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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________.
Commission File Number: 0-16947
PEOPLES HERITAGE FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
MAINE 01-0437984
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. BOX 9540
ONE PORTLAND SQUARE
PORTLAND, MAINE 04112-9540
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 761-8500
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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Title of Class
PREFERRED STOCK PURCHASE RIGHTS
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Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 19, 1999, the aggregate market value of the 103,021,370 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 1,048,674 shares held by all directors and executive officers of the
Registrant as a group (excluding the effects of unexercised stock options), was
$1.9 billion. This figure is based on the last sale price of $18.41 per share of
the Registrant's Common Stock on March 19, 1999, as reported in THE WALL STREET
JOURNAL on March 22, 1999. Although directors of the Registrant and executive
officers of the Registrant and its subsidiaries were assumed to be "affiliates"
of the Registrant for purposes of this calculation, the classification is not to
be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 19, 1999: 104,070,044
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated by reference into Part II, Items 5-8
and Part IV, Item 14 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 27, 1999 are incorporated by reference
into Part III, Items 10-13 of this Form 10-K.
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PART I.
ITEM 1. BUSINESS
THE COMPANY
Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank
and financial services holding company which is incorporated under the laws of
the State of Maine. The Company conducts business from its executive offices in
Portland, Maine and, as of December 31, 1998, 188 offices located in Maine, New
Hampshire and Massachusetts. At December 31, 1998, the Company had consolidated
assets of $10.1 billion and consolidated shareholders' equity of $762 million.
Based on total assets at December 31, 1998, the Company is the largest
independent bank holding company headquartered in northern New England and the
fifth largest independent bank holding company headquartered in New England.
The Company offers a broad range of commercial and consumer banking
services and products and trust and investment advisory services through three
wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New
Hampshire ("BNH") and Family Bank, FSB ("Family Bank"). PHB is a Maine-chartered
bank which operates offices throughout Maine and, through subsidiaries, engages
in mortgage banking, financial planning, insurance brokerage and equipment
leasing activities. At December 31, 1998, PHB had consolidated assets of $4.2
billion and consolidated shareholder's equity of $333 million. BNH is a New
Hampshire-chartered commercial bank which operates offices throughout New
Hampshire. At December 31, 1998, BNH had consolidated assets of $4.3 billion and
consolidated shareholder's equity of $328 million. Family Bank is a
federally-chartered savings bank which operates offices in Massachusetts and
southern New Hampshire. At December 31, 1998, Family Bank had consolidated
assets of $1.8 billion and consolidated shareholder's equity of $141 million.
Acquisitions have been, and are expected to continue to be, an
important part of the expansion of the Company's business. As of December 31,
1998, the Company had completed three acquisitions accounted for under the
pooling-of-interests method and seven acquisitions accounted for under the
purchase method since January 1, 1994. In addition, on January 1, 1999, the
Company completed the acquisition of SIS Bancorp. Inc. ("SIS"), a holding
company for SIS Bank, which was concurrently merged into Family Bank, and
Glastonbury Bank & Trust Company, a Connecticut chartered bank which conducts
business from eight offices in central Connecticut. Approximately 16,255,885
shares of common stock of the Company were issued in connection with this
acquisition, which was accounted for as a pooling-of-interests. SIS had total
assets of $2.0 billion and shareholders' equity of $139 million at December 31,
1998.
Unless the context otherwise requires, references herein to the Company
include its direct and indirect subsidiaries.
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BUSINESS OF THE COMPANY
The principal business of the Company consists of attracting deposits
from the general public through its offices and using such deposits to originate
loans secured by first mortgage liens on existing single-family (one-to-four
units) residential real estate and existing multi-family (over four units)
residential and commercial real estate, construction loans, commercial business
loans and leases and consumer loans and leases. The Company also provides
various mortgage banking services and, as discussed below, various trust and
investment advisory services, as well as engages in equipment leasing, financial
planning, securities brokerage and insurance brokerage activities. The Company
also invests in investment securities and other permitted investments.
The Company derives its income principally from interest charged on
loans and leases and, to a lesser extent, from interest and dividends earned on
investments, fees received in connection with the sale and servicing of loans,
deposit services and for other services and gains on the sale of assets. The
Company's principal expenses are interest expense on deposits and borrowings,
operating expenses, provisions for loan and lease losses and income tax expense.
Funds for activities are provided principally by deposits, advances from the
Federal Home Loan Bank ("FHLB") of Boston, securities sold under repurchase
agreements, amortization and prepayments of outstanding loans, maturities and
sales of investments and other sources.
PHB, BNH and Family Bank provide full trust services to their
customers. Each of the Company's banking subsidiaries focuses on offering
employee benefit trust services in which it will act as trustee, custodian,
administrator and/or investment advisor, among other things, for employee
benefit plans for corporate, self-employed, municipal and not-for-profit
employers throughout the Company's market areas. In addition, the Company's
banking subsidiaries serve as trustee of both living trust and trusts under
wills and as such hold, account for and manage financial assets, real estate and
special assets. Custody, estate settlement and fiduciary tax services, among
others, also are offered the Company's banking subsidiaries. At December 31,
1998, the Company had $3.0 billion of assets held by the trust departments of
its banking subsidiaries, which are not included in the Company's consolidated
balance sheet for financial reporting purposes.
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA"), and as such is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). The Company also is registered as a Maine
financial institution holding company under Maine law and as such is subject to
regulation and examination by the Superintendent of Banking of the State of
Maine ("Superintendent").
As a Maine-chartered bank, PHB is subject to regulation and examination
by the Superintendent, as a New Hampshire-chartered commercial bank, BNH is
subject to regulation and examination by the New Hampshire Bank Commissioner and
as a federally-chartered savings bank, Family Bank is subject to regulation and
examination by the Office of Thrift Supervision ("OTS"). Each of PHB, BNH and
Family Bank is a member of the Bank Insurance Fund ("BIF") administered
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by the Federal Deposit Insurance Corporation ("FDIC") and as a result also is
subject to regulation and examination by the FDIC.
SUBSIDIARIES
At December 31, 1998, the Company's only direct subsidiaries were PHB,
Bank of New Hampshire Corporation, a holding company for BNH, Peoples Heritage
Merger Corp., a holding company for Family Bank, and Peoples Heritage Capital
Trust I (the "Trust"). For additional information on the Trust, see Note 12 to
the Consolidated Financial Statements included in Item 8 hereof.
Set forth below is a brief description of certain indirect non-banking
subsidiaries of the Company.
Investments in Real Estate. The Company's banking subsidiaries hold
certain investments in real estate. Exclusive of other real estate owned and
investments in office properties and facilities, which are discussed under Item
2 hereof, at December 31, 1998 the Company's banking subsidiaries' investments
in real estate consisted entirely of interests in limited partnerships formed
for the purpose of investing in real estate for lower-income families, elderly
housing projects and/or the preservation or restoration of historically or
architecturally significant buildings or structures. At December 31, 1998, the
Company's banking subsidiaries investments in these limited partnerships had a
carrying value of $18.8 million.
Equipment Leasing Activities. PHB conducts equipment leasing activities
through Peoples Heritage Leasing Corporation, Inc. ("PHLC"). PHLC is
headquartered in Portland, Maine and engages in direct equipment leasing
activities, primarily involving office equipment, in the Portland, Maine
metropolitan area and elsewhere in the States of Maine, New Hampshire and
Massachusetts. At December 31, 1998, PHLC had $34.9 million of leases
outstanding.
Financial Planning and Securities Brokerage Activities. PHB conducts
financial planning, investment planning and securities brokerage activities
through Heritage Investment Planning Group, Inc. ("HIPG"). PHB also offers
through HIPG investments in mutual funds and annuities throughout the Company's
market areas. HIPG offers its services to individuals and small businesses from
its office located in Portland, Maine and from certain of the Company's other
locations in Maine, Massachusetts and New Hampshire. Sales professionals at HIPG
are registered representatives of Compulife Investor Services, Inc., a
registered broker/dealer, and all securities brokerage activities are conducted
through Compulife Investor Services, Inc. The sales professionals receive
referrals from the Company's branch offices throughout its market areas.
Insurance Brokerage Activities. PHB conducts insurance brokerage
activities through MPN Holdings, the holding company for Morse, Payson & Noyes,
which the Company acquired in October 1997, the Catalano Insurance Agency, Inc.,
which the Company acquired in September 1998, and A.D. Davis, Incorporated,
which the Company acquired in December 1998. Morse,
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Payson & Noyes is the largest insurance brokerage firm in Maine. Catalano
Insurance Agency, Inc. is headquartered in Methuen, Massachusetts, and A.D.
Davis, Incorporated is headquartered in North Conway, New Hampshire. During
1998, the Company completed the two acquisitions noted above for an aggregate of
454,864 shares of common stock of the Company and the acquisition of another
insurance brokerage agency, which was merged into Morse, Payson & Noyes, for
cash.
In addition, PHB conducts insurance sales activities through HIPG,
which offers limited life insurance and long-term care insurance products in
Maine as an agent for Compulife, Inc., in conjunction with the sales of
investment and annuities products.
COMPETITION
The Company encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from savings institutions,
commercial banks and credit unions with offices in the market areas served by
the Company. The Company also encounters competition for deposits from money
market funds, as well as corporate and government securities. The principal
methods used by the Company to attract deposit accounts include the variety of
services offered, the competitive interest rates offered and the convenience of
office locations, automated teller machines and expanded banking hours.
The Company's competition for real estate and other loans comes
principally from savings institutions, credit unions, commercial banks, mortgage
banking companies, insurance companies and other institutional lenders. The
Company competes for loans through interest rates, branch locations, loan
maturities, loan fees and the quality of service extended to borrowers and
brokers.
The Company also experiences significant competition in the offering of
trust services through its subsidiary banks, securities services through HIPG
and insurance products through HIPG and the Company's insurance brokerage
subsidiaries. This competition comes from a sundry of entities, including other
financial institutions, securities brokerage firms and insurance companies.
In recent years, Maine, New Hampshire and Massachusetts laws have
enabled the acquisition of financial institutions in these respective states by
financial institutions and financial institution holding companies based outside
of these states. As a result, the Company has encountered substantial
competition in its market areas, particularly from out-of-state banking
organizations that have entered the Maine, New Hampshire and Massachusetts
banking markets, and the Company expects to continue to encounter such
competition in the future.
EMPLOYEES
The Company had approximately 3,334 full-time employees as of December
31, 1998. None of these employees is represented by a collective bargaining
agent, and the Company believes that it enjoys good relations with its
personnel.
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REGULATION OF THE COMPANY
The following references to laws and regulations which are applicable
to the Company and its banking subsidiaries are brief summaries thereof which do
not purport to be complete and are qualified in their entirety by reference to
such laws and regulations.
BHCA - General. The Company, as a bank holding company, is subject to
regulation and supervision by the Federal Reserve Board. Under the BHCA, a bank
holding company is required to file annually with the Federal Reserve Board a
report of its operations and, with its subsidiaries, is subject to examination
by the Federal Reserve Board.
BHCA - Activities and Other Limitations. The BHCA generally prohibits a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. As a
result of recent amendments to the BHCA, the Federal Reserve Board generally may
approve an application by a bank holding company that is adequately capitalized
and adequately managed to acquire control of, or to acquire all or substantially
all of the assets of, a bank located in a state other than the home state of
such bank holding company, without regard to whether such transaction is
prohibited under the law of any state, provided, however, that the Federal
Reserve Board may not approve any such application that would have the effect of
permitting an out-of-state bank holding company to acquire a bank in a host
state that has not been in existence for any minimum period of time, not to
exceed five years, specified in the statutory law of the host state.
The BHCA also generally prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
Capital Requirements. For a description of the capital adequacy
guidelines adopted by the Federal Reserve Board to assess the adequacy of
capital of bank holding companies, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital" included in Item 7
hereof.
Affiliated Institutions. Under Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to each subsidiary
bank and to commit resources to support each subsidiary bank in circumstances
when it might not do so absent such policy. The Federal Reserve
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Board takes the position that in implementing this policy it may require bank
holding companies to provide such support when the holding company otherwise
would not consider itself able to do so.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a subsidiary bank to its
holding company in the form of loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are limited to 10% of a bank's
capital and surplus with respect to each affiliate and to 20% in the aggregate,
and are also subject to certain collateral requirements. These transactions, as
well as other transactions between a subsidiary bank and its holding company,
also must be on terms substantially the same as, or at least as favorable as,
those prevailing at the time for comparable transactions with non-affiliated
companies or, in the absence of comparable transactions, on terms or under
circumstances, including credit standards, that would be offered to, or would
apply to, non-affiliated companies.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to expiration of
the disapproval period if the Federal Reserve Board issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the Federal Reserve Board, the acquisition of more than 10% of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Securities Exchange Act of 1934 would, under the
circumstances set forth in the presumption, constitute the acquisition of
control.
In addition, any "company" would be required to obtain the approval of
the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of
an acquiror that is a bank holding company) or more of the outstanding Common
Stock of, or such lesser number of shares as constitute control over, the
Company.
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Maine Law. Under Maine law, the prior approval of the Superintendent is
required in any case in which (i) any person or company proposes to acquire
control of a Maine financial institution or a Maine financial institution
holding company and (ii) a Maine financial institution or Maine financial
institution holding company proposes to acquire more than 5% of the voting
shares of a Maine financial institution or a Maine financial institution holding
company. In addition, the prior approval of the Superintendent is required for
the acquisition of more than 5% of the voting shares of a financial institution,
whose home state is not Maine, by a Maine financial institution or a Maine
financial institution holding company.
In addition, any person or company which directly or indirectly
acquires more than 5% of the voting shares of a Maine financial institution or a
Maine financial institution holding company is required within five days of the
acquisition to file with the Superintendent a statement containing specified
information, including the background and identity of the person or company, the
source and amount of funds or other consideration for the purchase and any plans
or proposals which the acquiring person may have to liquidate the financial
institution or financial institution holding company, to sell its assets or
merge it with any company or to make any other major change in its business,
corporate structure or management. Any person or company also must file a notice
with the Superintendent when there is a material change in ownership. Under
Maine law, the acquisition of an aggregate of more than another 5% of the voting
shares is a material change.
A Maine financial institution holding company may not engage in any
activity other than managing or controlling financial institutions or other
activities deemed permissible by the Superintendent. The Superintendent has by
regulation determined that, with the prior approval of the Superintendent, a
financial institution holding company may engage in those activities which are
permissible for bank holding companies under the BHCA and those activities which
are permissible for savings and loan holding companies under the Home Owners'
Loan Act, and additional activities as specified by regulations.
New Hampshire Law. New Hampshire law generally prohibits a bank holding
company organized under the laws of New Hampshire or doing business in the State
of New Hampshire from directly or indirectly acquiring ownership or control of
any voting stock of any bank or national bank, if upon such acquisition (i) the
bank holding company would have more than twelve bank affiliates in New
Hampshire, or (ii) the dollar volume of the total of time, savings and demand
deposits in New Hampshire of the bank holding company and all its affiliates
would exceed 20% of the dollar volume of the total of time, savings and demand
deposits of all banks, national banks and federal savings and loan associations
in the State of New Hampshire as determined by the New Hampshire Bank
Commissioner. The above-referenced 20% limitation may be waived by the New
Hampshire Bank Commissioner and the New Hampshire Attorney General if both
determine that it is in the best interests of the State of New Hampshire,
provided that under no circumstances shall the total dollar volume of total
deposits exceed 30%.
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REGULATION OF BANKING SUBSIDIARIES
General. Each of PHB, BNH and Family Bank is subject to extensive
regulation and examination by the Superintendent, the New Hampshire Bank
Commissioner and the OTS, respectively. Each of the Company's banking
subsidiaries also is subject to regulation and examination by the FDIC, which
insures the deposits of each of the Company's banking subsidiaries to the
maximum extent permitted by law, and certain requirements established by the
Federal Reserve Board. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans. The laws and regulations governing the Company's banking subsidiaries
generally have been promulgated to protect depositors and not for the purpose of
protecting stockholders.
Capital Requirements. Each of the Company's banking subsidiaries is
subject to regulatory capital requirements of the FDIC (in the case of PHB and
BNH) and the OTS (in the case of Family Bank) which are substantially comparable
to the regulatory capital requirements of the Federal Reserve Board applicable
to bank holding companies such as the Company. At December 31, 1998, the
regulatory capital of each of the Company's banking subsidiaries substantially
exceeded applicable requirements.
Prompt Corrective Action. Section 38 of the Federal Deposit Insurance
Act ("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The
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federal banking regulator may not, however, reclassify a "significantly
undercapitalized" institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming
undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.
At December 31, 1998, each of the Company's banking subsidiaries had
capital levels which qualified it as a "well-capitalized" institution under
applicable laws and regulations.
FDIC Insurance Premiums. Each of the Company's banking subsidiaries is
a member of the BIF administered by the FDIC, although certain deposits of each
of these entities acquired in acquisitions are insured by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC.
As an FDIC-insured institution, each of the Company's banking
subsidiaries is required to pay deposit insurance premiums to the FDIC.
Effective January 1, 1997, the assessment schedule for both BIF and SAIF ranges
from 0 basis points (subject to a $2,000 annual minimum) to 27 basis points. In
addition, both BIF-insured institutions and SAIF-insured institutions are
assessed amounts in order for a federally-chartered Finance Corporation to make
payments on it bonds.
Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement prescribed by its appropriate
federal banking agency. The FDIC may, on a case-by-case basis and upon
application by an adequately capitalized insured depository institution, waive
the restriction on brokered deposits upon a finding that the acceptance of
brokered deposits does not constitute an unsafe or unsound practice with respect
to such institution. The Company's banking subsidiaries had $258 million of
brokered deposits outstanding at December 31, 1998.
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Community Investment and Consumer Protection Laws. In connection with
its lending activities, each of the Company's banking subsidiaries is subject to
a variety of federal laws designed to protect borrowers and promote lending to
various sectors of the economy and population. Included among these are the
federal Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act,
Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act
and Community Reinvestment Act ("CRA").
The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank
and FNB, the FDIC and the OCC, respectively) must conduct regular CRA
examinations of insured financial institutions and assign to them a CRA rating
of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In
1998, the CRA rating of the Company's banking subsidiaries was either
"outstanding" or "satisfactory."
Limitations on Dividends. The Company is a legal entity separate and
distinct from its banking and other subsidiaries. The Company's principal source
of revenue consists of dividends from its banking subsidiaries. The payment of
dividends by the Company's banking subsidiaries is subject to various regulatory
requirements.
Miscellaneous. The Company's banking subsidiaries are subject to
certain restrictions on loans to the Company or its non-bank subsidiaries, on
investments in the stock or securities thereof, on the taking of such stock or
securities as collateral for loans to any borrower, and on the issuance of a
guarantee or letter of credit on behalf of the Company or its non-bank
subsidiaries. The Company's banking subsidiaries also are subject to certain
restrictions on most types of transactions with the Company or its non-bank
subsidiaries, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms.
Regulatory Enforcement Authority. The enforcement powers available to
federal banking regulators is substantial and includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
TAXATION
Federal Taxation. The Company and its banking subsidiaries are subject
to those rules of federal income taxation generally applicable to corporations
under the Code. The Company and its banking subsidiaries, as members of an
affiliated group of corporations within the meaning of Section 1504 of the Code,
file a consolidated federal income tax return, which has the effect of
10
<PAGE> 12
eliminating or deferring the tax consequences of inter-company distributions,
including dividends, in the computation of consolidated taxable income.
State Taxation. As a financial institution holding company, the Company
is subject to a separate state franchise tax in lieu of state corporate income
tax. The amount of the tax is the sum of 1% of Maine net income and $.08 per
$1,000 of Maine assets as defined in Maine law. Maine assets are the Company's
total end of the year assets as reported to the United States Government on the
federal income tax return. Maine net income is the Company's net income or loss
as reported by the Company on its consolidated financial statements which is
apportioned to Maine under Maine law.
The Company is subject to New Hampshire business profits tax based on
federal taxable income attributable to New Hampshire apportionments. The tax is
essentially computed by excluding from taxable income any interest on U.S.
Government obligations, adding back New Hampshire business profits taxes used in
computing federal taxable income, and then multiplying the resulting New
Hampshire taxable income by 7.0%. The computed tax is offset by a credit for any
New Hampshire enterprise tax assessed on the affiliates' compensation, interest
and dividends paid.
The Company is subject to Massachusetts financial institution excise
tax based on federal taxable income primarily attributable to its Massachusetts
affiliates. The tax is computed by adding back tax-exempt income excluded from
federal taxable income, state income tax/excise taxes deducted from federal
taxable income, and then multiplying the resulting Massachusetts taxable income
by 10.91%. Certain affiliates chartered in Massachusetts pay taxes at less than
statutory rates.
ITEM 2. PROPERTIES
At December 31, 1998, the Company conducted its business from its
headquarters and main office at One Portland Square, Portland, Maine, and, as of
December 31, 1998, 188 offices located in Maine, New Hampshire and
Massachusetts. For additional information regarding the Company's lease
obligations, see Note 14 to the Consolidated Financial Statements included in
Item 8 hereof.
11
<PAGE> 13
The following table sets forth certain information with respect to the
offices of the Company as of December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value of
Number of Property and Leasehold
State Banking Offices Improvements Deposits
- ----------- --------------- ---------------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
PHB 75 $27,168 $2,862,122
BNH 78 28,272 2,896,694
Family Bank 35 14,515 1,222,429
--- ------- ----------
Total 188 $69,955 $6,981,245
=== ======= ==========
</TABLE>
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The information contained under the section captioned "Common Stock
Prices" on page 64 of the Company's Annual Report to Stockholders for the year
ended December 31, 1998 (the "Annual Report") is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Five-Year
Consolidated Financial and Other Data" on page 13 of the Company's Annual Report
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 14 through 31 of the Company's Annual Report is incorporated herein by
reference.
12
<PAGE> 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management" on pages 27 and 28 of the Company's Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required are contained
on pages 32 through 55 of the Company's Annual Report and are incorporated
herein by reference.
PART III.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to "Election of Directors" on pages 2 through
6 and "Executive Officers who are not Directors" on pages 9 and 10 of the
definitive Proxy Statement of the Company, dated March 22, 1999 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to "Compensation of Executive Officers and
Transactions with Management" on pages 7 and 8 and 13 through 16 of the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to "Beneficial Ownership of Common Stock by
Certain Beneficial Owners and Management" on pages 11 and 12 of the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to "Certain Transactions" on pages 19 and 20
of the Proxy Statement.
13
<PAGE> 15
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) The following financial statements are incorporated by reference
from Item 8 hereof and the Annual Report to Stockholders included herein as
Exhibit 13:
Consolidated balance sheets at December 31, 1998 and 1997
Consolidated statements of income for each of the years in the
three-year period ended December 31, 1998
Consolidated statements of changes in shareholders' equity for each of
the years in the three-year period ended December 31, 1998
Consolidated statements of cash flows for each of the years in the
three-year period ended December 31, 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
omitted because of the absence of conditions under which they are required or
because the required information is included in the financial statements and
related notes thereto.
