to the second
quarter of 1998. The ratio of portfolio loans to retail deposits was 83% and 92%
at June 30, 1999 and June 30, 1998, respectively.
Average non-interest bearing deposit accounts of $1.3 billion during the second
quarter of 1999 increased $64.0 million or 5% from the second quarter of 1998.
The increase reflects growth in both commercial and retail deposit balances.
Average interest-bearing deposit accounts, excluding brokered deposits, of $6.7
billion during the second quarter of 1999 decreased $10.8 million or less than
1% from the second quarter of 1998. The average rates paid on all deposit types
decreased from 4.09% in the second quarter of 1998 to 3.67% in the second
quarter of 1999.
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 of
Boston ("FHLB"). Average FHLB borrowings for the second quarter of 1999 were
$3.2 billion, which increased by $1.5 billion or 88% from the second quarter of
1998 in order to fund the growth in earning assets. FHLB collateral consists
primarily of first mortgage loans secured by 1 - 4 family properties, certain
unencumbered securities and other qualified assets. At June 30, 1999, the
Company's FHLB borrowings amounted to $3.6 billion and its additional borrowing
capacity was $2.3 billion.
Average balances for securities sold under repurchase agreements were $515
million, $537 million and $479 million for the quarters ended June 30, 1999,
March 31, 1999, and June 30, 1998, respectively. These borrowings are secured by
mortgage-backed securities and U.S. Government obligations.
INTEREST RATE RISK AND ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-Liability management is governed by policies
reviewed and approved annually by the Company's Board of Directors (the "Board")
and monitored periodically by a committee of the Board. The Board delegates
responsibility for asset-liability management to the corporate Liquidity and
Funds Management Committee ("LFMC"), which is comprised of members of senior
management who sets strategic directives that guide the day-to-day
asset-liability management activities of the Company. The LFMC also reviews and
approves all major risk, liquidity and capital management programs.
Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign
exchange rates, commodity prices and other market-driven rates or prices. The
Company has no trading operations and thus is only exposed to non-trading market
risk.
Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-credit risk to which the Company in exposed. Interest-rate risk
is the sensitivity of income to changes in interest rates. Changes in interest
rates, as well as fluctuations in the level and duration of assets, affect net
interest income, the Company's primary source of revenue. This risk arises
directly from the Company's core banking activities - lending, deposit gathering
and loan servicing. 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, (iv) the
rate of amortization of capitalized mortgage servicing rights and premiums paid
on securities, (v) the amount of unrealized gains and losses on securities
available for sale and (vi) the value of an institution's investment securities
and mortgage loans and the resultant ability to realize gains on the sale of
such assets.
The primary objective of interest-rate risk management is to control the
Company's exposure to interest-rate risk both within limits approved by the
Board of Directors and guidelines established by the LFMC. These limits and
guidelines reflect the Company's tolerance for interest-rate risk over both
short-term and long-term horizons. The Company controls interest-rate risk by
identifying, quantifying and, where appropriate, hedging its exposure.
The Company quantifies and measures interest-rate exposures using a model to
dynamically simulate net-interest income under various interest rate scenarios
over 12 months. Simulated scenarios include deliberately extreme interest
23
<PAGE> 24
rate "shocks" and more gradual interest rate "ramps." Key assumptions in these
simulation analyses relate to behavior of interest rates and spreads, the growth
or shrinkage of product balances and the behavior of the Company's deposit and
loan customers. The most material assumption relates to the prepayment of
mortgage assets (including mortgage loans, securities and mortgage servicing
rights). 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.
Complicating management's efforts to measure interest rate risk is the
uncertainty of the maturity, repricing and/or runoff 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 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 regarding rate changes are built in to the model.
In the case of prepayment of mortgage assets, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.
The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments, mainly fixed-rate
portfolio securities and borrowed fund maturities. When appropriate, the Company
will utilize off-balance sheet interest rate instruments such as interest-rate
swaps, forward-rate agreements, options, options on swaps and exchange traded
futures and options. The Company owns two interest-rate floors with a combined
notional amount of $20 million, expiring from 1999-2000, which were purchased to
protect certain rate sensitive assets against falling interest rates. The
Company has no direct or contingent liability as a result of these floors.
The Company's policy on interest-rate risk simulation specify that if interest
rates were to immediately shift up or down 200 basis points, estimated net
interest income for the subsequent 12 months should decline by less than 10%.
The Company was in compliance with this limit at June 30, 1999. The Company also
monitors gradual changes in market interest rates which it believes better
represents its exposure to net interest income. The following table reflects
the estimated exposure of the Company's net interest income for the 12 months
following the date indicated assuming a gradual shift in market interest rates
of 100 and 200 basis points, respectively.
<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Decrease Rate Decrease Rate Increase Rate Increase
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
June 30, 1999 $ (3,876) $ 7,012 $(10,497) $(14,458)
======== ======== ======== ========
March 31, 1999 $(11,349) $ 1,781 $ (4,674) $(11,596)
======== ======== ======== ========
</TABLE>
The results implied in the above table indicate estimated changes in simulated
net interest income for the subsequent 12 months assuming a gradual shift up or
down in market rates of 100 and 200 basis points across the entire yield curve.