(a)(3) The following exhibits are included as part of this Form 10-K.
14
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ----------- ------- --------
<S> <C> <C>
3(a)(1) Amended and Restated Articles of Incorporation of (1)
the Company
3(a)(2) Amendment to the Articles of Incorporation of the (2)
Company
3(b) Bylaws of the Company
4(a) Specimen Common Stock certificate (3)
4(b) Form of Indenture between the Company and Mellon
Bank, N.A., as trustee (4)
4(c) Form of Debenture due 2000 (4)
4(d) Amended and Restated Declaration of Trust relating to (5)
Peoples Heritage Capital Trust I, dated as of January
31, 1997, between the Company and the trustees named
therein
4(e) Form of Common Securities and form of Capital (5)
Securities of Peoples Heritage Capital Trust I
(included as Exhibits to the Amended and Restated
Declaration included as Exhibit 4(d))
4(f) Indenture, dated as of January 31, 1997, between the (5)
Company and The Bank of New York, as trustee,
relating to Junior Subordinated Deferrable Interest
Debentures due 2027 of the Company
4(g) Form of Junior Subordinated Deferrable Interest (5)
Debentures due 2027 of the Company (included as
Exhibit A to the Indenture included as Exhibit 4(f))
4(h) Series A Capital Securities Guarantee Agreement, (6)
dated as of January 31, 1997, relating to the Series
A Capital Securities of Peoples Heritage Capital
Trust I
4(i) Common Securities Guarantee Agreement, dated as of (6)
January 31, 1997, relating to the Common Securities
of Peoples Heritage Capital Trust I
10(a) Amended and Restated Severance Agreement between the (7)
Company and William J. Ryan
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ----------- ------- --------
<S> <C> <C>
10(b) Amended and Restated Severance Agreement between the (7)
Company and Peter J. Verrill
10(c) Form of Severance Agreement between the Company and (6)
each of R. Scott Bacon, David D. Hindle, John W.
Fridlington, Carol L. Mitchell and Wendy Suehrstedt
10(d) Form of Amendment to Severance Agreement between the (8)
Company and each of R. Scott Bacon and David D.
Hindle
10(e) Supplemental Retirement Agreement among the Company, (9)
its subsidiaries and William J. Ryan
10(f) Supplemental Retirement Agreement among the Company, (9)
its subsidiaries and Peter J. Verrill
10(g) Supplemental Retirement among the Company, its (10)
subsidiaries and John W. Fridlington
10(h) Form of Supplemental Retirement Agreement among the (8)
Company, its subsidiaries and each of R. Scott Bacon,
Carol L. Mitchell and Wendy Suehrstedt
10(i) Senior Officers' Deferred Compensation Plan, as (11)
amended
10(j) Directors' Deferred Compensation Plan, as amended (11)
10(k) 1986 Stock Option and Stock Appreciation Rights Plan, (1)(12)
as amended
10(l) 1986 Employee Stock Purchase Plan, as amended (1)(12)
10(m) Amended and Restated Restricted Stock Plan for Non- (6)
Employee Directors
10(n) Amended and Restated 1995 Stock Option Plan for Non- (13)
Employee Directors
10(o)(1) Amended and Restated Thrift Incentive Plan (6)
10(o)(2) First Amendment to Amended and Restated Thrift (6)
Incentive Plan
10(p)(1) Profit Sharing Employee Stock Ownership Plan (14)
10(p)(2) First Amendment to Profit Sharing Employee Stock (7)
Ownership Plan
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ----------- ------- --------
<S> <C> <C>
10(p)(3) Second Amendment to Profit Sharing Employee Stock (7)
Ownership Plan
10(q) 1996 Equity Incentive Plan, as amended (15)
10(r) Bank of New Hampshire Corporation Executive Excess (16)
Benefit Plan for Paul R. Shea
10(s) Supplemental Executive Retirement Plan agreement (17)
between The Family Mutual Savings Bank and David D.
Hindle
10(t) Split Dollar Insurance Agreement between The Family (18)
Mutual Savings Bank and David D. Hindle
10(u) Employment Agreement between the Company and F. (19)
William Marshall, Jr.
10(v) Form of Severance Agreement between the Company and (20)
Christopher W. Bramley
10(w) Stockholders Rights Agreement, dated September 12, (21)
1989, between the Company and American Stock Transfer
& Trust Company, as Rights Agent
13 Annual Report to Stockholders for 1998
21 Subsidiaries of the Company
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
- ----------------------------
(1) Incorporated by reference to the Agreement and Plan of Merger, dated as of
October 27, 1997, between the Company and CFX Corporation, which is included as
Exhibit A to the Prospectus/Proxy Statement included in the Form S-4
Registration Statement (No. 333-23991) filed by the Company with the Securities
and Exchange Commission ("SEC") on December 31, 1997.
(2) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 23, 1998.
(3) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-20243) filed by the Company with the SEC on February 22, 1988.
17
<PAGE> 19
(4) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on February 28, 1995.
(5) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 333-23991) filed by the Company with the SEC on March 26, 1997.
(6) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1996, filed with the SEC on March 31, 1997.
(7) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1995, filed with the SEC on March 29, 1996.
(8) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1997, filed with the SEC on March 27, 1998.
(9) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1990, filed with the SEC on March 23, 1991.
(10) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1994, filed with the SEC on March 30, 1995.
(11) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1993, filed with the SEC on March 17, 1994.
(12) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1993.
(13) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 21, 1997.
(14) Exhibit is incorporated by reference to the Form S-1 Registration Statement
(No. 33-53236) filed by the Company with the SEC on November 23, 1992.
(15) Exhibit is incorporated by reference to the Form 10-Q report filed by the
Company with the SEC on November 16, 1998.
(16) Exhibit is incorporated by reference to the Form 10-K report filed by Bank
of New Hampshire Corporation (File No. 0-9517) for the year ended December 31,
1994.
(17) Exhibit is incorporated by reference to the Form 10-K report filed by
Family Bancorp (File No. 0-17252) for the year ended December 31, 1993.
18
<PAGE> 20
(18) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-18613) filed by Family Bancorp.
(19) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on January 4, 1999.
(20) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on April 22, 1998.
(21) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on September 13, 1989.
The Company's management contracts or compensatory plans or arrangements
consist of Exhibit Nos. 10(a)-(v).
(b) Not applicable.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to Stockholders which are
required to be included herein.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
By: /s/ William J. Ryan Date: March 22, 1999
-------------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Robert P. Bahre Date: March 22, 1999
- --------------------------------------------------
Robert P. Bahre
Director
/s/ P. Kevin Condron Date: March 22, 1999
- --------------------------------------------------
P. Kevin Condron
Director
/s/ Everett W. Gray Date: March 22, 1999
- --------------------------------------------------
Everett W. Gray
Director
/s/ Andrew W. Greene Date: March 22, 1999
- --------------------------------------------------
Andrew W. Greene
Director
20
<PAGE> 22
/s/ Katherine M. Greenleaf Date: March 22, 1999
- --------------------------------------------------
Katherine M. Greenleaf
Director
/s/ Douglas S. Hatfield Date: March 22, 1999
- --------------------------------------------------
Douglas S. Hatfield
Director
/s/ David D. Hindle Date: March 22, 1999
- --------------------------------------------------
David D. Hindle
Director
/s/ Dana S. Levenson Date: March 22, 1999
- --------------------------------------------------
Dana S. Levenson
Director
/s/ Robert A. Marden, Sr. Date: March 22, 1999
- --------------------------------------------------
Robert A. Marden, Sr.
Vice Chairman
/s/ Philip A. Mason Date: March 22, 1999
- --------------------------------------------------
Philip A. Mason
Director
Date:
- --------------------------------------------------
John M. Naughton
Director
/s/ Malcolm W. Philbrook, Jr. Date: March 22, 1999
- --------------------------------------------------
Malcolm W. Philbrook, Jr.
Director
21
<PAGE> 23
/s/ Pamela P. Plumb Date: March 22, 1999
- --------------------------------------------------
Pamela P. Plumb
Vice Chairman
Date:
- --------------------------------------------------
Seth A. Resnicoff
Director
/s/ William J. Ryan Date: March 22, 1999
- --------------------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer
(principal executive officer)
/s/ Curtis M. Scribner Date: March 22, 1999
- --------------------------------------------------
Curtis M. Scribner
Director
/s/ Paul R. Shea Date: March 22, 1999
- --------------------------------------------------
Paul R. Shea
Director
/s/ John E. Veasey Date: March 22, 1999
- --------------------------------------------------
John E. Veasey
Director
/s/ Peter J. Verrill Date: March 22, 1999
- --------------------------------------------------
Peter J. Verrill
Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer (principal financial
and accounting officer)
22
<PAGE> 1
EXHIBIT 3(b)
BYLAWS
OF
PEOPLES HERITAGE FINANCIAL GROUP, INC.
(AMENDED AS OF JANUARY 26, 1999)
ARTICLE I
OFFICES
SECTION 1. Registered and Other Offices. The registered office of
Peoples Heritage Financial Group, Inc. (hereinafter called the "Corporation") in
the State of Maine shall be at One Portland Square, City of Portland, County of
Cumberland. The Corporation may also have an office or offices and keep the
books and records of the Corporation, in accordance with the laws of the State
of Maine, at such other place or places either within or without the State of
Maine as the Board of Directors of the Corporation (hereinafter called the
"Board") may from time to time determine or the business may require. The
principal office of the Corporation shall be located at One Portland Square,
Portland, Maine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. All meetings of the stockholders shall be
held at the principal office of the Corporation at One Portland Square,
Portland, Maine, or at such other place within or without the State of Maine as
may from time to time be fixed by the Board.
SECTION 2. Annual Meetings. The annual meeting of stockholders of the
Corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held either (i) at
10:00 A.M. on the fourth Tuesday of April of each year, if not a legal holiday,
and if a legal holiday then on the next succeeding day not a legal holiday, or
(ii) at such other time as the Board shall designate.
SECTION 3. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, may be called at any time by the Chairman of the Board,
the President or a majority of the Board and shall be called by the Chairman of
the Board, the President or the Clerk upon the written request of the holders of
not less than 50% of the issued and outstanding capital stock of the Corporation
entitled to vote on the matter for which the meeting is called, voting together
as a single class; provided, however, that special meetings of stockholders also
may be called in the manner specified in the Maine Business Corporation Act.
<PAGE> 2
SECTION 4. Notices of Meetings. Except as may otherwise be required by
law, notice of each meeting of stockholders, annual or special, shall be in
writing and shall state the place where it is to be held, the date and hour of
the meeting, and, in the case of a special meeting or when otherwise required by
law, the purpose or purposes thereof, and a copy thereof shall be served either
personally, by mail or any other means permitted by law upon each stockholder of
record entitled to vote at such meeting, not less than 10 nor more than 60 days
before the meeting. If mailed, it shall be directed to such stockholder at his
address as it appears on the records of the Corporation. Attendance of a
stockholder at a meeting, in person or by proxy, shall of itself constitute
waiver of notice and call, and of any defects therein, except when the
stockholder attends the meeting for the express and sole purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened, or that insufficient notice thereof
was given. Notice of any adjourned meeting of stockholders need not be given
except as otherwise provided in this Article II.
SECTION 5. Quorum. Except as otherwise required by law, at each meeting
of stockholders of the Corporation the holders of shares sufficient to cast a
majority of the votes represented by all voting shares of the Corporation issued
and outstanding and entitled to vote at such meeting, present in person or by
proxy, shall constitute a quorum. Stockholders present at a duly called or held
meeting at which a quorum was once present may continue to do business at the
meeting or any adjournment thereof, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 6. Adjournments. Whether or not a quorum is present at any
annual or special meeting of stockholders, a majority in interest of those
present in person or by proxy and entitled to vote may adjourn the meeting from
time to time to another time or place, at which time, if a quorum is present any
business may be transacted which might have been transacted at the meeting as
originally called. Notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken, unless the adjournment is for more than 30 days or a new record date is
fixed for the adjourned meeting, in which event a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 7. Organization. Each meeting of the stockholders shall be
presided over by the Chairman of the Board, or in his absence by the President,
or if neither the Chairman nor the President is present, by an Executive or
Senior Vice President. The Clerk, or in his absence a temporary Clerk, shall act
as secretary of each meeting of the stockholders. In the absence of the Clerk
and any temporary Clerk, the chairman of the meeting may appoint any person
present to act as secretary of the meeting. The chairman of any meeting of the
stockholders, unless prescribed by law or regulation or unless the Chairman of
the Board has otherwise determined, shall determine the order of the business
and the procedure at the meeting, including such regulation of the manner of
voting and the conduct of discussions as seem to him in order.
2
<PAGE> 3
SECTION 8. Proposals. At an annual meeting of the stockholders, only
such business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board, (b) otherwise properly brought before the meeting by
or at the direction of the Board, or (c) otherwise properly brought before the
meeting by a stockholder. For business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Clerk of the Corporation. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Corporation not less than 90 days prior to the anniversary date of the
immediately preceding annual meeting. A stockholder's notice to the Clerk shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting, (b) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (c) the class and number of
shares of the Corporation which are beneficially owned by the stockholder, and
(d) any material interest of the stockholder in such business. Notwithstanding
anything herein to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Article II,
Section 8. The presiding officer of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Article II,
Section 8, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted. This provision is not a limitation on any other applicable laws and
regulations.
At a special meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before a special meeting, business must be specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board or
such other person or persons as are authorized to call special meetings of
stockholders of the Corporation pursuant to Article II, Section 3 of these
Bylaws.
SECTION 9. Voting List. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least 10 days before
each meeting of the stockholders, a complete list of the stockholders entitled
to vote at such meeting, arranged in alphabetical order, with the address of and
the number of shares held by each, which list shall be in written or other form
which may be translated to readable form. The requirement of a list may be
satisfied by a card index showing the required information and alphabetically
arranged; and the list may be classified by classes and series of stock held. If
the Corporation maintains its stockholder records by means of electronic data
processing equipment, such list may be printed or prepared on microfilm,
provided that the Corporation shall provide the means of reducing or projecting
such list to readable form so as to permit inspection by any stockholder in
accordance with these Bylaws. The list of stockholders shall be subject to
inspection by any stockholder at any time during usual business hours, for a
period of not less than 10 days prior to such meeting. The list also shall be
produced and kept open at the time and place of the meeting and subject to the
inspection of any stockholder during such meeting. The original stock transfer
books shall be prima facie evidence as to who are the stockholders entitled to
examine such list or transfer books or to vote at any meeting of stockholders.
3
<PAGE> 4
SECTION 10. Voting. At each meeting of the stockholders, every
stockholder of record of the Corporation entitled to vote at such meeting shall
be entitled to vote the common or other shares of voting stock standing in his
name on the books of the Corporation and entitled to be voted at such meeting:
(i) at the time fixed pursuant to Article VIII of these Bylaws as the
record date for the determination of stockholders entitled to notice of and to
vote at such meeting, or
(ii) if no such record date shall have been fixed, then at the close of
business on the next day preceding the day on which notice of such meeting is
given, or
(iii) if notice of such meeting shall have been waived, then at the
close of business on the day next preceding the day on which such meeting is
held.
Each share of Common Stock shall be entitled to one vote per share, and
there shall be no cumulative voting in elections of directors. Except as
permitted by law, shares of its own stock belonging to the Corporation shall not
be voted directly or indirectly. Every stockholder entitled to vote at any
meeting of stockholders may cast such vote in person or by proxy appointed by an
instrument in writing, signed by such stockholder or his duly authorized
attorney delivered to the secretary of the meeting; provided, however, that no
proxy shall be voted after 11 months from its date, unless the proxy expressly
and conspicuously provides for a longer duration. At all meetings of the
stockholders all matters, except elections of directors and where other
provision is made by law or by the Amended and Restated Articles of
Incorporation of the Corporation, as amended (hereinafter called the "Articles
of Incorporation"), or by these Bylaws, shall be decided by a majority of the
votes cast by the stockholders present in person or by proxy and entitled to
vote thereon, provided that a quorum is present. Directors are to be elected by
a plurality of votes cast by the shares entitled to vote in the election at a
meeting at which a quorum is present. If, at any meeting of stockholders, due to
a vacancy or vacancies or otherwise, directors of more than one class of the
Board are to be elected, each class of directors to be elected at the meeting
shall be elected in a separate election by a plurality vote.
SECTION 11. Inspectors. For each meeting of stockholders, the Board
shall appoint one or more inspectors of election. If for any meeting the
inspector(s) appointed by the Board shall be unable to act or the Board shall
fail to appoint such inspector(s), inspector(s) may be appointed at the meeting
by the chairman thereof. No director or candidate for the office of director
shall act as an inspector for the election of directors; and inspectors need not
be stockholders. The inspector(s) appointed to act at any meeting of the
stockholders, before entering upon the discharge of their duties, shall be sworn
faithfully to execute the duties of inspector(s) at such meeting with strict
impartiality and according to the best of their ability, and the oath so taken
shall be subscribed by them. The inspector(s) shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum and the authenticity, validity and effect of
proxies; they shall receive votes, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, determine and announce the
4
<PAGE> 5
results, and otherwise see that the vote or election is conducted with fairness
to all stockholders. Upon request of the person presiding at the meeting or of
any stockholder entitled or claiming to be entitled to vote thereat, the
inspector(s) shall report in writing on any challenge, question or matter
determined by them and execute a certificate of any fact found by them. Any
report or certificate made by the inspector(s) shall be prima facie evidence of
the facts stated therein and of the vote as certified by them.
SECTION 12. Informal Action. Any action required to be taken at a
meeting of the stockholders, or any other action which may be taken at a meeting
of the stockholders, may be taken without a meeting if consent in writing,
setting forth the action so taken, shall be given by all of the stockholders
entitled to vote with respect to the subject matter thereof and filed with the
Clerk of the Corporation as part of the corporate records.
ARTICLE III
DIRECTORS
SECTION 1. General Powers and Number. The business and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all such authority and powers of the Corporation and do all such lawful
acts and things as are not by law, the Articles of Incorporation or these Bylaws
directed or required to be exercised or done by the stockholders. The number of
directors of the Corporation shall be determined as provided in the Articles of
Incorporation.
SECTION 2. Classification and Term. The Board shall be divided into
three classes as nearly equal in number as the then total number of directors
constituting the Board permits, with the term of office of one class expiring
each year. At each annual meeting of stockholders, directors selected to succeed
those whose terms are expiring shall be elected for a term of office to expire
at the third succeeding annual meeting of stockholders and when their respective
successors are elected and qualified.
SECTION 3. Qualifications and Compensation.
(a) No person may be elected as a director who, at the time of his
election, is over 72 years of age; provided that if any director shall reach 72
years of age during his term of office as director, such director shall serve as
director only until the next annual meeting of stockholders of the Corporation
next following his attainment of age 72.
(b) Members of the Board of the Corporation may receive a fee for the
services rendered as a director, including a fixed sum and expenses for
attendance at each meeting of the Board or committees thereof. No such payment
shall preclude any director from serving the Corporation in any other capacity
and receiving compensation therefor.
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SECTION 4. Nominations of Directors. Subject to the rights of holders
of any class or series of stock having a preference over the common stock as to
dividends or upon liquidation, nominations for the election of directors may be
made by the Board or a committee appointed by the Board or by any stockholder
entitled to vote generally in an election of directors. However, any stockholder
entitled to vote generally in an election of directors may nominate one or more
persons for election as directors at a meeting only if written notice of such
stockholder's intent to make such nomination or nominations has been given,
either by personal delivery or by United States mail, postage prepaid to the
Clerk of the Corporation not later than (i) 90 days prior to the anniversary
date of the immediately preceding annual meeting, and (ii) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to stockholders. Each such notice shall
set forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (e)
the consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedures.
SECTION 5. Quorum. At any meeting of the Board, a majority of the
directors then holding office shall constitute a quorum for the transaction of
business except where otherwise provided by law, the Articles of Incorporation
or these Bylaws. In the absence of a quorum, a majority of the directors present
may adjourn the meeting to some future time not more than 30 days later.
SECTION 6. Voting. At all meetings of the Board, each director present
shall have one vote. At all meetings of the Board, all questions, the manner of
deciding which is not otherwise specifically regulated by law, the Articles of
Incorporation or these Bylaws, shall be determined by a majority of the
directors present at the meeting.
SECTION 7. Place of Meeting. The Board may hold its meetings at such
place or places within or without the State of Maine as the Board from time to
time may determine or as shall be specified or fixed in the respective notices
or waivers of notice thereof.
SECTION 8. Annual Meeting. The Board shall meet for the purpose of
organization, the election of officers and the transaction of other business, as
soon as practicable after each annual election of directors, on the same day and
at the same place at which such election is held or at such other time or place
as shall be specified in a notice given as hereinafter provided for special
meetings of the Board or in a consent and waiver of notice thereof signed by all
directors.
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SECTION 9. Regular Meetings. Regular meetings of the Board shall be
held at such times and places as the Board may from time to time determine by
resolution. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting which would
otherwise be held on that day shall be held at said place at the same hour on
the next succeeding business day not a legal holiday. Notice of regular meetings
need not be given.
SECTION 10. Special Meetings; Notice. Special meetings of the Board
shall be held whenever called by a majority of the Board, the Chairman of the
Board or the President. Notice of each such meeting shall be mailed to each
director, addressed to him at his residence or usual place of business, at least
three days before the day on which the meeting is to be held, or shall be sent
to him at such place by telegraph, cable or wireless, or be delivered personally
or by telephone not later than the day before the day on which the meeting is to
be held. Except as otherwise expressly required by law or these Bylaws, the
purpose of any special meeting shall not be required to be stated in the notice
thereof. Notice of any meeting of the Board shall not be required to be given to
any director who signs a waiver of notice, either before or after the meeting,
or who shall be present at such meeting, unless the director states his
objection to the transaction of that item of business, on the ground of
insufficiency of notice thereof, when the item of business is first brought
before the meeting, and refrains from voting on or votes against such item of
business.
SECTION 11. Telephonic Meetings. The Board may hold a meeting by
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other. Notice of such
meeting, if any, shall be given as provided in Section 10 and shall give each
director the telephone number at which, or other manner in which, he will be
called.
SECTION 12. Organization. At each meeting of the Board, the Chairman of
the Board or in his absence the President, or in his absence a director chosen
by a majority of the directors present, shall act as chairman of such meeting
and preside thereat. The Clerk, or in the absence of the Clerk any person
appointed by the chairman, shall act as secretary of the meeting and keep the
minutes thereof. At all meetings of the Board, business shall be transacted in
the order and in the manner determined by the chairman of the meeting, subject
to the approval of the Board.
SECTION 13. Informal Action. Any action required to be taken at a
meeting of the directors or any action which may be taken at a meeting of the
directors or of a committee of the directors, may be taken without a meeting if
all of the directors, or all of the members of the committee, as the case may
be, sign written consents setting forth the action taken or to be taken, at any
time before or after the intended effective date of such action. Such consents
shall be filed with the minutes of directors' meetings or committee meetings, as
the case may be, and shall have the same effect as a unanimous vote.
SECTION 14. Resignation. Any director may resign at any time by giving
written notice to the Chairman or to the Clerk of the Corporation. Such
resignation shall take effect upon receipt of such notice or any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
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SECTION 15. Removal of Directors. At a duly constituted meeting of
stockholders called expressly for the purpose, any director may be removed with
or without cause by a vote of the holders of at least 67% of the shares then
entitled to vote in an election of directors, voting as a single class;
provided, however, that any director also may be removed for cause in the manner
specified in the Maine Business Corporation Act. Whenever the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of the Articles of Incorporation of the Corporation and any
resolutions adopted pursuant thereto, the provisions of this section shall
apply, in respect to the removal of a director or directors so elected, to the
vote of the holders of the outstanding shares of that class and not to the vote
of the outstanding shares as a whole.
SECTION 16. Vacancies. Any vacancies occurring in the Board by reason
of an increase in the number of directors may be filled by the Board, and any
directors so chosen shall hold office until the next election of directors by
the stockholders. Any other vacancy in the Board, whether by reason of death,
resignation, removal or otherwise, may be filled by the remaining directors, or
by a sole remaining director, and any directors so chosen shall hold office
until the next election of the class for which such directors shall have been
chosen and until their successors shall be elected and qualified.
Notwithstanding the foregoing, and except as otherwise required by law, whenever
the holders of any one or more series of Preferred Stock shall have the right,
voting separately as a class, to elect one or more directors of the Corporation,
the terms of the director or directors elected by such holders shall expire at
the next succeeding annual meeting of stockholders and vacancies created with
respect to any directorship of the directors so elected may be filled in the
manner specified by the resolution or resolutions of the Board establishing such
Preferred Stock.
SECTION 17. Liability. A director shall not be held personally liable
for monetary damages for failure to discharge any duty as a director unless the
director is found not to have acted honestly or in the reasonable belief that
the action was in or not opposed to the best interests of the Corporation or its
stockholders. No amendment, modification or repeal of this Article III, Section
17 shall be inconsistent with applicable law or adversely affect the rights
provided hereby with respect to any claim, issue or matter in any action, suit
or proceeding that is based in any respect on any action or omission, or alleged
action or omission, prior to such amendment, modification or repeal.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Executive Committee.
(a) The Board may appoint from the Board an Executive Committee of not
less than two members, and may delegate to such committee, except as otherwise
provided by law or the Articles of Incorporation, the powers of the Board in the
management of the business and affairs of the Corporation in the intervals
between meetings of the Board in all cases in which specific directions
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shall not have been given by the Board, as well as the power to authorize the
seal of the Corporation to be affixed to all papers which may require it.
(b) Meetings of the Executive Committee shall be held at such times and
places as the Chairman of the Executive Committee may determine. The Executive
Committee, by a vote of a majority of its members, may appoint a Chairman and
fix its rules of procedure, determine its manner of acting and specify what
notice, if any, of meetings shall be given, except as the Board shall by
resolution otherwise provide.
(c) The Executive Committee shall keep minutes of all business
transacted by it. All completed action by the Executive Committee shall be
reported to the Board at its meeting next succeeding such action or at its
meeting held in the month following the taking of such action, and shall be
subject to revision or alteration by the Board.
SECTION 2. Audit Committee. The Board shall designate not less than two
members of the Board who are not employed by the Corporation to constitute an
Audit Committee, which shall receive and evaluate internal and independent
auditor's reports, monitor the Corporation's adherence in accounting and
financial reporting to generally accepted accounting principles and perform such
other duties as may be delegated to it by the Board. Meetings of the Audit
Committee shall be held at such times and places as the Chairman of the Audit
Committee may determine. The Audit Committee, by a vote of a majority of its
members, may appoint a Chairman and fix its rules of procedure, determine its
manner of acting and specify what notice, if any, of meetings shall be given,
except as the Board shall by resolution otherwise provide.
SECTION 3. Other Committees. The Board may, by resolutions passed by a
majority of the Board, designate members of the Board to constitute other
committees which shall in each case consist of two or more directors, and shall
have and may execute such powers as may be determined and specified in the
respective resolutions appointing them. A majority of all the members of any
such committee may appoint a Chairman and fix its rules of procedure, determine
its manner of acting and fix the time and place, whether within or without the
State of Maine, of its meetings and specify what notice thereof, if any, shall
be given, unless the Board shall otherwise by resolution provide. A majority of
the Board shall have the power to change the membership of any such committee at
any time, to fill vacancies therein and to discharge any such committee or to
remove any member thereof, either with or without cause, at any time.
ARTICLE V
OFFICERS
SECTION 1. Titles. The principal officers of the Corporation shall be a
Chairman of the Board, a President and a Treasurer. Other officers may be
appointed in accordance with the provisions of this Article V and any two or
more offices may be held by the same person. Officers
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of the Corporation shall furnish to the Board a bond in such amount as the Board
shall deem necessary, and shall, upon taking office, take and subscribe to an
oath as provided under Maine law.
SECTION 2. Election, Term of Office and Qualifications. The principal
officers shall be elected annually by the Board. Each officer, except as may be
appointed in accordance with the provisions of this Article V, shall hold office
until his successor shall have been chosen and shall qualify or until his death
or until he shall have resigned or until he shall have been removed in the
manner hereinafter provided.
SECTION 3. Appointive Officers. The Board may from time to time appoint
or delegate the appointment of such other officers and assistant officers and
agents as it may deem necessary. Such officers shall hold office for such
period, have such authority and perform such duties, subject to the control of
the Board, as are in these Bylaws provided or as the Chief Executive Officer
designated by the Board or the Board may from time to time prescribe. The Chief
Executive Officer shall have authority to appoint and remove appointive
officers, agents and employees and to prescribe their powers and duties and may
authorize any other officer or officers to do so.
SECTION 4. The Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the stockholders and the Board, and the Chairman
shall perform such duties as the Board may from time to time prescribe.
SECTION 5. The President. In the absence or inability to act of the
Chairman of the Board, the President shall, when present, act as ex officio
chairman and shall preside at all meetings of the Board and the stockholders.
Unless the Chairman of the Board is designated by the Board as the Corporation's
Chief Executive Officer, the President shall be the Chief Executive Officer of
the Corporation and shall have general charge of the business affairs and
property of the Corporation. He shall have such other powers and perform such
duties as may from time to time be assigned to him by the Board or as may be
prescribed by these Bylaws.
SECTION 6. The Treasurer. The Treasurer shall have charge and custody
of, and be responsible for, all funds and securities of the Corporation, and
shall deposit all such funds in the name of the Corporation in such banks or
other depositories as shall be selected or authorized to be selected by the
Board; shall render or cause to be rendered a statement of the condition of the
finances of the Corporation at all regular meetings of the Board, and a full
financial report at the annual meeting of stockholders, if called upon so to do;
shall receive and give receipt for moneys due and payable to the Corporation
from any source whatsoever; and, in general, shall perform or cause to be
performed all the duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him by the Board or as may be
prescribed in these Bylaws.
SECTION 7. The Clerk. In addition to the foregoing officers, the Board
shall appoint a Clerk of the Corporation, who shall be a resident of the State
of Maine. The Clerk shall perform the functions required by law, shall not be
deemed an officer of the Corporation as a result of serving in such capacity and
shall not be liable in that capacity for any liabilities of the Corporation,
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including without limitation debts, claims, taxes, fines or penalties. The Clerk
shall keep, at the registered office of the Corporation or at another office of
the Corporation to which he has ready access, in a book kept for such purpose,
the records of all stockholders' meetings, including records of all votes and
minutes of such meetings. He may keep the stock transfer book and shall keep on
file a list of stockholders entitled to vote at each meeting and the most recent
list of stockholders. He may certify all votes, resolutions and actions of the
stockholders and of the Board. He shall attend the meetings of the directors and
the stockholders and record the proceedings in books kept for that purpose; and,
in his absence, a temporary Clerk shall be appointed and shall record such
meetings. He may give or cause to be given notice of all stockholders' and
directors' meetings. He shall have custody of the corporate seal and he shall
have authority to affix the same to any instrument requiring it and when so
affixed, it may be attested by his signature. The Board may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
SECTION 8. Resignation. Any officer may resign at any time by giving
written notice to the President or the Clerk. Such resignation shall take effect
upon receipt of such notice or at any later time specified therein; and unless
otherwise specified therein the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 9. Removal. Except as otherwise required by law, any officer
elected or appointed directly by the Board may only be removed, either with or
without cause, at any time by the vote of the majority of the Board at any
meeting of the Board called for that purpose. Any officer otherwise appointed
pursuant to this Article V may be removed, either with or without cause, by the
Board, the Executive Committee or the Chief Executive Officer.
SECTION 10. Vacancies. A vacancy in any office because of death,
resignation, removal or other causes shall be filled for the unexpired portion
of the term in the manner prescribed by these Bylaws for regular election or
appointment to such office.
ARTICLE VI
INDEMNIFICATION
SECTION 1. Indemnification. Without limitation, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, trustee,
partner, fiduciary, employee or agent of another corporation, partnership, joint
venture, trust, pension or other employee benefit plan or other enterprise,
against expenses, including attorney's fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding to the full extent permitted by the Maine Business
Corporation Act, provided that the Corporation shall not be liable for any
amount which may be due to any person in connection
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with a settlement of any action, suit or proceeding effected without its prior
written consent or any action, suit or proceeding initiated by an indemnified
person without its prior written consent, other than an action, suit or
proceeding seeking indemnification from the Corporation.
SECTION 2. Expenses. Expenses incurred in defending a civil, criminal,
administrative or investigative action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt by the Corporation of a written undertaking by or on
behalf of the director, officer, employee, agent, trustee, partner or fiduciary
to repay such amount under the circumstances specified in the Maine Business
Corporation Act and which otherwise meets the requirements of such Act. Such
undertaking shall be an unlimited general obligation of the person seeking the
advance, but need not be secured and may be accepted by the Corporation without
reference to financial ability to make the repayment.
SECTION 3. Other Rights and Remedies. The indemnification and
entitlement to advances of expenses provided by this Article VI shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in that person's official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, agent, trustee, partner or
fiduciary and shall inure to the benefit of the heirs, executors and
administrators of such a person. A right to indemnification hereunder may be
enforced by a separate action against the Corporation, if an order for
indemnification has not been entered by a court in any action, suit or
proceeding in respect to which indemnification is sought.
SECTION 4. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, trustee, partner, fiduciary, employee or
agent of another corporation, partnership, joint venture, trust, pension or
other employee benefit plan or other enterprise, against any liability asserted
against that person and incurred by that person in any such capacity, or arising
out of that person's status as such, whether or not the Corporation would have
the power to indemnify that person against such liability under this Article VI.
SECTION 5. Other. For purposes of this Article VI, references to the
"Corporation" shall include, in addition to the surviving corporation or new
corporation, any participating corporation in a consolidation or merger.
SECTION 6. Modification. The duties of the Corporation to indemnify and
to advance expenses to any person provided in this Article VI shall be in the
nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article VI shall alter, to the
detriment of such person, the right of such person to the advancement of
expenses or indemnification related to a claim based on an act or omission, or
alleged act or omission, which took place prior to such amendment or repeal.
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ARTICLE VII
CONTRACTS, CHECKS, BANK ACCOUNTS, ETC.
SECTION 1. Execution of Contracts. The Board may authorize any officer,
employee or agent, in the name and on behalf of the Corporation, to enter into
any contract or execute and satisfy any instrument, and any such authority may
be general or confined to specific instances, or otherwise limited.
SECTION 2. Loans. The President, or any officer, employee or agent
authorized by the President or by the Board, may effect loans and advances at
any time for the Corporation from any bank, trust company or other institutions
or from any firm, corporation or individual and for such loans and advances may
make, execute and deliver promissory notes, bonds or other certificates or
evidences of indebtedness of the Corporation, and when authorized so to do may
pledge and hypothecate or transfer any securities or other property of the
Corporation as security for any such loans or advances. Such authority conferred
by the Board or the President may be general or confined to specific instances,
or otherwise limited.
SECTION 3. Checks, Drafts, Etc. All checks, drafts and other orders for
the payment of money out of funds of the Corporation and all notes or other
evidences of the Corporation shall be signed on behalf of the Corporation in
such a manner as shall from time to time be determined by resolution of the
Board.
SECTION 4. Deposits. The funds of the Corporation not otherwise
employed shall be deposited from time to time to the order of the Corporation in
such banks, trust companies or other depositories as the Board may select or as
may be selected by an officer, employee or agent of the Corporation to whom such
power may from time to time be delegated by the Board.
SECTION 5. General and Special Bank Accounts. The Board or the
President or any other officer designated by the Board or appointed by the
President and authorized by the Board or the President may from time to time
authorize the opening and keeping of general and special bank accounts with such
banks, trust companies or other depositories as may be selected by the President
or any other officer or officers or agent or agents to whom power in that
respect shall have been delegated by the Board. The Board may make such special
rules and regulations with respect to such bank accounts, not inconsistent with
the provisions of these Bylaws, as it may deem expedient.
ARTICLE VIII
CAPITAL STOCK
SECTION 1. Certificates of Stock. Every holder of shares of stock shall
be entitled to have a certificate, in such form as the Board shall prescribe,
certifying the number and class of shares of stock of the Corporation owned by
him. Each such certificate shall be signed in the name of the
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Corporation by the Chairman of the Board, the President or an Executive or
Senior Vice President or a Vice President, and the Treasurer or an Assistant
Treasurer or the Clerk. Signatures of such officers may be facsimiles to the
extent permitted by the Maine Business Corporation Act. In case any officer or
officers who shall have signed, or whose facsimile signature or signatures shall
have been used on, any such certificate or certificates shall cease to be such
officer or officers, whether because of death, resignation or otherwise, before
such certificate or certificates shall have been delivered by the Corporation,
such certificate or certificates may nevertheless be adopted by the Corporation
and be issued and delivered as though the person or persons who shall have
signed such certificate or certificates or whose facsimile signature or
signatures shall have been used thereon had not ceased to be such officer or
officers. A record shall be kept of the respective names of the persons, firms
or corporations owning the stock represented by certificates for stock of the
Corporation, the number of shares represented by such certificates,
respectively, and the respective dates thereof, and, in case of cancellation,
the respective dates of cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled and a new certificate or
certificates shall not be issued in exchange for any existing certificates until
such existing certificate shall have been so canceled, except in cases otherwise
provided for in this Article VIII.
SECTION 2. Transfer of Shares. Each transfer of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Clerk of the Corporation, or with a transfer
agent appointed as in this Article VIII provided, upon the payment of any taxes
thereon and the surrender of the certificate or certificates for such shares
properly endorsed. The person in whose name shares of stock stand on the books
of the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation; provided that whenever any transfer of shares shall be made for
collateral security and not absolutely, such fact, if known to the Corporation
or to any such agent, shall be so expressed in the entry of transfer if
requested by both the transferor and the transferee.
SECTION 3. Date for Determining Stockholders of Record. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action.
SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder of
any shares of stock of the Corporation shall immediately notify the Corporation
of any loss, destruction or mutilation of the certificate therefor, and the
Board may, in its discretion, and after the expiration of such period of time as
it may determine to be advisable, cause to be issued to him a new certificate or
certificates for shares of stock, upon the surrender of the mutilated
certificate, or in case of loss or destruction of the certificate, upon proof
satisfactory to the Board of such loss or destruction, and the Board may, in its
discretion, require the owner of the lost, destroyed or mutilated certificate,
or his legal
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representatives, to give the Corporation a bond, in such sum and with such
surety or sureties as it may direct, to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss, destruction or
mutilation of any such certificate or the issuance of such new certificate.
SECTION 5. Examination of Books by Stockholders or Bondholders. The
Board shall, subject to any applicable laws, have the power to determine, from
time to time, whether and to what extent and at what times and places and under
what conditions and regulations the accounts and books and documents of the
Corporation, or any of them, shall be open to the inspection of the stockholders
or bondholders of the Corporation; and no stockholder or bondholder shall have
any right to inspect any account or book or document of the Corporation, except
as conferred by any such law, unless and until authorized so to do by resolution
of the Board or of the stockholders of the Corporation.
SECTION 6. Stockholders to be Registered. Only those persons whose
names are registered on the transfer books of the Corporation shall be entitled
to be treated by the Corporation as holders of the stock listed in their
respective names. The Corporation shall not be required to recognize any other
equitable or legal claim to or interest in any shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
expressly provided by the laws of Maine.
ARTICLE IX
WAIVER OF NOTICE
Whenever any notice is required to be given by these Bylaws or Articles
of Incorporation, or by statute, the person entitled thereto may in person, or
in the case of a stockholder by his attorney thereunto duly authorized, waive
such notice in writing, whether before or after the meeting, or other matter in
respect of which such notice is to be given, and in such event such notice need
not be given to such person and such waiver shall be equivalent to such notice,
and any action to be taken after such notice or after the lapse of a prescribed
period of time may be taken without such notice and without the lapse of any
period of time.
ARTICLE X
SEAL
The seal of the Corporation shall be in the form of a circle and shall
bear the name of the Corporation and the year of its incorporation.
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ARTICLE XI
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of
January and end on the last day of December in each year.
ARTICLE XII
EMERGENCY PREPAREDNESS
In the event of an emergency in the conduct of the business of the
Corporation resulting from an attack on the continental United States or any
nuclear or atomic disaster:
A. The officers and employees of the Corporation shall continue to
conduct the business of the Corporation under such guidance from the Board as
may be available, except as to matters which by statute require specific
approval of the Board, and subject to any directive of duly constituted
authority during the emergency.
B. In the absence or disability of any officer, or upon the refusal of
any officer to act, the Board may delegate for the time being that officer's
powers and duties to any other officer or director.
C. In the event of an emergency so severe as to prevent the conduct and
management of the business of the Corporation by the Board and the officers as
contemplated by these Bylaws, any two or more available directors shall
constitute an interim Executive Committee for the full conduct and management of
the business of the Corporation, subject to such regulations as the Board may
from time to time adopt for emergency preparedness, until such time as the
interim Executive Committee determines that the Corporation can resume the
conduct and management of the business of the Corporation in the manner
contemplated by these Bylaws.
D. If, as a consequence of an emergency, the Chief Executive Officer of
the Corporation cannot be located or is unable to assume and continue his normal
executive duties, then his powers and duties shall, without further action of
the Board, be assumed by one of the following officers in the seniority set
forth:
(1) President (unless he is serving as Chief Executive Officer);
(2) Executive Vice President;
(3) Senior Vice Presidents (in order of seniority); and
(4) Treasurer.
16
<PAGE> 17
The officer so assuming the powers and duties of the Chief Executive
Officer shall continue to serve until the majority of the available directors
certify in writing that either he is unable to serve longer in that capacity or
an officer senior to him is available to assume the powers and duties of the
Chief Executive Officer.
E. If, as a consequence of an emergency, the Treasurer of the
Corporation cannot be located or is unable to assume and continue his normal
duties, then the powers and duties of the Treasurer shall, without further
action of the Board, be assumed by one of the following officers in the
seniority set forth:
(1) President (unless he is serving as Chief Executive Officer);
(2) Executive Vice President;
(3) Senior Vice Presidents (in order of seniority); and
(4) Assistant Treasurer.
The officer so assuming the powers and duties of the Treasurer shall
continue to serve until the majority of the available directors certify in
writing that either he is unable to serve longer in that capacity or an officer
senior to him is available to assume the powers and duties of the Treasurer.
Anyone dealing with the Corporation may accept a certificate of two or
more officers that a specified individual is the acting Treasurer hereunder and
rely upon that certificate to remain in full force and effect until modified or
cancelled by a certificate of change signed by three officers of the
Corporation.
F. If during such emergency, or as a consequence thereof, the business
of the Corporation cannot be conducted and managed at its main office or at a
duly authorized branch office, its business may be conducted and managed at such
temporary location or locations as may be designated by the Board or by its
interim Executive Committee for which provision is made above; and the business
of the Corporation shall be returned from the temporary location or locations to
the main office of the Corporation and its duly authorized branch offices as
soon as practicable.
ARTICLE XIII
AMENDMENTS
These Bylaws (including, without limitation, this Article XIII) may be
altered, amended or repealed or new Bylaws may be adopted only by the Board.
17
<PAGE> 18
ARTICLE XIV
USE OF PRONOUNS
Use of the masculine gender in these Bylaws shall be considered to
represent either masculine or feminine gender whenever appropriate.
18
<PAGE> 1
Peoples Heritage Financial Group, Inc.
1998 Annual Report
[GRAPHIC OMITTED]
------------------------
Take a Closer Look
<PAGE> 2
THE WAY WE SEE COMMUNITY BANKING
There is more to Peoples Heritage than meets the eye. Our focused strategy gives
our customers the best of both worlds; the personalized service of a community
bank combined with all the resources of one of New England's largest banking
networks. By staying true to our vision in 1998, we achieved our fifth
consecutive record earnings year while expanding our market share, our reach
into new markets, and our depth of services.
TABLE OF CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Markets 4
Performance 6
Strategy 8
Services 10
Vision 12
Selected 5-year Consolidated Financial and Other Data 13
Management's Discussion and Analysis 14
Financial Statements 32
Corporate Directory 57
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Peoples Heritage Financial Group, Inc. is a $12 billion multi-state banking and
financial services holding company headquartered in Portland, Maine. At December
31, 1998, the Company's subsidiaries included Peoples Heritage Bank, Bank of New
Hampshire, and Family Bank and total assets were $10 billion. On January 1,
1999, the Company acquired SIS Bancorp, the $2 billion parent company of SIS
Bank and Glastonbury Bank & Trust Company.
PEOPLES HERITAGE BANK
75 branches throughout ME.
No. 1 market position.
20% market share.
$4.2 billion in assets.
BANK OF NEW HAMPSHIRE
78 branches throughout NH.
No. 1 market position.
22% market share.
$4.3 billion in assets.
Family/SIS Bank*
56 branches throughout MA,
4 in southern NH.
Strong local market position.
$3.4 billion in assets.
GLASTONBURY
BANK & TRUST COMPANY*
8 branches in
north-central CT.
$250 million in assets.
*Reflects SIS Bancorp acquisition completed 1/99.