Assuming a downward shift in rates, savings, money market and NOW accounts have
implied interest rate floors and it is assumed that the related interest expense
on these accounts will not decrease in proportion to the downward shift in
rates. Assuming a upward shift in rates of 200 basis points, the simulated
increase in interest income would be less than the simulated increase in
interest expense as the Company's fixed-rate earning assets exceed its
fixed-cost paying liabilities. It should be emphasized, however, that the
results are dependent on material assumptions such as those discussed above.
The Company uses interest rate floors, U.S. Treasury debt instruments and
principal only strips to mitigate the prepayment risk associated with mortgage
servicing rights (see "Non-Interest Income" for further details). At June 30,
1999, the Company had $200 million notional amount in interest rate floors, $20
million in U.S. Treasury bonds and $20 million in principal only strips. For
mortgage servicing rights, the adverse impact of current movements in interest
rates on expected future cash flows must be recognized immediately through an
adjustment to their carrying value. If interest rates decline, estimated future
fee income from mortgage servicing rights is reduced because of an expected
increase in mortgage prepayments.
The following table sets forth the net exposure at June 30, 1999 of the carrying
value of mortgage servicing rights and identified hedging instruments, assuming
an immediate shift by the indicated amount in market interest rates.
24
<PAGE> 25
<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Decrease Rate Decrease Rate Increase Rate Increase
---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage servicing rights ($20,800) ($9,900) $7,400 $10,400
Interest Rate floors 7,700 3,600 (1,000) (1,700)
U.S. Treasury bonds 6,800 3,000 (2,400) (4,400)
Principal only strips 7,300 3,400 (2,000) (3,000)
========================================================================
Net exposure $ 1,000 $100 $2,000 $1,300
========================================================================
</TABLE>
The foregoing estimates of the effects of specified changes in interest rates on
the Company's net interest income and the carrying value of its mortgage
servicing rights are based on various assumptions, as discussed above, which
approximate actual experience and which management of the Company considers to
be reasonable. The effects of changes in interest rates on the Company could
vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.
The most significant factors affecting market risk exposure of net interest
income during the first half of 1999 were (i) the increase in interest rates,
(ii) changes in the composition of mortgage assets, (iii) increases in consumer
savings accounts and increase in net free funds and (iv) the increase and
diversification of assets and off-balance sheet interest-rate instruments used
to hedge mortgage servicing rights.
The Company's earnings are not directly and materially impacted by movements in
foreign currency rate or commodity prices. Virtually all transactions are
denominated in the US dollar. Movements in equity prices may have an indirect
but modest impact on earnings by affecting the volume of activity of the amount
of fees from investment-related businesses.
LIQUIDITY
On a parent-only basis, the Company does not have substantial commitments or
debt service requirements. At June 30, 1999, such commitments consisted
primarily of junior subordinated debentures issued to a subsidiary, Peoples
Heritage Capital Trust I, in connection with that subsidiary's issuance of 9.06%
Capital Securities due 2027. The principal sources of funds for the Company to
meet parent-only obligations are dividends from its banking subsidiaries, which
are subject to regulatory limitations. Other sources of funds available to the
Company on a parent-only basis include borrowings from public and private
sources.
For banking subsidiaries of the Company, 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, banks have 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 its banks' loan portfolios also
provides 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.
25
<PAGE> 26
CAPITAL
At June 30, 1999, shareholders' equity amounted to $894.7 million. In addition,
through a subsidiary trust, the Company had outstanding $68.8 million of Capital
Securities which mature in 2027 and qualify as Tier 1 Capital. The Company paid
a $0.115 per share dividend on its common stock during the second quarter of
1999.
Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 9. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.
The Company's banking subsidiaries are also subject to federal, and in certain
cases state, regulatory capital requirements. At June 30, 1999, 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 capital requirements.
TABLE 9 - REGULATORY CAPITAL REQUIREMENTS
(Dollars in thousands)
<TABLE>
<CAPTION>
For Capital Adequacy
Actual Purposes Excess
--------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total capital (to risk weighted assets) $988,680 12.30% $643,875 8.00% $ 344,805 4.30%
Tier 1 capital (to risk weighted assets) 888,074 11.05% 321,537 4.00% 566,537 7.05%
Tier 1 leverage capital ratio (to average assets) 889,965 6.88% 517,760 4.00% 372,205 2.88%
As of December 31, 1998:
Total capital (to risk weighted assets) 968,974 13.02% 595,426 8.00% 373,548 5.02%
Tier 1 capital (to risk weighted assets) 875,723 11.76% 297,713 4.00% 578,010 7.76%
Tier 1 leverage capital (to average assets) 875,723 7.50% 467,096 4.00% 408,627 3.50%
</TABLE>
IMPACT OF THE YEAR 2000
The Company recognizes the significant potential impact from what is generally
called the "year-2000" computer problem. This problem results from a computer
programming convention where the specification of year data is truncated to two
digits instead of the literal four digits (i.e., the year "1998" is represented
as "98" and the century indicator of "19" is only assumed or automatically added
after processing is completed). As computer software programs using this
programming convention encounter data with year-2000 dates, they may
misinterpret the resulting "00" year representation as the year "1900" instead
of "2000." Date-based calculations under these conditions could result in
inaccurate results or system failures.