[Cover Photo: Pemaquid lighthouse, Maine]
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 % Change 1996 1995
============================================================================================================================
FOR THE YEAR
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating net income (1)(2) $ 125,232 $ 104,419 20% $ 83,786 $ 69,718
Net income 100,590 92,335 9 76,033 66,040
Net interest income 365,429 344,476 6 279,295 251,897
Non-interest income 98,978 79,783 24 57,423 46,656
(excluding securities transactions)
- ----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Operating diluted (1)(2) $ 1.40 $ 1.17 20% $ 1.01 $ 0.85
Basic 1.14 1.06 8 0.94 0.82
Diluted 1.12 1.04 8 0.92 0.80
Dividends per share 0.44 0.38 16 0.34 0.29
Book value per share at year end 8.70 8.23 6 7.71 7.24
- ----------------------------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
Excluding special charges:
Return on average assets (2) 1.28% 1.25% 2% 1.27% 1.19%
Return on average equity (2)(3) 17.06 15.17 12 13.99 12.71
Return on average assets 1.03 1.09 (6) 1.15 1.13
Return on average equity (3) 13.70 13.27 3 12.69 12.04
- ----------------------------------------------------------------------------------------------------------------------------
AT YEAR END
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $10,102,459 $9,668,242 4% $7,767,655 $6,168,281
Loans and leases, net 6,098,487 6,434,238 (5) 5,161,179 4,024,307
Deposits 6,981,245 6,747,419 3 5,936,430 4,834,969
Shareholders' equity 761,924 720,783 6 676,847 586,500
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1994
===============================================================
FOR THE YEAR
- ---------------------------------------------------------------
<S> <C>
Operating net income (1)(2) $ 51,528
Net income 50,785
Net interest income 223,737
Non-interest income 41,625
(excluding securities transactions)
- ---------------------------------------------------------------
PER COMMON SHARE
- ---------------------------------------------------------------
Earnings per share:
Operating diluted (1)(2) $ 0.64
Basic 0.64
Diluted 0.63
Dividends per share 0.18
Book value per share at year end 6.45
- ---------------------------------------------------------------
KEY PERFORMANCE RATIOS
- ---------------------------------------------------------------
Excluding special charges:
Return on average assets (2) 0.93
Return on average equity (2)(3) 10.12
Return on average assets 0.92
Return on average equity (3) 9.97
- ---------------------------------------------------------------
AT YEAR END
- ---------------------------------------------------------------
Total Assets $5,673,436
Loans and leases, net 3,740,024
Deposits 4,426,847
Shareholders' equity 515,423
- ---------------------------------------------------------------
</TABLE>
(1) Earnings before special charges. (2) Special charges consist of merger
related and other restructuring charges which on an after-tax basis were
$24,642, $12,084, $7,753, $3,678 and $743 for 1998, 1997, 1996, 1995 and 1994,
respectively. (3) Excludes effect of unrealized gains or losses on securities.
PERFORMANCE AT A GLANCE
Look closely at our five consecutive record earnings years and you will see a
bank with a disciplined acquisitions strategy and strong market share enabling
us to achieve growth with profitability, year after year.
In 1998, Peoples Heritage exceeded $100 million in net income for the
first time. On an operating basis, exclusive of merger-related charges, 1998
earnings rose 20%, to $125.2 million, or $1.40 per diluted share, over 1997
operating earnings of $104.4 million, or $1.17 per diluted share.
[GRAPH OMITTED]
[PICTURE OMITTED]
1
<PAGE> 4
Dear Shareholders:
In 1998 we achieved record earnings for our fifth consecutive year. Along the
way, we became one of the five largest banks in New England with the fourth
largest deposit market share. We also expanded our geographic reach, and as of
January 1, 1999, more than doubled our assets to $12 billion.
While building New England's leading community banking franchise, we are
building important momentum. With our focused strategy, we have continued to
enter new markets through profitable acquisitions while increasing market share
in our current markets.
For example, after 1997's acquisition of Atlantic Bancorp, we not only
became number one in market share in Maine, but number one in the state's
largest market, Greater Portland. In addition, we added insurance to our growing
roster of services, by acquiring Maine's largest independent insurance agency,
Morse, Payson & Noyes Insurance.
In 1998, we continued our expansion across New England with the
acquisition of CFX Corporation which took Peoples from a $6 billion bank to a
$10 billion bank. Bringing CFX into the Peoples fold vaulted our New Hampshire
Bank, Bank of New Hampshire, to the number one market position in the state and
expanded the market area of our Massachusetts bank, Family Bank, farther
westward.
This year, with the success of Morse, Payson & Noyes Insurance adding
$13 million in fee income to our 1998 bottom line, we acquired two additional
insurance companies -- A.D. Davis Insurance in New Hampshire and Catalano
Insurance in Massachusetts. Both acquisitions complement the market coverage of
our area banks and give us our first insurance presence in each of those two
states.
On January 1, 1999 we completed the acquisition of SIS Bancorp which
includes SIS Bank in Massachusetts and Glastonbury Bank & Trust Company in
Connecticut. The acquisition brought us to $12 billion in assets. It nearly
doubled our size in Massachusetts, giving us the eighth largest market share,
extended our reach into the western part of the state, and introduced us to the
Connecticut market.
With our proven acquisition expertise and operational discipline, we are
continuing to expand our business. Yet we remain unwavering in our
customer-focused approach to community banking. Even as we continue to acquire
more banks in a wider area, we typically let these local banks run as they have
with the same customer contact people in place and the same management
structure. We create new efficiencies by consolidating operations.
As a result, in all of our markets
we are now able offer an unusual combination: the advantage of personal,
community banking with the strength and depth of an increasingly
sophisticated financial services network. From our customers' viewpoint, it is
the best of both worlds.
I know that is one of the reasons why I was approached earlier this year
by the head of Maine's largest independent department store chain with 28
locations. He wanted localized, personal service, but had not realized we had
the sophistication of services to handle his payroll, inventory, the complexity
of his accounts and his multiple locations making deposits. Now he is a
customer.
Commercial loans, including C&I and Commercial real estate, now comprise
our largest lending category.
Our growing success extends to other areas of our business as well. In
Public Finance, we started with a minimal presence in Maine just three years ago
and are now the leader in the state as we take our business approach into New
Hampshire and Massachusetts. And the story is much the same for home equity
lending, home mortgages, indirect auto lending, trust and investment services,
and more -- as we apply our proven business techniques in our new markets with
positive results.
As New England's leading community banking franchise, we are continuing
to break ground as we look for new ways to build on our success and replicate
our positive results in each new market. I believe that our ability to expand
through profitable acquisitions, and our commitment to localized community
banking, will enable us to continue to serve our customers, and our
shareholders, in the years ahead.
Sincerely yours,
/s/ William J. Ryan
William J. Ryan
Chairman, President and
Chief Executive Officer
[PICTURE OMITTED]
2
<PAGE> 5
"With our proven acquisition expertise
and operational discipline, we are
continuing to expand our business.
Yet we remain unwavering in our
customer-focused approach
to community banking."
[PICTURE OMITTED]
3
<PAGE> 6
MARKETS
[GRAPH OMITTED]
[GRAPH OMITTED]
EXPANDING ACROSS NEW ENGLAND -- Our acquisitions and growth in 1998 solidified
our position as the largest and most profitable New England community banking
franchise. We now have the number one market share in New Hampshire,
complementing our number one market share in Maine -- and we entered Connecticut
for the first time. Expanding our breadth of services in 1998, we acquired
insurance agencies in Massachusetts and New Hampshire. Along with Maine's
largest insurance agency, these latest acquisitions will enable us to offer a
broader array of services to our customers.
NO. 1 IN MAINE -- In addition to our number one market share in Maine through
Peoples Heritage Bank, we now have the number one market share in the two
largest communities in the state, Greater Portland and Lewiston-Auburn.
NO. 1 IN NEW HAMPSHIRE -- In 1998, the acquisition of CFX Corporation lifted us
from number three to the number one market share in New Hampshire. We acquired
A.D. Davis Insurance, enabling us to offer new insurance products and services
to our New Hampshire customers.
GROWING IN MASSACHUSETTS -- In keeping with our strategy of acquiring
well-managed quality companies in attractive markets, the 1998 agreement to
purchase SIS Bancorp, Inc. was completed January 1, 1999. The acquisition
extended our reach into western Massachusetts, complementing our northeastern
and central Massachusetts banking franchise, Family Bank. It added almost $2
billion in assets, nearly doubled our size in Massachusetts, and lifted us from
tenth to the eighth largest deposit market share in the state. In addition, we
acquired Catalano Insurance with a coverage area similar to Family Bank which
will enable us to link new insurance products and services to our growing
distribution system.
ENTERING CONNECTICUT -- The 1998 agreement to purchase SIS Bancorp, Inc., also
introduced us to the Connecticut market for the first time. SIS Bancorp includes
SIS Bank in the Springfield, Massachusetts area and Glastonbury Bank & Trust
Company with offices in north-central Connecticut. SIS Bancorp not only provided
a compelling strategic fit, but is expected to increase our earnings growth
while enabling us to bring new business lines to SIS Bancorp's Massachusetts and
Connecticut markets including indirect auto lending, public finance, trust and
insurance.
Focusing on our markets
[PICTURE OMITTED]
4
<PAGE> 7
[PICTURE OMITTED]
Camden, Maine
Focusing on our markets
5
<PAGE> 8
PERFORMANCE
[GRAPH OMITTED]
[GRAPH OMITTED]
RECORD EARNINGS -- Peoples Heritage Financial Group achieved record annual net
earnings for the fifth consecutive year. Earnings reached $100.6 million, or
$1.12 per diluted share. That's up 9% from 1997's annual record net earnings of
$92.3 million, or $1.04 per diluted share. On an operating basis, exclusive of
merger-related charges, 1998 earnings soared 20% to $125.2 million over
operating earnings of $104.4 million in 1997.
INCREASED LOW COST DEPOSITS -- In 1998, we opened tens of thousands of new
checking accounts, achieving an increase of 16% in low cost demand deposits. The
increase was a result of both our acquisitions and the tremendous success of our
"Simply Free" checking product which was well received in all our markets. We
also increased our larger-balance commercial checking account deposits by
expanding relationships with our growing number of commercial loan customers.
INCREASED FEE INCOME -- A strong contributor to our financial performance in
1998, fee income rose 27% in 1998 over 1997. Most notably, trust and investment
services income increased by 33% and insurance commissions added $13 million to
fee income in 1998. While we have significantly increased our fee income, we
have not done it at the expense of customer satisfaction and do not charge our
customers for the use of our tellers, our PhoneBank, or any ATM in our
four-state banking network.
EFFICIENCY RATIO -- We continued to improve our efficiency ratio, despite the
fact that we are a community bank with over 220 branches spread throughout a
four state region from the Canadian border to the Hartford, Connecticut area. On
an operating basis, our efficiency ratio reached 56% in the fourth quarter of
1998, down from over 70% four years ago in 1994. Clearly, our acquisitions
continue to make a positive contribution to our efficiency.
TOTAL ASSETS -- While growing New England's leading community bank, we more than
doubled our assets to $12 billion from late 1997 to early 1999.
SOLID MARGINS -- With margins under pressure in 1998 from declining interest
rates and the acquisition of institutions with lower margins, we still achieved
a net interest margin of 4.11% -- a solid performance, even by commercial bank
standards. We increase the margins of acquired companies by introducing a
broader array of lending products and expertise.
LOAN GROWTH -- As a result of our market share growth, successful acquisitions
and marketing initiatives, we increased loans in key areas. Consumer loans rose
12% and commercial business loans were up 8% in 1998.
STRONG DIVIDEND -- We maintained a strong quarterly dividend throughout 1998 and
remain committed to returning 30% or more of net income to our shareholders in
the form of dividends. Following the fourth quarter of 1998, we increased our
quarterly dividend by 4.5%.
RETURN ON EQUITY -- A key measurement of a company's performance is return on
average equity (ROE). On an operating basis, our ROE reached 17.15% in the
fourth quarter of 1998.
RETURN ON ASSETS -- Our operating return on average assets (ROA) for 1998
reached a level of 1.28%, as compared to 1.25% for 1997. Both our ROA and ROE
levels compare well with returns of some of the country's leading banking
companies.
STRONG ASSET QUALITY -- Nonperforming loans continued to decrease as a
percentage of total loans and total assets. We have a strong system of checks
and balances to ensure continued asset quality strength.
[PICTURE OMITTED]
A CLOSER LOOK AT THE NUMBERS
6
<PAGE> 9
[PICTURE OMITTED]
Coos County, New Hampshire
A CLOSER LOOK AT THE NUMBERS
7
<PAGE> 10
STRATEGY
[GRAPH OMITTED]
[GRAPH OMITTED]
OUR BRAND OF COMMUNITY BANKING -- With our continued growth, we're now able to
combine our customer-driven community banking approach with an array of
increasingly sophisticated banking services not typically found at a community
bank. For our retail customers we now offer two dozen supermarket branches, 250
ATMs, and a phone bank that handles a million calls a month for our banks in
four states. For commercial customers we provide sophisticated computer-linked
banking and cash management services, while retaining unparalleled personal
attention. It's a way of doing business that is yielding positive results with
each new community we enter.
MERGER EXPERTISE -- Peoples Heritage has earned a proven track record in rapidly
achieving profitability and cost efficiencies through smart, strategic
acquisitions. By acquiring well-managed, quality companies in attractive
markets, we have been able to apply our proven integration skills and merger
expertise with consistent success. In just the past four years, we have executed
11 profitable acquisitions, significantly enhancing the value of our franchise.
And in 1998, we once again achieved growth with profitability in all our
markets.
OPERATIONAL EFFICIENCIES -- A key to our merger expertise is our ability to
rapidly achieve operational efficiencies, whether by consolidating locations or
merging back office operations. We consistently achieve cost savings in the 25%
range while retaining customer contact people in our markets. In fact, our cost
savings from the acquisition of CFX Corporation exceeded our 25% estimate.
A PATTERN OF SUCCESS -- Through our successful acquisitions, we have been able
to apply our proven business techniques from existing markets to our new markets
with positive results. Whether it's home equity lending, home mortgages, auto
lending, public finance, or trust and investments, our pattern of growth has
yielded significant success.
OUR MARKET NICHE -- Peoples Heritage occupies a unique niche in our markets.
While we offer the personalized service of a community bank, we offer
sophisticated services other community banks can't match. And while we now
compete head to head with the largest banks for commercial business, our local
roots and community-based approach set us apart. Not too big. Not too small. For
customers in our market areas, it's a niche that many feel is just right.
INVESTED IN OUR COMMUNITIES -- Being a community bank, we are a part of the
community. To us, that means being a responsible, involved neighbor. Through
public service, volunteer efforts, and an extensive contribution and sponsorship
program we give back to our communities. As an example, in Maine we converted an
old mill building through a revitalization effort that we expect to have a
significant impact on the economic and social well-being of the area.
SHAREHOLDER VALUE -- By demonstrating our ability to make sound acquisitions
while continuing to generate solid earnings, we expect to continue to create
value for our shareholders. As an example, we expect shareholders to benefit
from both EPS accretion and ROE improvement during our first year of combined
operation with SIS Bancorp. To further enhance shareholder value, in 1998 we
announced a stock split of two shares for one to return our stock price to a
comfortable level for individual investors.
CUSTOMER SERVICE TASK FORCE -- With our rapid growth over the past five years,
it is critical to ensure that customer service remains a top priority. In 1998,
Dave Hindle retired as CEO of Family Bank and was appointed head of Peoples'
Customer Service Task Force. As someone who has focused on customer service
throughout his long and successful banking career, Dave's stature and experience
speak to our commitment to our customers.
Y2K COMPLIANCE -- To protect our customers' accounts and ensure a smooth flow of
business, our comprehensive Y2K program is ensuring the readiness of the Company
and its affiliate banks. As of the close of 1998, final updates and testing of
all systems were nearing completion.
[PICTURE OMITTED]
UP CLOSE ON OUR STRATEGY
8
<PAGE> 11
[PICTURE OMITTED]
Boot Mill Canal, Lowell, Massachusetts
UP CLOSE ON OUR STRATEGY
9
<PAGE> 12
SERVICES
[GRAPH OMITTED]
[GRAPH OMITTED]
MORE BRANCHES -- As part of our commitment to make banking more convenient for
our customers, we increased our branch network to over 220 offices.
MORTGAGE LENDING -- As a community bank, we continue to lead the way in
providing home mortgages. With the acquisition of CFX Corporation, Peoples
Heritage became the number one mortgage originator in New Hampshire,
complementing our growing lead as the number one mortgage originator in Maine.
To strengthen our ability to provide our customers with the best service and
enhance profitability, in 1999 we announced plans to exit our less-profitable
correspondent mortgage lending business and re-focus our efforts on originations
in our own markets.
CONSUMER LENDING -- Leveraging our position as the number one home mortgage
originator in Maine and New Hampshire, we also increased our growth in home
equity lending in 1998. Peoples Heritage became the number one indirect auto
lender in both Maine and New Hampshire, while making inroads into Massachusetts.
COMMERCIAL LENDING -- With an increase of 8% in commercial lending, Peoples
Heritage is now the largest originator of small and mid-size commercial loans in
Maine and New Hampshire. In Maine, Peoples Heritage was recognized for the
second consecutive year as the Finance Authority of Maine's "Bank of the Year"
for our small business lending, and recognized by the U.S. Small Business
Administration as one of the state's top SBA lenders. Our expertise in
commercial lending also includes flexible services such as asset-based lending
to credit- worthy businesses.
INSURANCE -- As a leading home mortgage provider, indirect auto lender and small
and mid-size commercial lender throughout our banking network, it's a natural
extension to offer our customers insurance services for their homes, autos, and
businesses. Accordingly, our 1997 acquisition of Morse, Payson & Noyes Insurance
in Maine has already yielded impressive results. And in 1998, we extended
insurance services in two more states with the acquisitions of Catalano
Insurance in Massachusetts and A.D. Davis Insurance in New Hampshire. Our plan
is to initiate insurance marketing programs that will offer the customers of
Family Bank and Bank of New Hampshire a broader array of services and increase
our profitability as a full-service financial services provider.
TRUST SERVICES -- In 1998, our combined Trust Departments in Maine, New
Hampshire and Massachusetts reached nearly $5 billion in trust assets under
management. In addition, trust income swelled by 30 percent in 1998.
INVESTMENT PLANNING SERVICES -- One more way we provide our customers with
one-stop shopping for financial services is through our Heritage Investment
Planning Services group. Through Heritage, our customers can buy annuities,
stocks, bonds, and mutual funds. So our customers need only one source for the
broadest possible array of financial services.
PUBLIC FINANCE -- In 1998, our Public Finance department grew to the number one
market share in Maine and we expanded our success in Massachusetts and New
Hampshire.
LEASING -- For many of our commercial and Public Finance customers, our leasing
division means real savings and added convenience.
CASH MANAGEMENT SERVICES -- We understand that a bank's ability to offer
sophisticated cash management services and information reporting plays an
important role in a financial officer's decision to select a banking partner.
That's why our cash management services help keep our customers' business
capital working by accelerating the collection of funds, tracking and
controlling the disbursement of funds, and managing and investing funds to
maximize cash flow and investment income.
PRIVATE BANKING -- For customers requiring specialized banking services to
manage their personal and professional finances, our Private Banking division
provides a full complement of solutions to meet all their needs.
PHONEBANK -- An important component of our growing service delivery network, our
PhoneBank now handles a million calls a month for our banks in four states.
EXPANDED ATM NETWORK -- Our ATM network grew to 250 ATMs across four states,
including more ATMs in filling stations, supermarkets and shopping centers.
MORE SUPERMARKET BRANCHES -- As another convenience for our customers, we now
have two dozen supermarket branches offering weekend, evening and Sunday hours.
NEW WEB SITES -- In 1998, we launched new investor relations and consumer
information Web sites on the Internet. The new Web sites allow us to post a wide
range of up-to-the-minute information for fast and easy access. Peoples Heritage
Financial Group's Web site (www.phbk.com) features comprehensive investor
relations and corporate information on the bank holding company. The Peoples
Heritage Bank site (www.peoplesheritage.com) provides commercial and retail
customers with access to information on the bank's consumer products and
commercial services, as will similar sites for our New Hampshire and
Massachusetts banks.
[PICTURE OMITTED]
OUR COMMUNITY BANKING FOCUS
10
<PAGE> 13
[PICTURE OMITTED]
Hancock, New Hampshire
OUR COMMUNITY BANKING FOCUS
11
<PAGE> 14
VISION
At Peoples Heritage, we understand and appreciate that we've grown to become New
England's leading community banking franchise by putting our customers first.
Even as we continue to grow and acquire banks in new markets, our commitment
will not change. What has changed, however, is our ability to serve our
customers with a broader array of services -- backed by the strength, resources
and lending power of our multi-state banking system. And as our size and
services have grown, so have our opportunities.
Looking ahead, we believe that we can continue to attract new business,
and strengthen our existing relationships, by providing our customers with a
wide range of banking and financial services. To that end, we will continue to
seek sound, strategic acquisitions and introduce services that are consistent
with our community banking approach. In all our activities and endeavors, we
will seek to enhance shareholder value.
[PICTURE OMITTED]
TAKING THE LONG VIEW
12
<PAGE> 15
<TABLE>
<CAPTION>
Peoples Heritage Financial Group, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------------
RESULTS FOR THE YEAR 1998 1997 % Change 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 365,429 $ 344,476 6% $ 279,295 $ 251,897 $ 223,737
Provision for loan and lease losses 13,423 4,548 195 5,185 8,044 6,996
Non-interest income
(excluding securities transactions) 98,978 79,783 24 57,423 46,656 41,625
Securities transactions 5,817 2,697 116 3,287 2,499 401
Non-interest expense
(excluding special charges) 274,545 261,965 5 209,716 188,573 186,287
Special charges (1) 35,374 18,591 90 9,627 4,958 559
Net income 100,590 92,335 9 76,033 66,040 50,785
- -----------------------------------------------------------------------------------------------------------------------------
SHARE DATA (2)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.14 $ 1.06 8% $ 0.94 $ 0.82 $ 0.64
Diluted 1.12 1.04 8 0.92 0.80 0.63
Excluding special charges:
Diluted earnings per share (1) 1.40 1.17 20 1.01 0.85 0.64
Diluted cash earnings per share (1)(3) 1.53 1.27 20 1.06 0.88 0.67
Dividends per share 0.44 0.38 16 0.34 0.29 0.18
Book value per share at year end 8.70 8.23 6 7.71 7.24 6.45
Tangible book value per share at year end 7.28 6.79 7 6.78 6.84 6.08
Stock price:
High 26.75 23.81 12 14.32 11.44 7.57
Low 12.81 12.94 (1) 9.50 5.88 5.07
Close 20.00 23.00 (13) 14.00 11.38 6.00
Weighted average shares outstanding:
Basic 88,092,605 87,449,885 1 81,263,004 80,314,906 79,751,952
Diluted 89,452,863 89,180,826 -- 82,729,714 82,105,692 80,863,602
- -----------------------------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.03% 1.09% (6)% 1.15% 1.13% 0.92%
Return on average equity (4) 13.70 13.27 3 12.69 12.04 9.97
Net interest margin (4)(5) 4.11 4.45 (8) 4.56 4.64 4.40
Average equity to average assets (4) 7.45 8.23 (10) 9.05 9.35 9.19
Efficiency ratio (6) 57.17 59.78 (4) 62.28 63.16 70.20
Tier 1 leverage capital ratio 7.54 7.51 -- 8.56 9.14 8.93
Dividend payout ratio 38.60 35.85 8 38.75 35.69 28.49
Excluding special charges: (1)
Return on average assets (1) 1.28 1.25 2 1.27 1.19 0.93
Return on average equity (1)(4) 17.06 15.17 12 13.99 12.71 10.12
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
- -----------------------------------------------------------------------------------------------------------------------------
Assets $ 9,795,920 $ 8,439,645 16% $ 6,618,692 $ 5,864,498 $ 5,542,649
Loans and leases 7,078,368 5,923,445 19 4,692,204 3,986,530 3,661,200
Earning assets 8,934,037 7,776,991 15 6,171,913 5,479,306 5,124,291
Deposits 6,879,935 6,138,887 12 5,094,826 4,604,675 4,387,601
Shareholders' equity 729,447 694,580 5 599,015 548,331 509,136
- -----------------------------------------------------------------------------------------------------------------------------
AT YEAR END
- -----------------------------------------------------------------------------------------------------------------------------
Assets $10,102,459 $ 9,668,242 4% $ 7,767,655 $ 6,168,281 $ 5,673,436
Loans and leases 6,098,487 6,434,238 (5) 5,161,179 4,024,307 3,740,024
Debt and equity securities 2,334,575 1,830,942 28 1,564,647 1,307,767 1,305,269
Deposits 6,981,245 6,747,419 3 5,936,430 4,834,969 4,426,847
Borrowings 2,166,329 1,982,190 9 1,042,312 674,694 670,829
Shareholders' equity 761,924 720,783 6 676,847 586,500 515,423
Common shares outstanding (thousands) 87,546 87,585 -- 87,760 81,022 79,960
Nonperforming assets (7) 63,345 69,427 (9) 62,266 67,394 89,295
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Special charges consist of merger related and other restructuring charges,
which on an after-tax basis were $24,642, $12,084, $7,753, $3,678 and $743 for
1998, 1997, 1996, 1995 and 1994, respectively. See Note 9 to the Consolidated
Financial Statements. (2) Where appropriate amounts have been adjusted for a
two-for-one split of the common stock in May 1998. (3) Earnings before
amortization of goodwill and core deposit premiums. (4) Excludes effect of
unrealized gains or losses on securities. (5) Net interest income divided by
average interest-earning assets, calculated on a fully-taxable equivalent basis.
(6) Excludes distribution on securities of subsidiary trust, special charges and
securities transactions. (7) Nonperforming assets consist of nonperforming
loans, other real estate owned and repossessed assets, net of related reserves
where appropriate.
13
<PAGE> 16
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis which follows focuses on the factors affecting the
Company's results of operations during 1998, 1997 and 1996 and financial
condition at December 31, 1998 and 1997. The Consolidated Financial Statements
and related notes should be read in conjunction with this review. Certain
amounts in years prior to 1998 have been reclassified to conform to the 1998
presentation.
GENERAL
Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank holding
company which conducts business from its headquarters in Portland, Maine and, as
of December 31, 1998, 188 offices located in Maine, New Hampshire and
Massachusetts. The Company is the largest bank holding company headquartered in
northern New England and the fifth largest bank holding company headquartered in
New England.
The Company offers a broad range of commercial and consumer banking
services and products as well as trust, investment advisory and insurance
brokerage services through three wholly-owned banking subsidiaries: Peoples
Heritage Bank ("PHB"), Bank of New Hampshire ("BNH") and Family Bank, FSB
("Family"). PHB is a Maine-chartered bank which operates offices throughout
Maine and, through subsidiaries, engages in mortgage banking, financial
planning, insurance brokerage and equipment leasing activities. At December 31,
1998, PHB had consolidated assets of $4.2 billion and consolidated shareholder's
equity of $333 million. BNH is a New Hampshire-chartered commercial bank which
operates offices throughout New Hampshire. At December 31, 1998, BNH had
consolidated assets of $4.3 billion and consolidated shareholder's equity of
$328 million. Family is a federally-chartered savings bank which operates
offices in Massachusetts and southern New Hampshire. At December 31, 1998,
Family had consolidated assets of $1.8 billion and consolidated shareholder's
equity of $141 million. Each of PHB, BNH and Family is a member of the Bank
Insurance Fund ("BIF") administered by the Federal Deposit Insurance Corporation
("FDIC").
Business Strategy
The principal business of the Company consists of attracting deposits from the
general public and using such deposits and other sources of funds to originate
residential mortgage loans, commercial business loans and leases, commercial
real estate loans and a variety of consumer loans. In addition to keeping loans
for its own portfolio, the Company sells loans in the secondary market. The
Company also invests in mortgage-backed securities and securities issued by the
United States Government and agencies thereof, as well as other securities. In
addition, the Company engages in trust, investment advisory and insurance
brokerage activities and services residential mortgage loans for investors.
The Company's goal is to sustain profitable, controlled growth by focusing
on increasing loan and deposit market share in Maine, New Hampshire and
Massachusetts, developing new financial products, services and delivery
channels, closely managing yields on earning assets and rates on
interest-bearing liabilities, increasing noninterest income through, among other
things, expanded trust, investment advisory, insurance brokerage services and
mortgage banking operations and controlling the growth of noninterest expenses.
It is also part of the business strategy of the Company to supplement internal
growth with targeted acquisitions of other banking or thrift institutions in New
England. During the period covered by this discussion, the Company engaged in
numerous merger and acquisition related activities. For further information, see
Note 2 to the Consolidated Financial Statements and "Acquisitions" below. The
Company regularly evaluates potential acquisitions and as a general rule
announces acquisitions only after a definitive agreement has been reached.
The Company generally does not as a matter of policy make any specific
projections as to future earnings nor does it endorse any projections regarding
future performance that may be made by others.
Economic Conditions in Northern New England
The Company believes that Maine, New Hampshire, Massachusetts and New England in
general have witnessed steady economic growth since 1992. There can be no
assurance that this will continue to be the case, however, and the economies and
real estate markets in the Company's primary market areas will continue to be
significant determinants of the quality of the Company's assets in future
periods and, thus, its results of operations.
Acquisitions
On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc.
("SIS"). Approximately 16,255,885 shares of common stock of the Company (the
"Common Stock") were issued in connection with this acquisition, which was
accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion
and shareholders' equity of $139 million at December 31, 1998. The accompanying
discussion and financial statements do not include SIS.
During 1998, the Company completed the acquisition of three insurance
agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions
were accounted for as purchases and, accordingly, the Company's financial
statements reflect them from the date of acquisition. The Company recorded $9.3
million of goodwill in connection with these purchases. The acquired agencies
are being integrated into the Company's existing insurance agency operations.
On April 10, 1998, the Company completed the acquisition of CFX Corporation
("CFX"). Approximately 32,796,280 shares of Common Stock were issued in
connection with this transaction. At December 31, 1997, CFX had total assets of
$2.9 billion and total shareholders' equity of $245.7 million. The acquisition
of CFX was accounted for as a pooling-of-interests and, accordingly, financial
information for all periods presented prior to the date of acquisition has been
restated to present the combined financial condition and results of operations
as if the acquisition had been in effect for all such periods.
In the fourth quarter of 1997, the Company purchased Atlantic Bancorp
("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in
Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million
and total shareholders' equity of $37.7 million. The Company recorded $34.7
million of goodwill with this transaction. During the same period, the Company
also acquired all of the outstanding stock of MPN Holdings ("MPN"), the holding
company of Morse, Payson & Noyes Insurance. The transaction was effected through
the exchange of MPN stock for 445,678 shares of Common Stock and resulted in
$7.8 million of goodwill. Both acquisitions
14
<PAGE> 17
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
were accounted for as purchases and, accordingly, the Company's financial
statements reflect them from the date of acquisition.
On December 6, 1996, the Company completed the acquisition of Family
Bancorp, the holding company for Family. Approximately 10,960,670 shares of
Common Stock were issued in connection with this transaction, including
5,000,000 shares of treasury stock. Family had total assets of $925.8 million
and total shareholders' equity of $73.3 million. This transaction was accounted
for as a purchase, and accordingly, the financial statements reflect it from the
date of acquisition. The Company recorded $34.2 million of goodwill in
connection with this purchase.
On April 2, 1996, the Company completed the acquisition of Bank of New
Hampshire Corporation ("BNHC"), the holding company for BNH. Approximately
16,256,660 shares of Common Stock were issued in connection with this
transaction. At December 31, 1995, BNHC had total consolidated assets of $977.8
million and total consolidated shareholders' equity of $84.5 million. The
acquisition of BNHC was accounted for as a pooling-of-interests and,
accordingly, financial information for all periods presented prior to the date
of acquisition has been restated to present the combined financial condition and
results of operations as if the acquisition had been in effect for all such
periods.
The Company incurred various merger related and restructuring charges in
connection with the foregoing acquisitions (collectively, "special charges"). On
a pre-tax basis special charges amounted to $35.4 million, $18.6 million and
$9.6 million in 1998, 1997 and 1996, respectively. For additional information,
see "Results of Operations - Special Charges" and Note 9 to the Consolidated
Financial Statements.
RESULTS OF OPERATIONS
Overview
The Company reported net income of $101 million or $1.12 per diluted share in
1998, compared to $92 million or $1.04 per diluted share in 1997. Return on
average equity was 13.70%, compared to 13.27% in 1997. Excluding special
charges, the Company earned $1.40 per diluted share in 1998 compared to $1.17
per diluted share during 1997. Return on average equity excluding special
charges was 17.06% in 1998 compared to 15.17% in 1997. The improved results were
attributable to the successful assimilation of recent acquisitions, as well as
strong loan and deposit growth, which contributed to substantial increases in
net interest income, which on a fully-taxable equivalent basis amounted to $367
million and $346 million for the years ended 1998 and 1997, respectively.
Total revenues increased 11% during 1998 as a result of increases in both
net interest income and noninterest income. Net interest income increased 6%
during 1998, as compared to 1997. The increase was attributable to a 15%
increase in average interest-earning assets, offset in part by a decrease in net
interest margin from 4.45% in 1997 to 4.11% in 1998. The decline in net interest
margin was attributable to decreases in yields on loans and leases and, to a
lesser extent, increases in funding costs. Noninterest income increased 27%
during 1998, primarily as a result of increases in income from customer services
and insurance commissions.
Noninterest expenses, excluding distributions on the securities of a
subsidiary trust and special charges, increased 5% during 1998 compared to an
11% increase in total revenues. The increase in noninterest expenses primarily
resulted from increased salaries and employee benefits related to purchase
acquisitions in the fourth quarter of 1997, increased data processing expenses,
due in part to Year 2000 efforts, as well as additional amortization of goodwill
and other intangibles resulting from recent acquisitions using the purchase
accounting method.
Net Interest Income
The Company's taxable-equivalent net interest income increased 6% during 1998,
to $367 million compared to $346 million in 1997. Increased levels of average
earning assets, principally loans and leases, increased net interest income by
$48 million while lower net interest margins decreased net interest income by
$25 million. Average levels of loans and leases increased by $1.2 billion, or
19.5%, in 1998 compared to 1997, and all loan categories experienced double
digit growth. Excluding loans acquired through purchase acquisitions and
required loan divestitures, average loans and leases increased by 16% in 1998.
The net interest margin declined to 4.11% in 1998 from 4.45% during 1997, which
partially offset the positive effects of loan growth. Information on average
balances, yields and rates for the past three years can be found in Table 1.
Table 2 shows the changes from 1997 in tax equivalent net interest income by
category due to changes in rate and volume.
15
<PAGE> 18
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 1 - Three Year Average Balance Sheets
- --------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. For purposes of the table and the following discussion, (i)
income from interest-earning assets and net interest income is presented on a
fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) unpaid interest on nonaccrual loans has not been included for purposes
of determining interest income. Information is based on average daily balances
during the indicated periods.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
(Dollars in Thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and leases (1) $7,078,368 $ 599,127 8.45% $5,923,445 $522,367 8.82% $4,692,204 $418,465 8.92%
Securities available for sale(2) 1,768,727 110,735 6.26 1,785,962 117,897 6.60 1,359,525 86,640 6.37
Federal funds sold and other
short-term investments 86,942 4,970 5.72 67,584 3,293 4.87 120,184 6,280 5.23
---------- ---------- ---------- -------- ---------- -------
Total earning assets 8,934,037 714,832 8.02 7,776,991 643,557 8.28 6,171,913 511,385 8.29
---------- -------- -------
Nonearning assets 861,883 662,654 446,779
---------- ---------- ----------
Total assets $9,795,920 $8,439,645 $6,618,692
========== ========== ==========
Interest-bearing deposits:
Regular savings and
money market accounts 2,643,047 65,760 2.49 $2,450,692 62,283 2.54 $2,158,226 55,539 2.57
Certificates of deposit 2,889,790 158,713 5.49 2,705,971 148,205 5.48 2,247,634 124,849 5.56
Brokered deposits 283,499 16,534 5.83 155,281 9,324 6.00 64,389 93,689 5.73
---------- ---------- ---------- -------- ---------- --------
Total interest-bearing
deposits 5,816,336 241,007 4.14 5,311,944 219,812 4.14 4,470,249 184,077 4.12
Borrowed funds 1,966,309 106,520 5.42 1,407,391 77,463 5.50 865,581 46,105 5.33
---------- ---------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 7,782,645 347,527 4.47 6,719,335 297,275 4.42 5,335,830 230,182 4.31
---------- ---------- --------- -------- ---------- -------
Demand deposit accounts 1,063,599 826,943 624,577
Other liabilities (2) 120,229 111,299 59,270
Securities of subsidiary trust 100,000 87,488 --
Shareholders' equity (2) 729,447 694,580 599,015
---------- --------- ----------
Total liabilities and
shareholders' equity $9,795,920 $8,439,645 $6,618,692
========== ========== ==========
Net earning assets $1,151,392 $1,057,656 $ 836,083
========== ========== ==========
Net interest income
(fully-taxable equivalent) 367,305 346,282 281,203
Less: fully-taxable
equivalent adjustments (1,876) (1,806) (1,908)
-------- -------- --------
Net interest income $365,429 $344,476 $279,295
======== ======== ========
Net interest rate spread
(fully-taxable equivalent) 3.55% 3.86% 3.98%
==== ==== ====
Net interest margin
(fully-taxable equivalent) 4.11% 4.45% 4.56%
==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loans and leases include portfolio loans and leases, loans held for sale
and nonperforming loans, but unpaid interest on nonperforming loans has not
been included for purposes of determining interest income.
(2) Excludes effect of unrealized gains or losses on securities available for
sale.
16
<PAGE> 19
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 2 - Changes in Net Interest Income
- --------------------------------------------------------------------------------
The following table presents certain information on a fully-taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 vs 1997 Year Ended December 31, 1997 vs 1996
Increase (Decrease) Due To Increase (Decrease) Due To
- ----------------------------------------------------------------------------------------------------------------------------
Rate/ Rate/
(Dollars in Thousands) Rate Volume Volume Total Rate Volume Volume Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases (1) $(21,917) $101,864 $(3,187) $76,760 $(4,677) $109,806 $(1,227) $103,902
Securities available for sale (6,072) (1,138) 48 (7,162) 3,107 27,176 974 31,257
Federal funds sold and other
short-term investments 574 943 160 1,677 (424) (2,749) 186 (2,987)
-------- -------- ------- ------- ------- -------- ------- --------
Total earning assets (27,415) 101,669 (2,979) 71,275 (1,994) 134,233 (67) 132,172
-------- -------- ------- ------- ------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Regular savings and money
market access accounts (1,225) 4,886 (183) 3,478 (689) 7,526 (93) 6,744
Certificates of deposit 271 10,073 165 10,509 (1,798) 25,484 (330) 23,356
Brokered deposits (264) 7,693 (220) 7,209 174 5,208 253 5,635
-------- -------- ------- ------- ------- -------- ------- --------
Total interest-bearing deposits (1,218) 22,652 (238) 21,196 (2,313) 38,218 (170) 35,735
Borrowed funds (1,126) 30,740 (558) 29,056 1,537 28,859 962 31,358
-------- -------- ------- ------- ------- -------- ------- --------
Total interest-bearing liabilities (2,344) 53,392 (796) 50,252 (776) 67,077 792 67,093
-------- -------- ------- ------- ------- -------- ------- --------
Net interest income $(25,071) $ 48,277 $(2,183) $21,023 $(1,218) $ 67,156 $ (859) $ 65,079
======== ======== ======= ======= ======= ======== ======= ========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loans and leases include portfolio loans and loans held for sale and
nonperforming loans.
Provision and Allowance for Loan and Lease Losses
The Company recorded a provision for loan and lease losses in 1998 of $13.4
million, as compared to a $4.5 million provision in 1997. The provision for loan
losses was increased in 1998 in light of significant loan growth in commercial
and consumer loans, a $5.8 million increase in net charge-offs from 1997 to
1998, and the Company's estimate of future potential losses.
The allowance for loan and lease losses represented 1.42% of portfolio
loans outstanding at December 31, 1998, as compared to 1.38% at December 31,
1997. The improved coverage resulted primarily from a decrease in the amount of
the net loan portfolio, due primarily to a lower level of residential real
estate loans in portfolio. The ratio of the allowance to nonperforming loans at
December 31, 1998 was 166%, as compared to 152% at December 31, 1997. Management
believes that improvement in this coverage ratio is consistent with the change
in composition of the loan portfolio.
The allowance for loan and leases losses is maintained at a level
determined to be adequate by management to absorb future charge-offs of loans
and leases deemed uncollectable. This allowance is increased by provisions
charged to operating expense and by recoveries on loans previously charged off.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment and is determined based on
management's ongoing evaluation. The ongoing evaluation process includes a
formal analysis of the allowance each quarter, which considers, among other
procedures, the character and size of the loan portfolio, monitoring trends in
nonperforming loans, delinquent loans and net charge-offs, as well as new loan
originations and other asset quality factors. The Company evaluates the
commercial real estate and commercial business loan portfolio by using a loan by
loan analysis of a significant portion of "classified" loans and calculating a
reserve requirement on these loans. Based on these results, factors are applied
to the remaining portfolio to calculate a range of possible loan losses. For the
residential real estate and consumer loan portfolios, the range of reserves is
calculated by applying historical charge-off and recovery experience to the
current outstanding balance in each type of loan category, with consideration
given to loan growth over the preceding twelve months. Although management
utilizes its judgment in providing for possible losses, for the reasons
discussed under "Asset Quality - Nonperforming Assets," there can be no
assurance that the Company will not have to change its level of provision for
loan losses in subsequent periods.
17
<PAGE> 20
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 3 - Five Year Table of Activity in the Allowance for Loan and Lease
Losses
- --------------------------------------------------------------------------------
The following sets forth information concerning the activity in the Company's
allowance for loan and lease losses during the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $7,078,368 $5,923,445 $4,692,204 $3,986,530 $3,661,200
========== ========== ========== ========== ==========
Allowance at the beginning of period $ 89,983 $ 87,820 $ 80,818 $ 82,615 $ 88,465
Additions due to purchase acquisitions -- 7,361 11,365 2,457 --
Charge-offs:
Real estate loans 8,324 3,950 13,671 15,543 15,080
Commercial business loans and leases 4,303 6,632 4,353 3,234 6,281
Consumer loans and leases 11,925 10,063 4,906 3,673 3,278
---------- ---------- ---------- ---------- ----------
Total loans charged off 24,552 20,645 22,930 22,450 24,639
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate loans 4,543 5,601 10,430 6,397 6,773
Commercial business loans and leases 2,213 3,373 1,856 2,673 3,925
Consumer loans and leases 2,295 1,925 1,096 1,082 1,095
---------- ---------- ---------- ---------- ----------
Total loans recovered 9,051 10,899 13,382 10,152 11,793
---------- ---------- ---------- ---------- ----------
Net charge-offs 15,501 9,746 9,548 12,298 12,846
Provision for loan and lease losses 13,423 4,548 5,185 8,044 6,996
---------- ---------- ---------- ---------- ----------
Allowance at the end of the period $ 87,905 $ 89,983 $ 87,820 $ 80,818 $ 82,615
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.22% 0.16% 0.20% 0.31% 0.35%
Ratio of allowance to total portfolio loans
and leases at end of period 1.42 1.38 1.67 1.97 2.16
Ratio of allowance to nonperforming
loans at end of period 165.85 152.38 186.50 156.35 126.33
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Table 4 - Allocation of the Allowance for Loan and Lease Losses - Five Year
Schedule
- --------------------------------------------------------------------------------
The allowance for loan and lease losses is available for offsetting credit
losses in connection with any loan, but is internally allocated to various loan
categories as part of the Company's process for evaluating the adequacy of the
allowance for loan and lease losses. The following table sets forth information
concerning the allocation of the Company's allowance for loan and lease losses
by loan categories at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------------------
PERCENT
OF LOANS Percent Percent Percent Percent
IN EACH of Loans of Loans of Loans of Loans
CATEGORY in each in each in each in each
TO LOANS Category to Category to Category to Category to
AMOUNT TOTAL Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $45,024 55.63% $51,553 61.94% $50,450 62.49% $49,416 62.59% $50,543 64.58%
Commercial business
loans and leases 24,190 13.70 16,322 12.06 18,304 12.34 12,632 13.27 11,062 11.89
Consumer loans
and leases 18,691 30.67 14,866 26.00 12,809 25.17 11,795 24.14 12,163 23.53
Unallocated allowance
at end of period -- -- 7,242 -- 6,257 -- 6,975 -- 8,847 --
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
$87,905 100.00% $89,983 100.00% $87,820 100.00% $80,818 100.00% $82,615 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The unallocated component in the prior table relates to reserves acquired in
connection with the acquisition of CFX. These reserves were allocated during
1998 in accordance with the Company's analysis of the CFX loan portfolios.
Otherwise, the Company's methods and assumptions in determining the adequacy of
the allowance for loan losses has not changed significantly from prior years.
Review of specific loans, loan growth, charge-off history and regional and
national economic conditions and trends remain the primary determinants of the
adequacy of the allowance for loan and lease losses. Loan terms and portfolio
concentrations have not changed significantly during 1998, although mortgage
loans decreased from 40% to 33% of the loan portfolio at December 31, 1997 and
1998, respectively. At December 31, 1998, non-performing loans as a percent of
total loans was 0.87%, as compared to 0.91% at December 31, 1997. At December
31, 1998, the Company's allowance as a percentage of non-performing loans was
166% and has averaged 157% over the past five years (based on year end data). At
December 31, 1998, the Company's allowance was 5.7 times the 1998 net
charge-offs and has averaged 7.4 times net charge-offs over the past five years
(based on year end data.) This decline is due primarily to a reduced level of
recoveries related to loans charged off in the early 1990s.