The use of embedded chips into non-information processing applications has also
increased the risk of year-2000 problems in automated control and production
systems where date and calendar programming is involved (e.g., in automated
building environment controls or automated production equipment).
Year-2000 computer software or embedded chip system failures external to the
Company have the potential for negative impacts if they occur "upstream" (at
suppliers, service providers, fiduciary counter-parties or funding sources) or
"downstream" (at customers or other third-parties).
As with most large financial service providers, the Company relies on a
substantial number of information processing systems to deliver and manage its
financial services products and the year-2000 problem presents a significant
challenge. The Company relies heavily on external sources for computer software,
basic infrastructure services, product-line support services and other goods and
materials. The Company also exchanges a significant volume of data with external
parties, including other financial institutions, government entities, customers,
and business partners. The extent of the Company's reliance on external support
for its business operations adds to the challenge of getting "year-2000 ready."
26
<PAGE> 27
SOLUTION STRATEGY
The Company initiated a formal Year-2000 Readiness Project in 1997. A senior
management committee monitors the project and receives status reports on a
bi-weekly basis. The Board of Directors receives quarterly status updates. A
project team chaired by the Vice President of Technology and made up of a
full-time project coordinator and team leaders from core support and data
processing business units directs the detail readiness effort. Business unit
representatives are involved in assessment, testing and implementation tasks as
required. The Company is using both internal and external resources for various
project tasks.
The project plan has been segregated into five phases and closely follows the
guidelines provided by the Federal Financial Institutions Examination Council
(FFIEC), an inter-agency collaborative sponsored by the Federal Reserve Board,
the Federal Deposit Insurance Corp., the Office of the Comptroller of the
Currency, the Office of Thrift Supervision, and the National Credit Union
Administration. The project phases and description are as follows:
Awareness phase - the problem and project effort was initially defined and
senior project sponsorship and support was obtained. The project team was formed
and the overall nature of the project effort was communicated to employees and
other important external parties. This phase was initiated in January 1997 and,
except for the on-going customer and community awareness efforts, was completed
in July 1998.
Assessment phase - a system component inventory was conducted across
the Company. This included identifying all internally managed and controlled
hardware, software, networks, unique processing platforms, and external customer
and vendor data processing interdependencies. Various non-information
processing systems such as physical security, elevator, HVAC/building
environment and vault control systems were included in the inventory.
Each system component was rated on its importance to the enterprise and its
year-2000 compliance status. This assessment was used as a guide for repair or
replacement priority and resource assignments. The Company identified nearly 100
internally controlled or managed systems or system categories as "critical."
Twelve external services or data interfaces are currently considered as
"critical." Assessments of building environment and security control systems
indicated they were a low risk to the Company.
During this phase, a plan to identify material customers (as funds takers, funds
providers, or capital market/asset management counterparties), assess their
Year-2000 readiness, evaluate the risks to the Company, and develop appropriate
risk management strategies was formulated. The Assessment phase for company
systems and external suppliers and servicers was concluded in August 1998.
Renovation phase - a solution strategy was determined and planned for
each system at risk and the strategies were executed. This included re-coding,
hardware and software replacement or upgrade, and other associated changes. For
systems and services supplied by external parties, the Company obtained from
vendors their year-2000 readiness certifications and statements or monitored the
vendor's progress in renovation, internal testing and availability of certified
systems or upgrades. The review of current service contracts for year-2000
implications was also included in this phase.
The Company relies on vendors for over 90% of its software systems and
components, including the core mainframe-based software. The remaining
approximately 10% of software is mainframe-based customized product or in-house
developed micro-computer database applications. The renovation phase commenced
in October 1997 and software upgrades, replacements and other remediation were
completed in June 1999.
Validation Phase - this phase includes developing and executing test scripts in
specific testing environments where system dates can be set ahead and
documenting the results. The validation plans closely follow regulatory
guidances dictating the independent testing of critical systems in the Company's
test centers even when vendor certifications are available. Testing designs
include unit, integrated (with internal and external systems), point-to-point
and end-to-end testing as appropriate. Business unit management, project
management and internal audit provide final validation of the testing process
and year-2000 readiness.
The testing of critical rated and non-critical rated internal systems and
external servicers and data interfaces, user acceptance and audit review was
completed in June 1999.
The Company is communicating with, or otherwise monitoring, the year-2000
readiness progress of significant external providers of infrastructure services
on an on-going basis; the Company does not expect to directly test with these
providers. At this time, the Company is not aware of any material disruption of
infrastructure services which may be likely to occur.
27
<PAGE> 28
Implementation phase - once systems are validated as year-2000 ready, repairs,
upgrades or replacements are installed into production during this phase. All
critical systems have been validated as Year 2000 ready, or repaired or replaced
as necessary and put into production by June 1999. All non-critical systems have
been validated as Year 2000 ready, or repaired or replaced as necessary and put
into production by June 1999. Also as part of the implementation phase, the
Company conducted systematic analyses regarding core critical business processes
in order to create a Y2K specific Business Resumption Contingency Plan, an
addendum to the already existing Company wide Business Recovery Plan focusing on
the uniqueness of potential Y2K failure scenarios. Business processes critical
to the Company have been analyzed and broken down into manual processes or other
workaround tasks and fully documented. A method to evaluate the validity of the
Y2K plan has been developed and was approved by the Board in May 1999. The final
Y2K plan is anticipated to receive Board approval in the third quarter. The
Company has also developed an Event Management Plan and strategy to serve as a
master management tool for all tasks necessary to meet the millennium rollover
period, including those necessary for a swift and expedient return from any
alternate operating contingency procedures back to normal operations. The plan
includes preparation tasks, validation procedures, and internal and external
communications protocols, and forms a Y2K "Command Center" consisting of senior
management and Y2K support units to function as communications/coordination
centers for possible event disruptions. The Event Management Plan and strategy
are expected to be complete and validated in September 1999. The Company is also
proactively working with employees, customers, and industry peers, media and the
White House Council on Y2K in efforts to increase awareness and educate
customers and the public with regard to Y2K preparedness and safety.
Ongoing activities include the monitoring and evaluation of internal system
changes for year-2000 risk impacts, the monitoring of material customer, vendor,
and counterparty risk, and the continuing development and implementation of
customer and community awareness efforts.
COST
The Company does not separately track the internal costs incurred for the year-
2000 project, except for the dedicated salary of the project coordinator. The
vast majority of internal costs relates to the payroll cost for staff assigned
to the year-2000 project team and Company personnel assigned to testing the
changes resulting from the Year 2000 effort. The Company has incurred $1.6
million of expenses in 1999 and anticipates that the incremental cost of the
Year 2000 project will be approximately $2.0 million in 1999. All year 2000
costs are expensed as incurred, and are being funded out of the Company's
operating cash flow.
SUMMARY
Based on the risk assessment, remediation, testing and monitoring efforts to
date, the Company expects substantially all of its critical and important
systems will operate successfully in all material respects through the century
change. Therefore, the Company believes internal system failures are unlikely to
materially adversely affect the Company's operations or financial condition,
although there can be no assurances in this regard. The Company has already
successfully tested with several critical external service providers and will
continue in 1999 to validate and monitor changes in the readiness of its
critical service providers, including the Company's electric power,
telecommunications and transportation service providers. At this time, the
Company believes the most likely "worst case" scenario consists of temporary and
localized disruptions in infrastructure services, which may disrupt the
Company's ability to service customers and/or the ability of external service
providers to service the Company.
The magnitude and scope of the Company's efforts to address the year-2000
problem may be revised periodically as the quality and quantity of knowledge
about the project increases. It should also be noted that this description of
the Company's efforts involves estimates and projections that are subject to
change as work continues and such changes could be substantial.
Pursuant to FFIEC guidelines, the Company is required to develop commercial
credit risk controls to monitor and assess Year 2000 risk. As of July 1999, the
Company had exceeded its target for reviewing commercial loan balances for year-
2000 readiness.
28
<PAGE> 29
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which sets accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This Statement currently is
scheduled to be effective for the Company for years beginning January 1, 2001.
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.
29
<PAGE> 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate Risk
and Asset - Liability Management" is incorporated herein by reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by
management to be immaterial to the financial condition and results of
operations of the Company.
Item 2. Changes in securities - not applicable.
Item 3. Defaults upon senior securities - not applicable.
Item 4. Submission of matters to a vote of security holders.
(a) An annual meeting of shareholders of the Company was held on
April 27, 1999 ("Annual Meeting").
(b) Not applicable.
(c) There were 104,070,044 shares of Common Stock of the Company
eligible to be voted at the Annual Meeting and 86,813,803 shares
were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting
and the vote for each proposal were as follows:
1. Election of directors for a three-year term
DIRECTOR NOMINEES ELECTED
FOR THREE YEAR TERMS: FOR WITHHELD
------------------------- --- --------
P. Kevin Condron 86,035,821 777,794
Douglas S. Hatfield, Jr. 85,968,992 852,803
Philip A. Mason 85,927,234 886,561
William J. Ryan 86,031,364 782,431
Curtis M. Scribner 86,035,488 778,307
DIRECTOR NOMINEES ELECTED
FOR TWO YEAR TERMS
-------------------------
John M. Naughton 86,000,266 773,529
Seth A. Resnicoff 85,911,821 901,974
DIRECTOR NOMINEE ELECTED
FOR ONE YEAR TERM
------------------------
David D. Hindle 86,018,329 795,465
2. Proposal to ratify the appointment of KPMG LLP as the
Company's independent auditors for the year ending December
31, 1999.
FOR AGAINST ABSTAIN
86,369,695 218,828 225,271
(d) Not applicable.
Item 5. Other Information - not applicable.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibit 10 - Agreement, dated as of August 5, 1999, between the
Company and F.William Marshall, Jr.
Exhibit 27 - Financial Data Schedule.
(b) The Company filed a Current Report on Form 8K on April 23, 1999,
June 2, 1999 (as amended on June 9, 1999), June 10, 1999, July
27, 1999 and July 28, 1999.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date August 16, 1999 By: /s/ William J. Ryan
-----------------------------
William J. Ryan
Chairman, President and
Chief Executive Officer
Date August 16, 1999 By: /s/ Peter J. Verrill
-----------------------------
Peter J. Verrill
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(principal financial and
accounting officer)
31
<PAGE> 1
Exhibit 10
AGREEMENT
Agreement, dated as of the 5th day of August 1999, by and between
Peoples Heritage Financial Group, Inc. (the "Company") and F. William Marshall,
Jr. (the "Executive").