Noninterest Income
Noninterest income was $104.8 million in 1998 compared to $82.5 million in 1997.
The 27% increase in 1998 resulted primarily from increases of $5.2 million in
customer services income, $3.9 million in trust and investment advisory income
and $11.1 million in insurance commissions.
Customer services income of $33.5 million increased 18% from 1997 and was
attributable to growth in the number of transaction accounts (30,000 new
accounts were added in 1998 through internal growth) and related fees and
increases in ATM income of $1.8 million.
Mortgage banking services income of $23.1 million decreased 10% or $2.7
million during 1998. The decrease resulted from $11.1 million of impairment
recognized on mortgage servicing rights due to increased loan prepayments as a
result of decreases in market interest rates. This was partially offset by a
$2.4 million valuation adjustment on a related interest rate floor and by
increased gains on sales of loans. The Company's portfolio of residential
mortgages of $3.6 billion serviced for investors decreased by $1.8 billion or
33% from December 31, 1997 to December 31, 1998 because of sales of mortgage
servicing rights. Gains on the sales of mortgage servicing rights totaled $1.6
million and $2.4 million in 1998 and 1997, respectively. As a result of these
sales and the impairment writedowns, capitalized mortgage servicing rights
decreased from $59.7 million at December 31, 1997 to $39.3 million at December
31, 1998. See Note 7 to the Consolidated Financial Statements. Residential
mortgage loan originations obtained from correspondent lenders amounted to $4.1
billion, $2.9 billion and $844.5 million in 1998, 1997, and 1996, respectively,
or 74%, 82% and 66% of total residential mortgage loan originations during these
periods. The increased amounts of loan originations significantly contributed to
the increase in residential mortgage sales income of $7.7 million in 1998. Gains
from the sale of loans are dependent on market and economic conditions and, as a
result, there can be no assurance that the mortgage sales income reported in
prior periods will be achieved in the future.
In January, 1999, the Company announced its intention to exit the
correspondent mortgage business. The Company determined that profit margins
derived from the correspondent mortgage business were not sufficient to offset
the risks or to support the resources needed to service the volume generated.
The Company intends to increase its emphasis on core businesses and believes
that resulting income opportunities, when combined with the reduction in
operating expenses associated with the correspondent mortgage lending business,
will help to offset the loss of income from exiting this business in future
years.
19
<PAGE> 22
- --------------------------------------------------------------------------------
Table 5 - Mortgage Banking Services Income
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to the Company's
mortgage banking activities at the dates or for the periods ended.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
At or for the Year Ended December 31,
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential mortgages
serviced for investors $3,598,896 $5,381,003 $4,343,659
========== ========== ==========
Residential mortgage
sales income $ 20,964 $ 13,227 $ 9,358
Residential mortgage
servicing income, net 9,135 10,160 8,298
Impairment reserve for
mortgage servicing rights (11,055) -- --
Valuation adjustment -
interest rate floor 2,380 -- --
Gains on sale of mortgage
servicing rights 1,642 2,380 --
---------- ---------- ----------
Mortgage banking
services income $ 23,066 $ 25,767 $ 17,656
========== ========== ==========
- --------------------------------------------------------------------------------
</TABLE>
Trust and investment advisory services income of $15.7 million increased 33%
during 1998 primarily due to increased assets under management. Assets under
management were $3.0 billion and $2.7 billion at December 31, 1998 and 1997,
respectively, an increase of 11%.
Insurance commissions of $13.0 million and $1.9 million in 1998 and 1997,
respectively, were generated through the Company's recent acquisitions of
insurance agencies.
Net securities gains amounted to $5.8 million and $2.7 million during 1998
and 1997, respectively. Gains from the sale of securities are subject to market
and economic conditions and, as a result, there can be no assurance that gains
reported in prior periods will be achieved in the future.
Other noninterest income amounted to $13.6 million and $12.0 million during
1998 and 1997, respectively, and consisted primarily of miscellaneous loan fees
and increases in the cash surrender value of bank owned life insurance.
<PAGE> 23
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense of $309.9 million in 1998 compared to $280.6 million in
1997. The $29.3 million increase was largely attributable to the increase in
special charges ($16.8 million), higher data processing expenses ($5.2 million)
and higher intangible amortization ($2.9 million). Excluding special charges and
intangible amortization, noninterest expense increased 3.8%. The efficiency
ratio improved to 57.17% during 1998 from 59.78% in 1997 reflecting the
efficiencies created by the assimilation of recent acquisitions, as well as
operating improvements.
Salaries and benefits expense of $138.8 million increased 6% during 1998.
This increase was due primarily to salaries and benefits related to 1997 fourth
quarter acquisitions accounted for as purchases (MPN and Atlantic) as well as
increased commissions on retail loan originations and back office staffing costs
to support the increased loan and deposit volumes. The cost savings achieved as
a result of the recent acquisitions partially offset the effect of these
increases.
Data processing expense increased 34% to $20.1 million in 1998 from $15.0
million during 1997. The increase in expense was attributable to the
implementation of system upgrades to accommodate increased volumes, and to a
lesser degree, expenditures for the Year 2000 initiatives. See "Impact of the
Year 2000" for further discussion.
Occupancy expenses increased 9% while equipment expense and advertising and
marketing expense each decreased 8% during 1998. These expenses reflected the
assimilation of recent acquisitions and a related branch divestiture.
Amortization of goodwill and deposit premiums increased by $2.9 million or
33% during 1998 due to goodwill associated with the recent acquisitions which
were accounted for as purchases. See "General - Acquisitions".
Other noninterest expense, which is comprised primarily of general and
administrative expenses, decreased $3.2 million or 6% during 1998 through cost
savings realized from the assimilation of recent acquisitions.
Special Charges
Special charges consist of merger expenses of $35.4 million, $11.4 million, and
$9.6 million during 1998, 1997 and 1996, respectively, and a $7.2 million charge
related to exiting the lease securitization business, conducted through CFX
Funding, in 1997. On an after-tax basis, special charges amounted to $24.6
million, $12.1 million and $7.8 million for the years ended 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
Table 6 - Special Charges
- --------------------------------------------------------------------------------
The following table summarizes special charges recorded in 1998 by type, all of
which were related to the acquisition of CFX, and shows the balance in the
accrued liability account as of December 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Special Cash Write- Balance at
(In Thousands) Charges in 1998 Transactions downs Adjustments December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Termination payments to employees $12,551 $(11,156) $ -- $(1,363) $ 32
Data processing/systems integration 7,663 (10,624) -- 2,961 --
Professional fees 8,169 (8,653) -- 484 --
Other exit costs 3,637(1) (1,906) -- (600) 1,131
Property and asset write-downs 16,707 -- (15,114) (1,593) --
Gain on sale of branches (13,353) 13,242 -- 111 --
------- -------- -------- ------- ------
$35,374(2) $(19,097) $(15,114) $ 0 $1,163
======= ======== ======== ======= ======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Primarily related to CFXFunding. (2) On an after-tax basis special charges
in 1998 amounted to $24.6 million.
The termination payments made in connection with the CFX merger covered
approximately 280 employees whose positions were eliminated as a result of the
merger. Property and asset write-downs related to the CFX merger related mainly
to real estate investments, duplicate facilities, fixed assets, and a portfolio
of automobile leases. Write-downs to estimated fair value were based on
independent appraisals where practical and on management estimates for the
remaining assets. The write-down on the auto lease portfolio was based on
expected future cash flows.
The Company will incur additional one-time merger charges related to the
acquisition of SIS, which were previously estimated by the Company to amount to
approximately $18 million on an after-tax basis (inclusive of the after-tax cost
of the establishment of a charitable foundation). Although the Company currently
does not believe that there will be a material change in this amount, special
charges will be dependent on actual expenses incurred in connection with the
acquisition of SIS and as a result may be more or less than previously estimated
by the Company.
Taxes
The Company's effective tax rate was 32% in 1998 compared to 35% in 1997. The
decrease in 1998 was due primarily to the reorganization of certain corporate
entities, increased levels of bank-owned life insurance and lower state taxes.
Comprehensive Income
The Company's comprehensive income amounted to $94.2 million and $98.2 million
during 1998 and 1997, respectively. Comprehensive income differed from the
Company's net income in these periods because of a $6.4 million unrealized loss
on securities during 1998 and a $5.9 million unrealized gain on securities
during 1997. For additional information, see the Consolidated Financial
Statements.
20
<PAGE> 24
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
COMPARISON OF 1997 AND 1996
The Company reported net income of $92.3 million for 1997, or $1.04 per diluted
share, compared with the $76.0 million, or $0.92 per diluted share reported in
1996. Return on average assets and return on average equity were 1.09% and
13.27%, respectively, for 1997 compared with 1.15% and 12.69%, respectively, in
1996. Excluding the impact of special charges, net income and diluted earnings
per share were $104.4 million and $1.17, respectively, for 1997 and $83.8
million and $1.01, respectively, for 1996. Return on average assets and return
on average equity were 1.25 % and 15.17%, respectively, for 1997 and 1.27% and
13.99%, respectively, for 1996, excluding special charges.
Net interest income on a fully taxable-equivalent basis totaled $346.3
million compared with $281.2 million in 1996. The 23% increase in 1997 reflected
strong internal loan growth, as well as the 12 month impact of the Family
acquisition and an approximately three month impact of the Atlantic acquisition
in 1997. Both acquisitions were accounted for as purchases.
The provision for loan and lease losses was $4.5 million in 1997 compared
to a $5.2 million provision in 1996 as a result of favorable asset quality
trends. The ratio of the allowance to nonperforming loans at December 31, 1997
was 152% compared to 187% at December 31, 1996. The allowance for loan and lease
losses represented 1.38% of total loans at December 31, 1997 compared to 1.67%
at December 31, 1996. The decline reflects the impact of purchase acquisitions
of institutions with lower allowances as a percentage of loans and leases.
Noninterest income was $82.5 million and $60.7 million for the years ended
December 31, 1997 and 1996, respectively. Increases of $8.0 million in customer
services income and $8.1 million in mortgage services income contributed to the
$21.8 million or 36% increase in 1997. Customer services income of $28.3 million
reflected a 39% growth from 1996. In 1997, mortgage banking income was $25.8
million, which increased $8.1 million or 46% due to a $6.2 million increase in
mortgage sales income and a $1.0 million increase in residential mortgage
servicing income.
Noninterest expense was $280.6 million for 1997 compared with $219.3
million for 1996, a 28% increase. The 1997 increase was primarily attributable
to the Family and Atlantic acquisitions, in addition to the expense associated
with capital securities issued by a subsidiary trust and an increase in special
charges related to the CFX acquisition. The efficiency ratio, which excludes
special charges and dividends on the Trust Preferred Capital securities,
improved from 62.28% in 1996 to 59.78% in 1997.
Average earning assets increased $1.6 billion or 26% in 1997, mostly due to
the acquisition of Family in December 1996 and Atlantic in the fourth quarter of
1997. However, the increase also reflected internal growth in loans and loans
held for sale. Average interest-bearing deposits increased 19% in 1997 primarily
from the aforementioned acquisitions.
FINANCIAL CONDITION
The Company's consolidated total assets increased by $434 million, or 4%, from
$9.7 billion at December 31, 1997 to $10.1 billion at December 31, 1998.
Shareholders' equity totaled $762 million at December 31, 1998 compared to $721
million at December 31, 1997, an increase of 6%.
Average earning assets increased $1.2 billion or 15% in 1998 primarily as a
result of increased loan originations. After adjusting for loan growth related
to purchase acquisitions and required divestitures, average loans increased by
16% in 1998. In 1997, average earning assets increased 9%, excluding the impact
of the acquisition of Family Bank in December 1996 and Atlantic Bank in the
fourth quarter of 1997. See Table 1 for more information on loan growth. Average
loans as a percentage of average earning assets was 79% in 1998 and 76% in 1997.
Investment Securities and Other Earning Assets
The average balance of the securities portfolio was $1.8 billion in both 1998
and 1997. The portfolio is comprised primarily of U.S. Treasury securities and
mortgage-backed securities, most of which are seasoned 15-year federal agency
securities. Other securities consist of collateralized mortgage obligations and
asset-backed securities. Substantially all securities are AAA or equivalently
rated.
21
<PAGE> 25
- --------------------------------------------------------------------------------
Table 7 - Maturities of Securities
- --------------------------------------------------------------------------------
The following table sets forth the scheduled maturities and weighted average
yields of the Company's debt securities available for sale at December 31,
1998.
<TABLE>
<CAPTION>
Amortized Cost Maturing in
- ----------------------------------------------------------------------------------------------------------------------------------
More than One More than Five More than
One Year or Less to Five Years to Ten Years Ten Years Total
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agencies $153,630 4.97% $ 99,206 5.20% $12,998 6.41% $ 54,574 5.71% $ 320,408 5.23%
Tax-exempt bonds
and notes 18,153 5.03 8,698 4.57 202 5.43 439 5.36 27,492 4.89
Other bonds and notes 1,276 7.46 834 7.00 819 7.32 272 6.66 3,201 7.24
Mortgage-backed
securities 1,158 5.71 13,743 6.59 97,760 6.44 1,605,737 6.12 1,718,398 6.14
Collateralized mortgage
obligations -- -- 2,735 4.66 13,213 6.59 139,653 5.96 155,601 5.99
-------- -------- -------- ---------- ----------
Total $174,217 5.00 $125,216 5.31 $124,992 6.46 $1,800,675 6.10 $2,225,100 5.99
======== ======== ======== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Securities available for sale are carried at fair value and had an unrealized
loss of $984 thousand at December 31, 1998 as compared to an unrealized gain of
$9.1 million at December 31, 1997. These unrealized gains and losses do not
impact net income or regulatory capital but are recorded as adjustments to
shareholders' equity, net of related deferred income taxes. Unrealized gains and
losses, net of related deferred income taxes, are a component of the Company's
"Comprehensive Income" contained in the Consolidated Statement of Changes in
Shareholders' Equity.
Loans
Residential real estate loans (including loans held for sale) averaged $3.0
billion in 1998 compared to $2.5 billion in 1997, a 21% increase. The increase
in the 1998 average balance resulted primarily from a significant increase in
loans originated through correspondent lenders for resale into the secondary
market. It is the Company's general practice to sell loans that conform to
federal agency standards into the secondary market.
Commercial real estate loans averaged $1.4 billion in 1998 and $1.3 billion
in 1997, an 11% increase. The Company is continuing to focus on lending to small
and medium size business customers within its geographic markets. These loans
consist of loans secured by income-producing commercial real estate, service
industry real estate, multi-family residential real estate and retail trade real
estate, as well as loans for the acquisition, development and construction of
such commercial real estate.
Commercial loans and leases averaged $832 million in 1998 and $743 million
in 1997, an increase of 12%. The Company also originates commercial business
leases through one of its subsidiaries. These leases are direct equipment
leases, primarily office equipment, and amounted to $34.9 million at December
31, 1998.
Consumer loans and leases averaged $1.8 billion in 1998 and $1.4 billion in
1997, an increase of 27%. The growth in consumer loans was primarily in indirect
auto loans and home equity loans. Mobile home loans continue to decline,
reflecting the Company's strategy to emphasize other types of consumer loans.
The Company has ceased originating auto lease receivables. Automobile lease
receivables acquired through the CFX acquisition totaled $96.9 million at
December 31, 1998 compared to $117.8 million at December 31, 1997. The Company
had classified these auto lease receivables as held for sale during most of
1998, but transferred the balance to portfolio in December 1998 at the lower of
cost or market value. Although the Company had negotiated with several
interested parties to sell the portfolio, it was determined to be more
advantageous to hold the portfolio until maturity.
- --------------------------------------------------------------------------------
Table 8 - Scheduled Contractual Amortization of Loans at December 31, 1998
- --------------------------------------------------------------------------------
The following table sets forth the scheduled contractual amortization of the
Company's loans at December 31, 1998, as well as the amount of loans which
are scheduled to mature after one year which have fixed or adjustable
interest rates. Demand loans, loans having no schedule of repayments and no
stated maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------------------------------------
Commercial
Residential Commercial Business Consumer
Real Estate Real Estate Loans and Loans and
(Dollars in Thousands) Loans Loans Leases Leases Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 75,778 $ 417,767 $489,120 $ 249,170 $1,231,835
After one year through
five years 366,688 519,141 249,243 975,294 2,110,366
Beyond five years 1,577,548 484,674 109,086 672,883 2,844,191
---------- ---------- -------- ---------- ----------
Total $2,020,014 $1,421,582 $847,449 $1,897,347 $6,186,392
========== ========== ======== ========== ==========
Interest rate terms on
amounts due after one year:
Fixed $ 952,676 $ 650,533 $270,073 $1,081,919 $2,955,201
Adjustable 991,560 353,282 88,256 566,258 1,999,356
- -------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 27
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 9 - Composition of Loan Portfolio
- --------------------------------------------------------------------------------
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
(Dollars in Thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate loans $2,020,014 33% $2,635,663 40% $2,050,484 39% $1,530,801 37% $ 1,49 39%
Commercial real
estate loans:
Permanent first
mortgage loans 1,281,774 21 1,286,372 20 1,149,910 22 981,160 24 933,482 24
Construction and
development loans 139,808 2 118,985 2 79,864 2 57,607 1 37,794 1
---------- --- ---------- --- ---------- --- ---------- --- ---------- ---
Total 1,421,582 23 1,405,357 22 1,229,774 24 1,038,767 25 971,276 25
---------- --- ---------- --- ---------- --- ---------- --- ---------- ---
Commercial loans and
leases 847,449 14 786,578 12 647,737 12 544,685 14 454,583 12
Consumer loans and
leases 1,897,347 30 1,696,623 26 1,321,004 25 990,872 24 899,638 24
---------- --- ---------- --- ---------- --- ---------- --- ---------- ---
Total loans
receivable 6,186,392 100% 6,524,221 100% 5,248,999 100% 4,105,125 100% 3,822,639 100%
=== === === === ===
Allowance for loan
and lease losses 87,905 89,983 87,820 80,818 82,615
---------- ---------- ---------- ---------- ----------
Net loans receivable $6,098,487 $6,434,238 $5,161,179 $4,024,307 $3,740,024
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET QUALITY
General
The Company monitors its asset quality with lending and credit policies which
require the regular review of its portfolio. The Company maintains an internal
rating system which provides a mechanism to regularly monitor the credit quality
of its loan portfolio.
The Company's residential loan portfolio accounted for 33% of the total
loan portfolio at December 31, 1998, down from 40% at the end of 1997. The
decrease in 1998 resulted primarily from refinancings due to falling market
interest rates. The Company's strategy generally is to originate fixed-rate
residential loans for sale to investors in the secondary market. The Company's
residential loans are generally secured by single-family homes (one-to-four
units) and have a maximum loan to value ratio of 80%, unless they are protected
by mortgage insurance. At December 31, 1998, 0.44% of the Company's residential
loans were nonperforming, as compared to .58% at December 31, 1997.
The Company's commercial real estate loan portfolio accounted for 23% of
the total loan portfolio at December 31, 1998, compared to 22% at December 31,
1997. This portfolio consists primarily of loans secured by income-producing
commercial real estate (including office and industrial buildings), service
industry real estate (including hotels and health care facilities), multi-family
(over four units) residential properties and food stores. It is the intention of
the Company to maintain commercial real estate loans as a percentage of the
overall loan portfolio at the same or lower levels in the future. At December
31, 1998, 1.34% of the Company's commercial real estate loans were
nonperforming, as compared to 1.56% at December 31, 1997.
The Company's commercial business loan portfolio accounted for 14% of the
total loan portfolio at December 31, 1998, compared to 12% at December 31, 1997.
Commercial business loans and leases are generally made to small to medium size
businesses located within the Company's geographic market area. These loans are
not concentrated in any particular industry, but reflect the broad-based
economies of Maine, New Hampshire and Massachusetts. Commercial loans consist
primarily of loans secured by various equipment, machinery and other corporate
assets, as well as loans to provide working capital to business in the form of
lines of credit. At December 31, 1998, 1.68% of the Company's commercial
business loans were nonperforming, as compared to 1.70% at December 31, 1997.
Consumer loans and leases accounted for 30% of the Company's total loan
portfolio at December 31, 1998, compared to 26% at December 31, 1997. The
Company has a diversified consumer loan portfolio which included $767.0 million
of automobile loans and leases, $538.4 million of home equity, $182.5 million of
mobile home, $138.3 million of education, and $47.0 million of boat and
recreational vehicle loans. The increase over the prior year was due primarily
to growth in automobile and home equity loans. The growth is consistent with the
Company's strategy to provide a full range of financial services to its
customers and to originate loans which are short-term and offer a higher yield
than longer-term mortgage loans. At December 31, 1998, 0.57% of the Company's
consumer loans were nonperforming, as compared to 0.50% at December 31, 1997.
23
<PAGE> 28
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Nonperforming Assets
Nonperforming assets consist of nonperforming loans (which do not include
accruing loans 90 days or more overdue) and other real estate owned and
repossessed assets. Total nonperforming assets as a percentage of total assets
decreased to .63% at December 31, 1998 compared to .72% at December 31, 1997. In
addition, total nonperforming assets as a percentage of total loans and other
nonperforming assets was 1.02% and 1.06% at December 31, 1998 and 1997,
respectively. See Table 11 for a summary of nonperforming assets for the last
five years.
The Company continues to focus on asset quality issues and to allocate
significant resources to the key asset quality control functions of credit
policy and administration and loan review. The collection, workout and asset
management functions focus on the reduction of nonperforming assets. Despite the
ongoing focus on asset quality and reductions of nonperforming asset levels,
there can be no assurance that adverse changes in the real estate markets and
economic conditions in the Company's primary market areas will not result in
higher nonperforming asset levels in the future and negatively impact the
Company's operations through higher provisions for loan losses, net loan
chargeoffs, decreased accrual of interest income and increased noninterest
expenses as a result of the allocation of resources to the collection and
workout of nonperforming assets.
It is the policy of the Company to generally place all commercial real
estate loans and commercial business loans and leases which are 90 days or more
past due, unless secured by sufficient cash or other assets immediately
convertible to cash, on nonaccrual status. Residential real estate loans and
consumer loans and leases are placed on nonaccrual status generally when in
management's judgment the collectability of interest and/or principal is
doubtful. At December 31, 1998, the Company had $21.6 million of accruing loans
which were 90 days or more delinquent, as compared to $8.4 million of such loans
at December 31, 1997. The increase at year end 1998 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. Customer
service and collection issues caused by converting to a new residential loan
servicing system in October 1998 were the primary cause of the increase. The
Company has been working with customers to resolve the service and collection
matters, and believes the increase is not indicative of a trend.