WITNESSETH:
WHEREAS, the Company's employment of the Executive was terminated
effective as of the close of business on June 30, 1999 in accordance with the
terms of the Employment Agreement, dated as of January 1, 1999, between the
Company and the Executive (the "Company Employment Agreement"); and
WHEREAS, the Company desires to have the Executive provide, and the
Executive is willing to provide the Company with, consulting services on the
terms and conditions set forth herein; and
WHEREAS, the Company desires to have the Executive enter into an
agreement pursuant to which the Executive refrains from competing against the
Company and taking certain other actions, and the Executive is willing to agree
to such obligations; and
WHEREAS, the consulting services and other obligations of the Executive
set forth herein will be of substantial value to the Company;
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and other good and valuable consideration, the parties hereto agree as
follows:
1. CONSULTANCY.
(a) In consideration of the payments specified in Section 5(a)(i)
hereof, during the period commencing on the first day following the date of
expiration of the period referred to in Section 4(b)(iv) hereof and ending six
months thereafter (the "Consulting Period"), the Executive undertakes to provide
his personal advice and counsel to the Company and Family Bank, FSB, a
wholly-owned subsidiary of the Company, in connection with the business of the
Company and Family Bank, FSB, including consulting with the Company and Family
Bank, FSB regarding their operations and customer relationships, growth and
expansion opportunities and other business matters (collectively, the
"Consulting Services"), subject to the terms and conditions which are set forth
herein.
(i) In no event shall the Executive be required to
provide Consulting Services hereunder for more than 35 hours per week or 140
hours in any calendar month during the Consulting Period.
<PAGE> 2
(ii) The Executive shall provide such Consulting Services
commensurate with the Executive's prior experience as may be reasonably
requested by the Chief Executive Officer of the Company or his designee from
time to time and at mutually agreeable times. Such Consulting Services may be
provided in person, telephonically, electronically or by correspondence.
(iii) The Executive shall not be required to provide
Consulting Services outside a 50-mile radius of Springfield, Massachusetts,
provided that the Executive may be requested to provide consulting services at
the executive offices of the Company located in Portland, Maine up to not more
than four times per month during the Consulting Period.
(b) The Company shall reimburse the Executive or otherwise provide
for or pay for all reasonable expenses incurred by the Executive at the request
of the Company, subject to such reasonable documentation as may be requested by
the Company. If such expenses are paid in the first instance by the Executive,
the Company shall reimburse the Executive therefor upon receipt of such
reasonable documentation as may be requested by the Company.
(c) During the Consulting Period, the Executive shall be treated
as an independent contractor and shall not be deemed to be an employee of the
Company or any subsidiary or other affiliate of the Company.
2. NON-COMPETE.
The Executive agrees that during the four-year period commencing on the
date of this Agreement the Executive will not, directly or indirectly, as
director, officer, employee, principal or agent, or in any other capacity,
manage, operate, consult with or be employed by any insured depository
institution, trust company or parent holding company of any such institution or
company which has its main office in Maine, Massachusetts, New Hampshire or
Connecticut and transacts business in any area in such states in which the
Company or any of its banking subsidiaries maintains offices, provided, however,
that this provision shall not prohibit the Executive from owning bonds,
preferred stock or up to five percent (5%) of the outstanding common stock of
any such entity if such common stock is publicly traded.
3. CONFIDENTIALITY; NONDISPARAGEMENT.
(a) Except in the course of providing Consulting Services to the
Company hereunder, the Executive shall not, except as required by law or
regulation (including without limitation in connection with any judicial or
administrative process or proceeding), at any time disclose to any third party
or use any confidential information or proprietary data of the Company or any of
its subsidiaries or affiliates (including predecessors thereof) other than in
connection with services rendered by the Executive under Section 1 hereof. The
Executive agrees that all information concerning the identity of the customers
of the Company and its subsidiaries and the relations of the Company and its
subsidiaries to their customers is confidential information. The obligations of
the
2
<PAGE> 3
Executive with respect to any particular information shall terminate at such
time as such information becomes part of the public domain, provided that such
disclosure was not the result of a disclosure by the Executive which was not
permitted by the terms of this Agreement.
(b) The Executive represents and agrees that he will keep the
terms, amount and existence of this Agreement completely confidential and that
he will not hereafter disclose any information concerning this Agreement to any
entity or person, except (i) as may be required pursuant to law or regulation
(including without limitation in connection with any judicial or administrative
process or proceeding) after written notice of any such requirement is provided
by the Executive to the Company or (ii) as may be necessary to enforce the
provisions of this Agreement at law or in equity.
(c) The Executive agrees not to make, either directly or
indirectly, or cause to be made, either directly or indirectly, by any other
person or entity, any statement or comment, whether oral, written, electronic or
otherwise, or to take any other action which disparages or criticizes the
Company or any subsidiaries or affiliates thereof, their present or former
directors, officers, employees, management, practices or services, or which
disrupts or impairs or could disrupt or impair the operations of the Company or
any of its subsidiaries or affiliates. The Company agrees not to make, either
directly or indirectly, or cause to be made, either directly or indirectly, by
any other person or entity, or permit to be made by any director, officer,
employee or representative of the Company, any statement or comment, whether
oral, written, electronic or otherwise, or to take any other action which
disparages or criticizes the Executive.
(d) Each of the Company and the Executive covenants and agrees
that upon any final, nonappealable adjudication that such party has violated the
terms of this Section 3, the party asserting such a violation shall be entitled
to seek and be awarded damages together with such party's costs, reasonable
attorneys' fees and expenses in connection with enforcing the terms hereof.
4. RELEASES.
(a) For, and in consideration of the commitments made herein by
the Company, including without limitation the releases in paragraph (c) below,
the Executive, for himself and for his heirs, successors and assigns, does
hereby release completely and forever discharge the Company and its
subsidiaries, affiliates, stockholders, attorneys, officers, directors, agents,
employees, successors and assigns, and any other party associated with the
Company (the "Released Parties"), to the fullest extent permitted by applicable
law, from any and all claims, rights, demands, actions, liabilities,
obligations, causes of action of any and all kind, nature and character
whatsoever, known or unknown, in any way connected with his employment by the
Company or any of its subsidiaries (including predecessors thereof), either as a
director, officer or employee, or termination of such employment.
(b) The Executive hereby specifically and unconditionally releases
the Released Parties from any and all claims which the Executive may have
against any of them and which arose on or
3
<PAGE> 4
before the date of this Agreement under the Age Discrimination in Employment Act
(the "ADEA"), including, but not limited to, any claim attributable to the
Company' solicitation of the Executive's consent to the terms of this Agreement,
and further acknowledges and represents that
(i) the Executive waives the Executive's claims under the
ADEA knowingly and voluntarily in exchange for the
commitments made herein by the Company, and that the
benefits provided thereby constitute consideration of
value to which the Executive would not otherwise have
been entitled;
(ii) the Executive has been advised in writing by the
Company to consult an attorney in connection with
this Agreement;
(iii) the Executive has been given a period of 21 days
within which to consider the terms hereof;
(iv) the Executive may revoke the waiver of ADEA claims
set forth in this Section 4 for a period of seven (7)
days following the execution of this Agreement and
the Executive's waiver of ADEA claims hereunder shall
not become effective until this revocation period has
expired;
(v) if the Executive revokes the waiver of ADEA claims in
accordance with subparagraph (iv) above, this
Agreement shall be null and void and the Executive
shall cease to be entitled to receive the payments
and benefits specified in Section 5 hereof; and
(vi) this Agreement complies in all respects with Section
7(f) of the ADEA, the waiver provision of the Older
Workers Benefit Protection Act.
Notwithstanding the foregoing, the Executive does not release the
Company from claims arising out of any breach by the Company of (i) any
remaining obligations of the Company pursuant to Section 6.4(e), (f) and (g),
Section 6.9 and Section 11 of the Amended and Restated Employment Agreement,
dated as of June 30, 1997, between the Executive and Springfield Institution for
Savings (the "SIS Employment Agreement"), (ii) this Agreement or (iii) Section
5.8 of the Agreement and Plan of Merger, dated as of July 20, 1998, as amended,
among the Company, Peoples Heritage Merger Corp. and SIS Bancorp, Inc. (the
"Merger Agreement").
(c) For, and in consideration of the commitments made herein by
the Executive, including without limitation the releases in paragraphs (a) and
(b) above, the Company, for itself, and for its successors and assigns does
hereby release completely and forever discharge the Executive and his heirs,
successors and assigns, to the fullest extent permitted by applicable law,
4
<PAGE> 5
from any and all claims, rights, demands, actions, liabilities, obligations,
causes of action of any and all kind, nature and character whatsoever, known or
unknown, in any way connected with the Executive's employment by the Company or
any of its subsidiaries (including predecessors thereof), either as a director,
officer or employee. Notwithstanding anything in the foregoing to the contrary,
the Company does not release the Executive from claims arising out of any breach
by the Executive of (i) any law or regulation by the Executive during the term
of and related to his employment by the Company or any of its subsidiaries
(including predecessors thereof), either as a director, officer or employee, or
(ii) this Agreement.