It is also the policy of the Company to place on nonaccrual and therefore
nonperforming status loans currently less than 90 days past due or performing in
accordance with their terms but which in management's judgment are likely to
present future principal and/or interest repayment problems and which thus
ultimately would be classified as nonperforming.
Net Charge-offs
Net charge-offs were $15.5 million during 1998, as compared to $9.7 million in
1997. Net charge-offs in 1998 represented .22% of average loans and leases
outstanding, as compared to .16% in 1997. Increased charge-offs in 1998 compared
to 1997 were primarily due to real estate loans which benefited from net
recoveries of $1.7 million in 1997 while 1998 had net charge-offs of $3.8
million. Net recoveries on real estate loans in 1997 related primarily to
commercial real estate loans.
- --------------------------------------------------------------------------------
Table 10 - Net Charge-offs as a Percent of Average Loans Outstanding
- --------------------------------------------------------------------------------
The following table sets forth net charge-offs (recoveries) to average loans
outstanding by type of loan during the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans 0.09% (0.40)%
Commercial business loans and leases 0.25 0.44
Consumer loans and leases 0.52 0.56
Total 0.22 0.16
- --------------------------------------------------------------------------------
</TABLE>
See Table 3 for the more information concerning charge-offs and recoveries
during each of the past five years.
24
<PAGE> 29
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 11 - Five Year Schedule of Nonperforming Assets
- --------------------------------------------------------------------------------
The following table sets forth information regarding nonperforming assets at the
dates indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Residential real estate loans:
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 8,901 $15,323 $10,811 $12,634 $13,435
Troubled debt restructurings -- -- -- -- --
------- ------- ------- ------- -------
Total 8,901 15,323 10,811 12,634 13,435
------- ------- ------- ------- -------
Commercial real estate loans:
Nonaccrual loans 19,110 19,582 17,174 19,746 26,978
Troubled debt restructurings 6 2,304 3,476 4,546 9,316
------- ------- ------- ------- -------
Total 19,116 21,886 20,650 24,292 36,294
------- ------- ------- ------- -------
Commercial business loans and leases:
Nonaccrual loans 14,186 13,255 9,650 8,866 9,082
Troubled debt restructurings 59 114 579 1,859 2,684
------- ------- ------- ------- -------
Total 14,245 13,369 10,229 10,725 11,766
------- ------- ------- ------- -------
Consumer loans:
Nonaccrual loans 10,742 8,473 5,398 4,040 3,903
Troubled debt restructurings -- -- -- -- --
------- ------- ------- ------- -------
Total 10,742 8,473 5,398 4,040 3,903
------- ------- ------- ------- -------
Total nonperforming loans:
Nonaccrual loans 52,939 56,633 43,033 45,286 53,398
Troubled debt restructurings 65 2,418 4,055 6,405 12,000
------- ------- ------- ------- -------
Total 53,004 59,051 47,088 51,691 65,398
------- ------- ------- ------- -------
Other nonperforming assets:
Other real estate owned,
net of related reserves 6,717 7,158 13,071 14,150 18,503
In-substance foreclosures,
net of related reserves -- -- -- -- 3,391
Repossessions, net of related reserves 3,624 3,218 2,107 1,553 2,003
------- ------- ------- ------- -------
Total 10,341 10,376 15,178 15,703 23,897
------- ------- ------- ------- -------
Total nonperforming assets $63,345 $69,427 $62,266 $67,394 $89,295
======= ======= ======= ======= =======
Accruing loans 90 days overdue $21,574 $ 8,355 $ 8,038 $ 4,412 $ 6,354
======= ======= ======= ======= =======
Total nonperforming loans
as a percentage of total loans 0.86% 0.91% 0.90% 1.26% 1.71%
Total nonperforming assets
as a percentage of total assets 0.63 0.72 0.80 1.09 1.57
Total nonperforming assets
as a percentage of total loans
and other nonperforming assets 1.02 1.06 1.18 1.64 2.32
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 30
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Deposits
Average interest-bearing deposits increased 9% during 1998 to $5.8 billion.
Average retail certificates of deposit increased $184 million during 1998 to
$2.9 billion. The average rate paid on certificates of deposit in 1998 of 5.49%
was comparable to the 1997 rate of 5.48%. See Table 13 for the scheduled
maturities of certificates of deposits of $100,000 or more. As part of its
overall funding strategy, the Company uses deposits obtained through investment
banking firms which obtain funds from their customers for deposit with the
Company ("brokered deposits"). These brokered deposits (which include short term
certificates of deposit and money market accounts) averaged $283 million and
$155 million in 1998 and 1997, respectively. The average rate paid on brokered
deposits was 5.83% in 1998 compared to 6.00% in 1997. Other interest-bearing
deposits (savings, NOW and money market accounts) averaged $2.6 billion and $2.5
billion in 1998 and 1997, respectively. The average rate paid on these deposits
declined from 2.54% in 1997 to 2.49% in 1998.
Demand deposit accounts averaged $1.1 billion and $827 million in 1998 and
1997, respectively, an increase of $236.7 million. Excluding the impact of
acquisitions, average demand deposit accounts increased $213.3 million in 1998
or 26%. The increase in demand deposits is consistent with the Company's
increased marketing of these lower-cost accounts.
- --------------------------------------------------------------------------------
Table 12 - Change in Deposit Balances by Category of Deposits
- --------------------------------------------------------------------------------
The following table presents the changes in the balances of deposits outstanding
at the dates indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998-1997 Change
(Dollars in Thousands) 1998 1997 1996 Amount Percent
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits $1,122,812 $ 969,567 $ 798,559 $ 153,245 15.8%
Money market access/NOW accounts 1,702,394 1,522,252 1,390,714 180,142 11.8
Regular savings 1,009,051 1,084,158 1,059,751 (75,107) (6.9)
Certificates of deposit 2,889,418 2,921,452 2,617,446 (32,034) (1.1)
Brokered deposits 257,570 249,990 69,960 7,580 3.0
---------- ---------- ---------- ---------
Total deposits $6,981,245 $6,747,419 $5,936,430 $ 233,826 3.5
========== ========== ========== =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Table 13 - Maturity of Certificates of Deposit of $100,000 or more at December
31, 1998
- --------------------------------------------------------------------------------
The following table sets forth the scheduled maturity of certificates of deposit
of $100,000 or more at December 31, 1998.
- --------------------------------------------------------------------------------
(Dollars in Thousands) Balance Percent
- --------------------------------------------------------------
3 months or less $203,786 35.46%
Over 3 to 6 months 155,302 27.03
Over 6 to 12 months 123,167 21.44
More than 12 months 92,344 16.07
-------- ------
$574,599 100.00%
======== ======
- --------------------------------------------------------------
Other Funding Sources
Average borrowed funds for 1998 were $2.0 billion, compared with $1.4 billion in
1997. The Company's primary source of funds, other than deposits, are securities
sold under repurchase agreements and advances from the Federal Home Loan Bank of
Boston ("FHLB"). FHLB borrowings increased because growth in earning assets,
particularly loans held for sale, exceeded growth in deposits. FHLB collateral
consists primarily of first mortgage loans secured by 1-4 family properties,
certain unencumbered securities and other qualified assets. At December 31,
1998, FHLB borrowings amounted to $1.7 billion. The Company's estimated
additional borrowing capacity with the FHLB at December 31, 1998 was $1.3
billion.
At December 31, 1998 and 1997, securities sold under repurchase
agreements amounted to $444.8 million and $453.7 million, respectively, and
were collateralized by mortgage backed securities and U.S. Government
obligations.
26
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 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 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 is 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
and (iv) the value of the company'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 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 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 Board's limits on interest-rate risk simulation specify that if interest
rates were to shift up or down 300 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 December 31, 1998. The following table reflects
the estimated exposure of the Company's net interest income for the next 12
months assuming an immediate shift in market interest rates of 200 basis points.
- ---------------------------------------------------------------------
200 Basis Point 200 Basis Point
Rate Increase Rate Decrease
- ---------------------------------------------------------------------
December 31, 1998 $(8,416) $(7,661)
======= ========
- ---------------------------------------------------------------------
Management believes that the exposure of the Company's net interest income
to gradual and/or modest changes in interest rates is relatively small. It
should be emphasized, however, that the results are dependent on material
assumptions such as those discussed above.
The Company uses interest rate floors tied to the Constant Maturity Treasury
("CMT") index and U.S. Treasury debt instruments to mitigate the prepayment risk
associated with mortgage servicing rights (see "Non-Interest Income" for further
details). At December 31, 1998 the Company had $100 million notional amount in
CMT floors and $40 million in Treasury bonds. See Note 14 to the Consolidated
Financial Statements. 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.
27
<PAGE> 32
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth the net exposure at the date indicated of the
carrying value of mortgage servicing rights assuming an immediate shift by the
indicated amount in market interest rates.
<TABLE>
- -------------------------------------------------------------------------------------------------
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
(Dollars in Thousands) Rate Decrease Rate Decrease Rate Increase Rate Increase
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Mortgage servicing rights $(15,709) $(9,818) $ 7,855 $ 11,782
CMT Floors 7,600 3,400 (2,500) (3,200)
Treasury bonds 14,336 6,360 (5,110) (9,250)
-------- ------- ------- --------
Net Exposure $ 6,227 $ (58) $ 245 $ (668)
======== ======= ======= ========
- -------------------------------------------------------------------------------------------------
</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 1998 were (i) the decrease in interest rates during October, 1998,
(ii) changes in the composition of mortgage assets (iii) increases in consumer
savings accounts and increase in net free funds, (iv) the increase in assets and
off-balance sheet interest-rate instruments to increase the hedge position for
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 December 31, 1998, such commitments consisted
primarily of $105.7 million of junior subordinated debentures (including accrued
interest) issued to a subsidiary, Peoples Heritage Capital Trust I, in
connection with that subsidiary's issuance of 9.06% Capital Securities due 2027.
See Notes 12 and 18 to the Consolidated Financial Statements. 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. See
Note 13 to the Consolidated Financial Statements. 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. For additional information regarding
off-balance sheet risks and commitments, see Note 14 to the Consolidated
Financial Statements.
CAPITAL
At December 31, 1998, shareholders' equity totaled $762 million or 7.54% of
total assets, as compared to $721 million or 7.46% at December 31, 1997. The 6%
increase was primarily due to the Company's net income during 1998, which more
than offset $38 million of stock repurchases (1,761,040 shares) and $38 million
in dividends to shareholders. In addition, the Company issued 454,864 shares in
connection with purchase acquisitions.
During 1997, the Company completed a stock repurchase of 2,245,600 shares
for $36 million. In January 1997, a trust subsidiary of the Company issued $100
million of Capital Securities, as discussed above, which qualify as Tier 1
Capital. See Note 12 to the Consolidated Financial Statements.
Capital guidelines issued by the Federal Reserve Board require the Company
to maintain certain ratios. The Company's Tier 1 Capital, as defined by the
Federal Reserve Board, was $735.5 million at December 31, 1998, compared to
$687.4 million at December 31, 1997. The Company's regulatory capital ratios
currently exceed all applicable requirements. See Note 13 to the Consolidated
Financial Statements.
The Company's banking subsidiaries also are subject to federal, and in
certain cases, state regulatory capital requirements. At December 31, 1998, each
of the Company's banking subsidiaries was deemed to be "well capitalized" under
the regulations of the applicable federal banking agency and in compliance with
applicable state regulatory capital requirements.
28
<PAGE> 33
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
IMPACT OF THE YEAR 2000
General
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 in 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."
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
periodic basis. The Board of Directors receives quarterly project 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 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 effort 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 - an inventory of system components, external relationships
and funding risks 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, and HVAC/building operations, were also 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. Systems and servicers were rated
as "critical," "important" or "non-critical." A "critical" system, if not
operational for 0-48 hours, would materially risk customer service delivery,
assets or prestige of a primary business line; an "important" system, if not
operational for 2 to 10 days, would present a similar risk. The Company
identified nearly 100 internally controlled or managed systems or system
categories as "critical." Approximately 30 external services or data interfaces
are listed as "critical." Assessments of non-information processing 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 were 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 ten percent of software is mainframe-based customized product or
in-house developed micro-computer database applications. The renovation phase
commenced in October 1997. Software upgrades, custom code remediation, current
functionality testing and re-installation into the production environment was
completed in January 1999 for all of the critical rated mainframe-based software
systems. Vendor upgrades have been received for all critical rated networked and
stand-alone micro-computer systems and approximately 90% have been installed
into the production environment as of December 1998. The remaining critical
upgrades will be installed into the production environment by April 1999 while
the important rated upgrades will be installed into production by June 1999. Any
required renovations or replacements for non-information processing systems are
expected to be completed by 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
29
<PAGE> 34
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
regulatory guidance dictating the independent testing of critical systems in
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.
Unit and internal integrated testing of critical software was substantially
completed in January 1999, with re-testing and testing with critical external
systems to be completed by April 1999. Micro-computer and mainframe hardware
clock testing was completed in December 1998. Validation of internal
telecommunications (voice and data) hardware are expected to be completed by
April 1999. The testing and validation of critical and important rated systems
are expected to be completed by 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.
Implementation Phase - once systems are validated as year-2000 ready,
repairs, upgrades or replacements are installed into production if not done so
already. Contingency plans and precautionary steps for various failure scenarios
are developed based on an on-going risk assessment process and the Company's
business recovery plan. A specific year-2000 implementation strategy (event
management plan) will be developed to manage the century transition period.
Contingency and event management plans are tested or validated by internal or
external independent reviewers.
This phase also includes the monitoring and evaluation of internal system
changes for year-2000 risk impacts, the monitoring of material customer, vendor
and counterparty risk, and the development and implementation of customer and
community awareness efforts. The Company expects to complete the contingency and
event management plan and validation by June 1999. In light of the foregoing, it
is expected that the year-2000 event management team will be ready by December
1999 to manage the century transition period into the year 2000.
Costs
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 incurred approximately
$1.4 million in incremental costs in 1998 for year-2000 work and currently
estimates that incremental costs of the Year 2000 project will total
approximately $1.7 million in 1999, for a total incremental cost of $3.1
million. The estimate of total year-2000 costs has increased $0.5 million from
the Company's third quarter 1998 estimates due mainly to higher estimates for
contract programming. 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
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 the readiness of the remainder, 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. Acquisitions
affected by the Company, including the recently completed acquisition of SIS,
also could alter the potential effects of the Year 2000 issue on the Company's
business and operations.
Pursuant to FFIEC guidelines, the Company is required to develop commercial
credit risk controls to monitor and assess Year 2000 risk. The Company set an
internal goal, in conformity with industry standards, of reviewing 70% of the
commercial loan balances for Year 2000 readiness. As of January 31, 1999, 74% of
the goal has been achieved.
30
<PAGE> 35
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
IMPACT ON 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, which is
effective for years beginning January 1, 2000, is not expected to have a
significant impact on the Company's financial condition or results of
operations.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of these terms. Actual results could differ materially from those set
forth in forward looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the company operates, competitive products and pricing,
fiscal and monetary polices of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
31
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Number of Shares and Per Share Data) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 360,271 $ 424,567
Federal funds sold and other short-term investments 250,084 13,091
Securities available for sale, at market value 2,334,575 1,802,758
Securities held to maturity, market value $28,495 in 1997 -- 28,184
Loans held for sale, market value $500,679 in 1998
and $400,363 in 1997 500,134 398,369
Loans and leases 6,186,392 6,524,221
Less: Allowance for loan and lease losses 87,905 89,983
----------- ----------
Net loans and leases 6,098,487 6,434,238
----------- ----------
Premises and equipment 108,027 114,729
Goodwill and other intangibles 124,363 127,416
Mortgage servicing rights 39,273 59,702
Other assets 287,245 265,188
----------- ----------
Total assets $10,102,459 $9,668,242
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 1,009,051 $1,084,158
Money market access and NOW accounts 1,702,394 1,522,252
Certificates of deposit (including certificates of $100
or more of $574,599 in 1998 and $482,065 in 1997) 2,889,418 2,921,452
Brokered deposits 257,570 249,990
Demand deposits 1,122,812 969,567
----------- ----------
6,981,245 6,747,419
Federal funds purchased and securities sold under
repurchase agreements 444,801 568,535
Borrowings from the Federal Home Loan Bank of Boston 1,701,517 1,394,746
Other borrowings 20,011 18,909
Other liabilities 92,961 117,850
----------- ----------
Total liabilities 9,240,535 8,847,459
----------- ----------
Company obligated, mandatorily redeemable securities of subsidiary trust
holding solely parent junior subordinated debentures 100,000 100,000
Shareholders' equity:
Preferred stock, par value $0.01;
5,000,000 shares authorized, none issued -- --
Common stock, par value $0.01; 200,000,000 shares authorized,
90,391,699 issued in 1998 and 89,324,737 in 1997 904 893
Paid-in capital 450,409 436,367
Retained earnings 364,353 303,864
Accumulated other comprehensive income:
Net unrealized gain (loss) on securities available for sale (571) 5,805
Treasury stock at cost (2,845,731 shares in 1998 and 1,739,347 shares in 1997) (53,171) (26,146)
----------- ----------
Total shareholders' equity 761,924 720,783
----------- ----------
$10,102,459 $9,668,242
=========== ==========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
32
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------
(In Thousands, Except Number of Shares and Per Share Data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans and leases $ 597,975 $ 521,509 $ 417,532
Interest and dividends on securities 114,981 120,242 91,945
----------- ----------- -----------
Total interest and dividend income 712,956 641,751 509,477
----------- ----------- -----------
Interest expense:
Interest on deposits 241,007 219,812 184,077
Interest on borrowed funds 106,520 77,463 46,105
----------- ----------- -----------
Total interest expense 347,527 297,275 230,182
----------- ----------- -----------
Net interest income 365,429 344,476 279,295
Provision for loan and lease losses 13,423 4,548 5,185
----------- ----------- -----------
Net interest income after provision
for loan and lease losses 352,006 339,928 274,110
----------- ----------- -----------
Noninterest income:
Customer services 33,524 28,304 20,305
Mortgage banking services 23,066 25,767 17,656
Trust and investment advisory services 15,737 11,824 9,584
Insurance commissions 13,006 1,899 --
Net securities gains 5,817 2,697 3,287
Other noninterest income 13,645 11,989 9,878
----------- ----------- -----------
104,795 82,480 60,710
----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 138,778 131,433 107,378
Data processing 20,104 14,962 12,528
Occupancy 21,969 20,143 17,452
Equipment 16,721 18,164 13,653
Amortization of goodwill and deposit premiums 11,611 8,743 5,527
Distributions on securities of subsidiary trust 9,060 8,351 --
Advertising and marketing 8,261 8,946 6,693
Special charges 35,374 18,591 9,627
Other noninterest expenses 48,041 51,223 46,485
----------- ----------- -----------
309,919 280,556 219,343
----------- ----------- -----------
Income before income tax expense 146,882 141,852 115,477
Applicable income tax expense 46,292 49,517 39,444
----------- ----------- -----------
Net income $ 100,590 $ 92,335 $ 76,033
=========== =========== ===========
Weighted average shares outstanding:
Basic 88,092,605 87,449,885 81,263,004
Diluted 89,452,863 89,180,826 82,729,714
Earnings per share:
Basic $ 1.14 $ 1.06 $ 0.94
Diluted 1.12 1.04 0.92
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
33
<PAGE> 38
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT Compen- Accumulated Other
NUMBER OF SHARES Par Paid-in Retained sation Treasury Comprehensive
AND PER SHARE DATA) Value Capital Earnings ESOP Stock Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 809 $ 368,179 $ 216,926 $(118) $ (7,805) $ 8,509 $ 586,500
Net Income -- -- 76,033 -- -- -- 76,033
Unrealized gains on securities, net of
reclassification adjustment (1) -- -- -- -- -- (8,946) (8,946)
---------
Comprehensive Income 67,087
---------
Issuance of 658,996 shares under benefit plans 6 3,286 -- -- -- -- 3,292
Treasury stock issued (337,354 shares at
an average price of $6.91) -- -- (134) -- 2,466 -- 2,332
Treasury stock purchased and retired
(56,000 at an average price of $18.35) -- (609) -- -- (419) -- (1,028)
Purchase of 5,000,000 shares of treasury
stock pursuant to acquisition -- -- -- -- (60,342) -- (60,342)
Issuance of 10,960,670 shares
pursuant to acquisition 60 47,492 -- -- 60,342 344 108,238
Decrease in unearned compensation - ESOP -- -- -- 118 -- -- 118
Cash dividends paid -- -- (29,350) -- -- -- (29,350)
Common stock dividends declared 10 11,412 (11,422) -- -- -- --
-------- --------- --------- ----- -------- ------- ---------
Balances at December 31, 1996 885 429,760 252,053 -- (5,758) (93) 676,847
Net Income 92,335 92,335
Unrealized gains on securities,
net of reclassification adjustment (1) -- -- -- -- -- 5,898 5,898
---------
Comprehensive Income 98,233
---------
Issuance of 651,000 shares under benefit plans 7 4,846 -- -- -- -- 4,853
Treasury stock issued (1,255,198 shares at
an average price of $13.59) -- -- 1,530 -- 15,529 -- 17,059
Treasury stock purchased (2,245,600
shares at an average price of $15.99) -- -- -- -- (35,917) -- (35,917)
Cash dividends paid -- -- (40,285) -- -- -- (40,285)
Common stock dividends declared 1 1,761 (1,769) -- -- -- (7)
-------- --------- --------- ----- -------- ------- ---------
Balances at December 31, 1997 893 436,367 303,864 -- (26,146) 5,805 720,783
Net Income -- -- 100,590 -- -- -- 100,590
Unrealized gains on securities, net of
reclassification adjustment (1) -- -- -- -- -- (6,376) (6,376)
---------
Comprehensive Income 94,214
---------
Cancellation of CFX treasury shares at
acquisition (110,586 shares) (1) (1,879) -- -- 1,880 -- --
Issuance of 727,038 shares under benefit plans 8 7,366 -- -- -- -- 7,374
Treasury stock issued (544,071 shares at
an average price of $12.60) -- -- (2,244) -- 9,098 -- 6,854
Treasury stock purchased (1,761,040
shares at an average price of $21.58) -- -- -- -- (38,003) -- (38,003)
Common stock issued for acquisitions 5 8,601 -- -- -- -- 8,606
Payment of fractional shares (1) (46) -- -- -- -- (47)
Cash dividends -- -- (37,857) -- -- -- (37,857)
-------- --------- --------- ----- -------- ------- ---------
Balances at December 31, 1998 $ 904 $ 450,409 $ 364,353 $ -- $(53,171) $ (571) $ 761,924
======== ========= ========= ===== ======== ======= =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Disclosure of reclassification amount: 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period $(2,595) $7,651 $ (6,809)
Less: reclassification adjustment for gains included in net income, net of tax 3,781 1,753 2,137
------- ------ -----------
Net unrealized gains (losses) on securities $(6,376) $5,898 $ (8,946)
======= ====== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
34
<PAGE> 39
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 100,590 $ 92,335 $ 76,033
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan and lease losses 13,423 4,548 5,185
Provision for depreciation 14,662 14,866 12,018
Amortization of goodwill and other intangibles 11,611 8,657 5,388
Net (increase) decrease in net deferred tax assets/liabilities 21,916 8,837 5,742
Net (gains) losses realized from sales of securities and consumer loans (5,817) (2,610) (2,723)
Net (gains) losses realized from sales of loans held for sale (17,198) (11,257) (7,364)
Net decrease (increase) in mortgage servicing rights 20,429 (18,744) (9,305)
Proceeds from sales of loans held for sale (5,041,304) 3,156,388 1,204,155
Residential loans originated and purchased for sale 4,956,737 (3,349,645) (1,236,280)
Net decrease (increase) in interest and dividends receivable and other assets (36,952) (58,782) (7,789)
Net increase (decrease) in other liabilities (23,251) (17,346) 29,473
----------- ----------- -----------
Net cash provided (used) by operating activities $ 14,846 $ (172,753) $ 74,533
----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal repayments of investment securities -- $ 53,328 $ 89,755
Purchase of investment securities -- (37,905) (87,253)
Proceeds from sales of securities available for sale 624,398 298,779 120,283
Proceeds from maturities and principal repayments of securities available for sale 813,138 735,940 694,466
Purchases of securities available for sale (1,945,453) (1,250,168) (698,146)
Net (increase) decrease in loans and leases 322,328 (1,033,785) (710,543)
Proceeds from sales of loans -- 36,358 16,356
Net additions to premises and equipment (12,846) (13,000) (19,903)
Payment for acquisitions, net of cash acquired -- (28,261) 54,605
----------- ----------- -----------
Net cash provided (used) by investing activities $ (198,435) $(1,238,714) $ (540,380)
----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 233,826 $ 456,813 $ 326,882
Net increase (decrease) in securities sold under repurchase agreements (8,888) 144,100 87,396
Proceeds from Federal Home Loan Bank of Boston borrowings 3,083,947 1,440,445 717,498
Payments on Federal Home Loan Bank of Boston borrowings (2,777,176) (825,000) (507,147)
Proceeds from issuance of securities of subsidiary trust -- 98,361 --
Net increase (decrease) in other borrowings 1,102 (8,228) 1,737
Issuance of stock 14,181 12,609 5,355
Purchase and retirement of treasury stock (38,003) (35,924) (61,370)
Cash dividends paid to shareholders (37,857) (40,285) (29,350)
----------- ----------- -----------
Net cash provided by financing activities $ 471,132 $ 1,242,891 $ 541,001
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents $ 287,543 $ (168,576) $ 75,154
Cash and cash equivalents at beginning of period 322,812 491,388 416,234
----------- ----------- -----------
Cash and cash equivalents at end of period $ 610,355 $ 322,812 $ 491,388
=========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In conjunction with the purchase acquisitions detailed in Note 2 to the
Consolidated Financial Statements, assets were acquired and liabilities were
assumed as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Fair value of assets acquired $10,615 $21,425 $959,089
Less liabilities assumed 2,009 12,122 850,851
------- ------- --------
Net effect on capital $ 8,606 $ 9,303 $108,238
======= ======= ========
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, 1997, and 1996, interest of $355,450,
$290,358, and $225,491 and income taxes of $29,850, $39,305, and $28,835 were
paid, respectively. During 1998, $28,184 of investment securities were
transferred to securities available for sale. During 1997, $73,859 of portfolio
loans were transferred to loans held for sale.