5. PAYMENTS AND BENEFITS.
(a) In consideration of the obligations of the Executive
hereunder, the Company agrees to provide the following benefits to the
Executive:
(i) with respect to the Executive's obligations under
Section 1 above, the Company shall pay to the
Executive $209,000 of compensation for the Consulting
Period, such compensation to be paid in six equal
monthly installments commencing on the first day
following the date of expiration of the period
referred to Section 4(b)(iv) hereof and continuing on
the same day of each of the five succeeding months
thereafter;
(ii) with respect to the Executive's other covenants and
obligations under this Agreement, the Company shall
pay to the Executive an aggregate of $900,000,
payable in four installments, as follows: $250,000 on
the first day following the date of expiration of the
period referred to in Section 4(b)(iv) hereof;
$250,000 on January 15, 2000; and $200,000 on each of
January 15, 2001 and January 15, 2002;
(iii) with respect to the Executive's period of employment
by the Company from January 1, 1999 through June 30,
1999, the Company shall pay to the Executive a bonus
for services rendered to the Company equal to the
higher of (i) $100,000 or (ii) 50% of the amount, if
any, that would have been paid to him pursuant to the
Company's Executive Management Short-Term Incentive
Plan but for the termination of his employment, such
bonus to be payable in early 2000 at the same time as
any bonuses under such plan are paid to the executive
officers of the Company, but in any event shall be
paid no later than January 31, 2000; and
(iv) provided that it is able to do so by the terms of the
applicable plans and insurance carriers, the Company
agrees to arrange for the Executive's continued
participation (which by its terms shall include
5
<PAGE> 6
coverage for the Executive's spouse) under the
Company's health and dental insurance plans, at the
Executive's sole expense, for the period commencing
on the first day following the third anniversary of
the date of termination of the employment of the
Executive by the Company and ending on the earlier of
(i) with respect to the Executive, the date the
Executive attains age 65, and with respect to the
Executive's spouse, the date she attains age 65, and
(ii) the date, if any, the Executive obtains
full-time employment with another employer,
regardless of the level of health and dental
insurance benefits provided by such new employer, if
any. The Company shall bill the Executive for the
cost of such health and dental insurance plans in
accordance with its practices in place at the time.
(b) Payments to the Executive under this Section 5 may be paid by
the Company by check mailed to the address of the Executive set forth in Section
10 hereof or at such other address as the Executive may notify the Company in
accordance with the terms of such section.
(c) If any payment pursuant to this Section 5 is required to be
made on a day which is not a business day, payment shall be made on the first
business day thereafter, and no interest shall accrue on any such payment for
the intervening period. For purposes of this Agreement, the term "business day"
means any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of Maine are authorized by law, regulation or
executive order to remain closed.
(d) In the event of a Change in Control of the Company, (i) any
remaining payments due to the Executive pursuant to paragraphs (a)(i), (a)(ii)
and (a)(iii) of this Section 5 shall become immediately due and payable in one
lump sum payment, and (ii) the Executive shall not have any obligations under
Section 2 or Section 3(a) of this Agreement beyond the date of the Change in
Control. A "Change in Control of the Company" shall be deemed to have occurred:
(i) if any "person," as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")(other than the Company and
any trustee or other fiduciary holding securities under any employee benefit
plan of the Company), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting power of the Company's
then outstanding securities; (ii) if during any period of two consecutive years
(not including any period prior to the adoption of this Agreement), individuals
who at the beginning of such period constitute the Board of Directors, and any
new director whose election by the Board of Directors or nomination for election
by the Company's stockholders was approved by a vote of at least two-thirds of
the directors then still in office who either were directors at the beginning of
the two-year period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority of the Board
of Directors; (iii) upon the consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation that
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities
6
<PAGE> 7
of the surviving entity) more than 50% of the combined voting power of the
voting securities of the Company outstanding immediately after such merger or
consolidation; or (iv) upon the complete liquidation of the Company or the
consummation of the sale or disposition by the Company of all or substantially
all of the Company's assets.
6. NATURE OF PAYMENT OBLIGATIONS.
(a) Provided that the Executive complies in all material respects
with his obligations pursuant to Sections 1, 2, 3 and 4 hereof in accordance
with their terms, and except as otherwise provided in Section 6(b) and Section 7
hereof, the Company's obligation to pay the Executive the benefits and payments
provided in Section 5 hereof shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any purported
termination of this Agreement, other than pursuant to Section 6(b) hereof,
set-off, counterclaim, recoupment, defense or other right which the Company may
have against the Executive or anyone else, and each and every such payment made
or benefit provided shall be final and the Company shall not seek to recover all
or any part of any such payment or benefit from the Executive or from whomsoever
may be entitled thereto for any reason whatsoever.
(b) If the Executive materially breaches any of his obligations
hereunder, the Company may terminate this Agreement by written notice of
termination provided to the Executive, and thereafter the Executive shall be
entitled to no further benefits and payments under the terms of this Agreement.
In the event of the death of the Executive, (i) any payment that remains to be
made by the Company under Section 5(a)(iii) shall become due and payable to the
Executive's estate within five business days after the Company is notified in
writing of such death and (ii) the Executive's spouse shall continue to be
entitled to the medical and dental benefits provided under Section 5(a)(iv)
hereof for the period specified therein at the sole expense of such spouse,
provided that the Company is able to continue to provide such benefits by the
terms of the applicable plans and insurance carriers and the Company was
providing such benefits to the Executive in accordance with such section at the
time of his death. Except as provided in the preceding sentence, the estate and
family of the Executive shall be entitled to no further benefits and payments
under the terms of this Agreement in the event of the death of the Executive.
7. LIMITATION ON PAYMENTS.
(a) Notwithstanding anything in this Agreement to the contrary, in
the event that the Company, based upon the assertion of a deficiency by the
Internal Revenue Service against the Company or the Executive which the Company,
after consultation with the Company's outside legal counsel and/or independent
public accountants, believes has a high probability of success, determines that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable (or distributed or distributable) pursuant to
the terms of this Agreement, either of the Employment Agreements referred to in
Section 12 hereof or otherwise (a "Payment"), would be nondeductible by the
Company for federal income tax purposes because of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), then the aggregate present value
7
<PAGE> 8
of the amounts payable or distributable to or for the benefit of the Executive
pursuant to this Agreement (the "Agreement Payments") shall be reduced (but not
below zero) to the Reduced Amount. For purposes of this Section 7, the term
"Reduced Amount" shall mean an amount expressed in present value which maximizes
the aggregate present value of Agreement Payments without causing any Payment to
be nondeductible by the Company because of Section 280G of the Code.
(b) If the Company determines pursuant to Section 7(a) that any
Payment would be nondeductible by the Company because of Section 280G of the
Code, then the Company shall promptly give the Executive notice to that effect
and a copy of the detailed calculation thereof and of the Reduced Amount, and
the Executive may then elect, in his sole discretion, which and how much of the
Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Agreement Payments equals the Reduced Amount) and
shall advise the Company in writing of his election within 10 days of his
receipt of notice. If no such election is made by the Executive within such
10-day period, then the Company may elect which and how much of the Agreement
Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Agreement Payments equals the Reduced Amount) and
shall notify the Executive promptly of such election.
(c) If the Company determines pursuant to Section 7(a) that any
Payment which has been made to the Executive is or would be nondeductible by the
Company because of Section 280G of the Code (an "Overpayment"), such Overpayment
shall be treated for all purposes as a loan to the Executive, which he shall
repay to the Company, together with interest at the applicable federal rate
provided for in Section 7872(f)(2) of the Code, upon demand by the Company.
(d) Determinations of present value for purposes of this Section 7
shall be determined in the manner set forth in Section 280G(d)(4) of the Code.
(e) All determinations made by the Company under this Section 7
shall be final and binding upon the Executive.
(f) The Executive acknowledges and agrees that Section 6.9 of the
SIS Employment Agreement has no applicability to the payments and benefits to be
provided to him under this Agreement and in no way conflicts with, limits or
otherwise modifies the requirements of this Section 7.
8. REPRESENTATION. The Company and the Executive represent and
warrant to each other that they have carefully read this Agreement and consulted
with respect thereto with their respective counsel and that each of them fully
understands the content of this Agreement and its legal effect. Each party
hereto also represents and warrants that this Agreement is a legal, valid and
binding obligation of such party which is enforceable against it in accordance
with its terms.
8
<PAGE> 9
9. SUCCESSORS AND ASSIGNS. This Agreement will inure to the
benefit of and be binding upon the Executive and the Company, including any
successor to the Company by merger or consolidation or any other change in form
or any other person or firm or corporation to which all or substantially all of
the assets and business of the Company may be sold or otherwise transferred.
This Agreement may not be assigned by any party hereto without the consent of
the other party.
10. NOTICES. Any communication to a party required or permitted
under this Agreement, including any notice, direction, designation, consent,
instruction, objection or waiver, shall be in writing and shall be deemed to
have been given at such time as it is delivered personally, or five (5) days
after mailing if mailed, postage prepaid, by registered or certified mail,
return receipt requested, addressed to such party at the address listed below or
at such other address as one such party may by written notice specify to the
other party or parties, as applicable:
If to the Executive:
F. William Marshall, Jr.
87 Ely Road
Longmeadow, Massachusetts 01106
If to the Company:
Peoples Heritage Financial Group, Inc.
P.O. Box 9540
One Portland Square
Portland, Maine 04112-9540
Attention: President
11. WITHHOLDING. The Company may withhold from any amounts payable
under this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
12. ENTIRE AGREEMENT; SEVERABILITY. This Agreement incorporates
the entire understanding among the parties relating to the subject matter
hereof, recites the sole consideration for the promises exchanged and supersedes
any prior agreements between the Company and the Executive with respect to the
subject matter hereof, including without limitation, the Company Employment
Agreement and the SIS Employment Agreement, provided that nothing contained
herein shall affect any remaining obligations of the Company to the Executive
under Section 6.4(e), (f) and (g), Section 6.9 and Section 11 of the SIS
Employment Agreement or Section 5.8 of the Merger Agreement. In reaching this
Agreement, no party has relied upon any representation or promise except those
set forth herein.
13. WAIVER. Failure to insist upon strict compliance with any of
the terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition. A waiver of
9
<PAGE> 10
any provision of this Agreement must be made in writing, designated as a waiver
and signed by the party against whom its enforcement is sought. Any waiver or
relinquishment of any right or power hereunder at any one or more times shall
not be deemed a waiver or relinquishment of such right or power at any other
time or times.
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
15. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Maine
applicable to agreements made and entirely to be performed within such
jurisdiction.
16. HEADINGS. The headings of sections in this Agreement are for
convenience of reference only and are not intended to qualify the meaning of any
section. Any reference to a section number shall refer to a section of this
Agreement, unless otherwise stated.
IN WITNESS WHEREOF, the Company and the Executive have entered into
this Agreement as of the day and year first above written.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
By: /s/ William J. Ryan
---------------------------------------------
William J. Ryan, Chairman, President
and Chief Executive Officer
/s/ F. William Marshall, Jr.
---------------------------------------------
F. William Marshall, Jr.
10
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68,775
0
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