- --------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements
35
<PAGE> 40
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts Expressed in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Peoples Heritage Financial Group, Inc.
(the "Company") and its subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry. The Company's
principal business activities are retail, commercial and mortgage banking as
well as trust, investment advisory and insurance brokerage services, and are
conducted through the Company's direct and indirect subsidiaries located in
Maine, New Hampshire and Massachusetts, consisting of Peoples Heritage Bank,
Bank of New Hampshire and Family Bank, respectively (collectively, the "Banks"),
as well as wholly owned subsidiaries of the Banks. The Company and its
subsidiaries are subject to competition from other financial institutions and
are also subject to regulation of, and periodic examination by, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Maine
Bureau of Banking, the New Hampshire Bank Commissioner and the Federal Reserve
Board. The following is a description of the more significant accounting
policies.
Financial Statement Presentation.
The Consolidated Financial Statements include the accounts of Peoples Heritage
Financial Group, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain amounts
in prior periods have been reclassified to conform to the current presentation.
Assets held in a fiduciary capacity by subsidiary trust departments are not
assets of the Company and, accordingly, are not included in the Consolidated
Balance Sheets.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan and lease losses,
deferred tax assets and the valuation of mortgage servicing rights.
Cash and Cash Equivalents.
The Company is required to comply with various laws and regulations of the
Federal Reserve Bank which require that the Company maintain certain amounts of
cash on deposit and is restricted from investing those amounts.
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold and other short-term investments minus
federal funds purchased. Generally, federal funds are sold or purchased for
one-day periods.
Securities.
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost.
Investments not classified as "held to maturity" are classified as
"available for sale." Securities available for sale consist of debt and equity
securities that are available for sale in response to changes in market interest
rates, liquidity needs, changes in funding sources and other similar factors.
These assets are specifically identified and are carried at market value.
Changes in market value, net of applicable income taxes, are reported as a
separate component of shareholders' equity. When a decline in market value of a
security is considered other than temporary, the loss is charged to net
securities gains (losses) in the consolidated statements of income as a
writedown.
Premiums and discounts are amortized and accreted over the term of the
securities on a level yield method adjusted for prepayments. Gains and losses on
the sale of securities are recognized at the time of the sale using the specific
identification method.
Loans.
Loans are carried at the principal amounts outstanding adjusted by partial
charge-offs and net deferred loan costs or fees. Except for residential real
estate and consumer loans, loans are generally placed on nonaccrual status when
they are past due 90 days as to either principal or interest, or when in
management's judgment the collectibility of interest or principal of the loan
has been significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against interest
on loans. A loan can be returned to accrual status when collectibility of
principal is reasonably assured and the loan has performed for a period of time,
generally six months. Loans are classified as impaired when it is probable that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status and collateral value.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount is amortized as an adjustment of the related
loan's yield using the interest method over the contractual life of the related
loans.
Consumer lease financing loans are carried at the amount of minimum lease
payments plus residual values, less unearned income which is amortized into
interest income using the interest method.
Allowance for Loan and Lease Losses.
The allowance for loan and lease losses is maintained at a level determined to
be adequate by management to absorb future charge-offs of loans and leases
deemed uncollectible. This allowance is increased by provisions charged to
operating expense and by recoveries on loans previously charged off, and reduced
by charge-offs on loans and leases.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and management's estimation of
future potential losses. The Company evaluates the commercial loan portfolio by
using a loan by loan analysis of a significant portion of "classified" loans and
calculating a reserve requirement on these loans. Based on these results, loss
factors are applied to the remaining portfolio to calculate a range of possible
loan losses. Loss factors are calculated based on the assigned risk rating, and
are regularly updated based on the Company's actual loss experience. Residential
real estate and consumer loans are evaluated as a group by applying historical
charge-off and recovery experience to the current outstanding balance in each
loan category, with consideration given to loan growth over the preceding twelve
months. Although management uses available information to establish the
appropriate level of the allowance for loan and lease losses, future additions
to the allowance may be necessary based on estimates that are susceptible to
36
<PAGE> 41
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
change as a result of changes in economic conditions and other factors. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan and lease losses.
Such agencies may require the Company to recognize adjustments to the allowance
based on their judgments about information available to them at the time of
their examination.
Bank Owned Life Insurance.
Bank owned life insurance ("BOLI") represents life insurance on the lives of
certain employees. The Company is the beneficiary of the insurance policies.
Increases in the cash value of the policies, as well as insurance proceeds
received, are recorded in other income, and are not subject to income taxes. The
cash value is included in other assets.
Premises and Equipment.
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of related assets.
Long-lived assets are evaluated periodically for other-than-temporary
impairment. An assessment of recoverability is performed prior to any writedown
of the asset. If circumstances suggest that their value may be permanently
impaired, an expense would then be charged in the current period.
Goodwill and Other Intangibles.
Goodwill is amortized on a straight-line basis over various periods not
exceeding twenty years; core deposit premiums are amortized on a level-yield
basis over the estimated life of the associated deposits. Goodwill and other
intangible assets are reviewed for possible impairment when it is determined
that events or changed circumstances may affect the underlying basis of the
asset.
Mortgage Banking and Loans Held for Sale.
Loans originated for sale are classified as held for sale. These loans are
specifically identified and carried at the lower of aggregate cost or estimated
market value. Forward commitments to sell residential real estate mortgages are
contracts which the Company enters into for the purpose of reducing the market
risk associated with originating loans for sale. Market value is estimated based
on outstanding investor commitments or, in the absence of such commitments,
current investor yield requirements.
Gains and losses on sales of mortgage loans are determined using the
specific identification method and recorded as mortgage sales income, a
component of mortgage banking services income. The gains and losses resulting
from the sales of loans with servicing retained are adjusted to recognize the
present value of future servicing fee income over the estimated lives of the
related loans. Purchased mortgage servicing rights are recorded at cost upon
acquisition.
Mortgage servicing rights are amortized on an accelerated method over the
estimated weighted average life of the loans. Amortization is recorded as a
charge against mortgage service fee income, a component of mortgage banking
services income. The Company's assumptions with respect to prepayments, which
affect the estimated average life of the loans, are adjusted periodically to
reflect current circumstances. In evaluating the realizability of the carrying
values of mortgage servicing rights, the Company assesses the estimated life of
its servicing portfolio based on data which is disaggregated to reflect note
rate, type and term on the underlying loans.
Mortgage servicing fees received from investors for servicing their loan
portfolios are recorded as mortgage servicing fee income when received. Loan
servicing costs are charged to noninterest expenses when incurred.
Derivative Financial Instruments.
The Company may purchase interest rate floors tied to the CMT index to mitigate
the prepayment risk associated with mortgage servicing rights. Changes in fair
value are reported as a component of mortgage banking income. The Company also
utilizes Treasury options to modify its forward mortgage commitments. Changes in
fair value of the options are included in the calculation of the carrying value
of the loans held for sale.
Investments in Limited Partnerships.
The Company has several investments in tax advantaged limited partnerships.
These investments are included in other assets and are amortized over the same
period the tax benefits are expected to be received.
Pension and 401(k) Plans.
The Company and its subsidiaries have defined benefit and defined contribution
pension plans which cover most full-time employees. The benefits are based on
years of service and the employee's career average earnings. The Company's
funding policy is to contribute annually the maximum amount that can be deducted
for federal income tax purposes. Contributions are intended to provide not only
for benefits attributed to service to date, but also for those expected to be
earned in the future.
The Company maintains Section 401(k) savings plans for substantially all
employees of the Company and its subsidiaries. Under the plans, the Company
makes a matching contribution of a portion of the amount contributed by each
participating employee, up to a percentage of the employee's annual salary. The
plans allow for supplementary profit sharing contributions by the Company, at
its discretion, for the benefit of participating employees.
Stock Compensation Plans.
Statement of Financial Accounting Standards (SFAS No. 123), "Accounting for
Stock-Based Compensation" encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. The Company has elected to continue with the
accounting methodology in Opinion No. 25 and, as a result, must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. The pro forma disclosures include the
effects of all awards granted on or after January 1, 1995. See Note 15 - Stock
Based Compensation Plans.
37
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Income Taxes.
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Income taxes are allocated to each
entity in the consolidated group based on its share of taxable income.
Tax credits generated from limited partnerships are reflected in earnings
when realized for federal income tax purposes.
Earnings Per Share.
Earnings per share have been computed in accordance with SFAS No. 128, Earnings
Per Share. Basic earnings per share have been calculated by dividing net income
by weighted average shares outstanding before any dilution, and diluted earnings
per share have been calculated by dividing net income by weighted average shares
outstanding after giving effect to the potential dilution that could occur if
the common stock equivalents were converted into common stock using the treasury
stock method.
Segment Reporting.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information which establishes standards for reporting
information about operating segments. An operating segment is defined as a
component of a business for which separate financial information is available
that is evaluated regularly by the chief operating decision-maker in deciding
how to allocate resources and evaluate performance. This statement is effective
for 1998 annual financial statements. The Company's primary business is banking,
which provides over 90% of its revenues and profits. Banking services are
provided within the framework of three community banks which have similar
economic characteristics and provide similar products and services through
similar distribution channels in similar regulatory environments. Accordingly
disaggregated segment information is not presented.
38
<PAGE> 43
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
2. ACQUISITIONS
On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc.
("SIS"). Approximately 16,255,885 shares of common stock of the Company (the
"Common Stock") were issued in connection with this acquisition, which was
accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion
and shareholders' equity of $139 million at December 31, 1998. The accompanying
financial statements do not include SIS.
During 1998, the Company completed the acquisition of three insurance
agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions
were accounted for as purchases and, accordingly, the Company's financial
statements reflect them from the date of acquisition.. The Company recorded $9.3
million of goodwill in connection with these purchases. The acquired agencies
are being integrated into the Company's existing insurance agency operations.
On April 10, 1998, the Company completed the acquisition of CFX Corporation
("CFX"). Approximately 32,796,280 shares of Common Stock were issued in
connection with this transaction. At December 31, 1997, CFX had total assets of
$2.9 billion and total shareholders' equity of $245.7 million. The acquisition
of CFX was accounted for as a pooling-of-interests and, accordingly, financial
information for all periods presented prior to the date of acquisition has been
restated to present the combined financial condition and results of operations
as if the acquisition had been in effect for all such periods.
In the fourth quarter of 1997, the Company purchased Atlantic Bancorp
("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in
Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million
and total shareholders' equity of $37.7 million. The Company recorded $34.7
million of goodwill with this transaction. During the same period, the Company
also acquired all of the outstanding stock of MPN Holdings "MPN", the holding
company of Morse, Payson & Noyes Insurance. The transaction was effected through
the exchange of MPN stock for 445,678 shares of Common Stock and resulted in
$7.8 million of goodwill. Both acquisitions were accounted for as purchases and,
accordingly, the Company's financial statements reflect them from the date of
acquisition.
On December 6, 1996, the Company completed the acquisition of Family
Bancorp, the holding company for Family. Approximately 10,960,670 shares of
Common Stock were issued in connection with this transaction, including
5,000,000 shares of treasury stock. Family had total assets of $925.8 million
and total shareholders' equity of $73.3 million. This transaction was accounted
for as a purchase and, accordingly, the financial statements reflect it from the
date of acquisition. The Company recorded $34.2 million of goodwill in
connection with this purchase.
On April 2, 1996, the Company completed the acquisition of Bank of New
Hampshire Corporation ("BNHC"), the holding company for BNH. Approximately
16,256,660 shares of Common Stock were issued in connection with this
transaction. At December 31, 1995, BNHC had total consolidated assets of $977.8
million and total consolidated shareholders' equity of $84.5 million. The
acquisition of BNHC was accounted for as a pooling-of-interests and,
accordingly, financial information for all periods presented prior to the date
of acquisition has been restated to present the combined financial condition and
results of operations as if the acquisition had been in effect for all such
periods.
The Company incurred various merger related and restructuring charges in
connection with the foregoing acquisitions (collectively, "special charges"). On
a pre-tax basis special charges amounted to $35.4 million, $18.6 million and
$9.6 million in 1998, 1997 and 1996, respectively. For additional information,
see Note 9 - Special Charges.
39
<PAGE> 44
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
A summary of the amortized cost and market values of securities available for
sale and held to maturity follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Market
AVAILABLE FOR SALE Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U. S. Government obligations and obligations
of U.S. Government agencies and corporations $ 320,408 $ 664 $ (803) $ 320,269
Tax-exempt bonds and notes 27,492 286 -- 27,778
Other bonds and notes 3,201 42 -- 3,243
Mortgage-backed securities 1,718,398 2,964 (4,453) 1,716,909
Collateralized mortgage obligations
155,601 693 (443) 155,851
---------- -------- --------- ----------
Total debt securities 2,225,100 4,649 (5,699) 2,224,050
---------- -------- --------- ----------
Federal Home Loan Bank of Boston stock 110,429 -- -- 110,429
Other equity securities 30 66 -- 96
---------- -------- --------- ----------
Total equity securities 110,459 66 -- 110,525
---------- -------- --------- ----------
Total securities available for sale $2,335,559 $ 4,715 $ (5,699) $2,334,575
========== ======== ========= ==========
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
U. S. Government obligations and obligations
of U.S. Government agencies and corporations $ 507,134 $ 1,859 $ (702) $ 508,291
Tax-exempt bonds and notes 19,899 46 -- 19,945
Other bonds and notes 82,780 15 (33) 82,762
Mortgage-backed securities 814,037 6,271 (1,499) 818,809
Collateralized mortgage obligations 257,591 1,551 (168) 258,974
---------- -------- --------- ----------
Total debt securities 1,681,441 9,742 (2,402) 1,688,781
---------- -------- --------- ----------
Federal Home Loan Bank of Boston stock 88,309 0 -- 88,309
Other equity securities 23,944 1,728 (4) 25,668
---------- -------- --------- ----------
Total equity securities 112,253 1,728 (4) 113,977
---------- -------- --------- ----------
Total securities available for sale $1,793,694 $ 11,470 $ (2,406) $1,802,758
========== ======== ========= ==========
- --------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY:
DECEMBER 31, 1998 -- -- -- --
========== ======== ========= ==========
DECEMBER 31, 1997
U.S. Government obligations and obligations
of U.S. Government agencies and corporations $ 7,721 $ 76 $ (6) $ 7,791
Tax-exempt bonds and notes 13,470 177 (1) 13,646
Other bonds and notes 400 -- -- 400
Mortgage-backed securities 6,234 75 (9) 6,300
Collateralized mortgage obligations 359 -- (1) 358
---------- -------- --------- ----------
Total securities held to maturity $ 28,184 $ 328 $ (17) $ 28,495
========== ======== ========= ==========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market values of debt securities available for sale at
December 31, 1998 by contractual maturities are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. At
December 31, 1998, the Company had $76.1 million of securities available for
sale with call provisions.
- --------------------------------------------------------------------------------
Available for Sale Amortized Cost Market Value
- --------------------------------------------------------------------------------
December 31, 1998:
Due in one year or less $ 174,217 $ 174,640
Due after one year
through five years 125,216 125,561
Due after five years
through ten years 124,992 125,422
Due after ten years 1,800,675 1,798,427
---------- ----------
Total debt securities $2,225,100 $2,224,050
========== ==========
- --------------------------------------------------------------------------------
A summary of realized gains and losses on securities available for sale for
1998, 1997 and 1996 follows:
- --------------------------------------------------------------------------------
Gross Realized Gross Realized
Gains Losses
- ---------------------------------------------------------
1998 $5,837 $ 20
1997 5,244 2,634
1996 2,281 109
- ---------------------------------------------------------
40
<PAGE> 45
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
4. LOANS AND LEASES
The Company's lending activities are conducted principally in Maine, New
Hampshire and Massachusetts. The principal categories of loans in the Company's
portfolio are residential real estate loans, which are secured by single-family
(one to four units) residences; commercial real estate loans, which are secured
by multi-family (five or more units) residential and commercial real estate;
commercial business loans and leases; and consumer loans and leases.
A summary of loans and leases follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Residential real estate mortgages $2,020,014 $2,635,663
Commercial real estate mortgages:
Commercial real estate 1,281,774 1,286,372
Construction and development 139,808 118,985
---------- ----------
1,421,582 1,405,357
---------- ----------
Commercial business loans and leases 847,449 786,578
Consumer loans and leases 1,897,347 1,696,623
---------- ----------
Total loans and leases $6,186,392 $6,524,221
========== ==========
Loans and leases include unearned income and net deferred loan costs of $9.5
million at December 31, 1998 and net deferred loan fees of $2.2 million at
December 31, 1997.
- --------------------------------------------------------------------------------
NONPERFORMING LOANS
The following table sets forth information regarding nonperforming loans and
accruing loans 90 days or more overdue at the dates indicated:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Residential real estate mortgages:
Nonaccrual loans $ 8,901 $15,323
Commercial real estate loans:
Nonaccrual loans 19,110 19,582
Troubled debt restructurings 6 2,304
------- -------
Total 19,116 21,886
Commercial business loans and leases:
Nonaccrual loans 14,186 13,255
Troubled debt restructurings 59 114
------- -------
Total 14,245 13,369
Consumer loans:
Nonaccrual loans 10,742 8,473
Total nonperforming loans:
Nonaccrual loans 52,939 56,633
Troubled debt restructurings 65 2,418
------- -------
Total $53,004 $59,051
======= =======
Accruing loans which are 90 days overdue $21,574 $ 8,355
======= =======
- --------------------------------------------------------------------------------
41
<PAGE> 46
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The ability and willingness of the borrowers to repay loans is generally
dependent on current economic conditions and real estate values within the
borrowers' geographic areas.
Interest income that would have been recognized for 1998 if nonperforming
loans at December 31, 1998 had been performing in accordance with their original
terms approximated $4.9 million.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and loans on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or on which payments of principal or interest have become
contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is probable that the Company
will collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is not a commercial, commercial real estate or an
individually significant mortgage or consumer loan. The amount of impairment for
these types of impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into the consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.
At December 31, 1998 and 1997, total impaired loans were $36.4 million and
$39.0 million, of which $20.6 million and $24.8 million had related allowances
of $7.1 million and $7.0 million, respectively. During the years ended December
31, 1998 and 1997, the income recognized related to impaired loans was $3.2
million and $2.3 million respectively, and the average balance of outstanding
impaired loans was $35.2 million and $36.6 million, respectively. The Company
recognizes interest on impaired loans on a cash basis when the ability to
collect the principal balance is not in doubt; otherwise, cash received is
applied to the principal balance of loan.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 89,983 $ 87,820 $ 80,818
Allowance on acquired loans -- 7,361 11,365
Provisions charged to operations 13,423 4,548 5,185
Loans and leases charged off (24,552) (20,645) (22,930)
Recoveries 9,051 10,899 13,382
-------- -------- --------
Balance at end of period $ 87,905 $ 89,983 $ 87,820
======== ======== ========
- --------------------------------------------------------------------------------
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- --------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------
Land $ 15,814 $ 18,960
Buildings and leasehold improvements 100,816 110,997
Furniture, fixtures and equipment 110,976 106,115
-------- --------
227,606 236,072
Less accumulated depreciation
and amortization 119,579 121,343
-------- --------
$108,027 $114,729
======== ========
- ----------------------------------------------------------------------
42
<PAGE> 47
7. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31, 1998,
1997 and 1996 follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 59,702 $ 40,958 $ 27,195
Mortgage servicing
rights capitalized 80,695 55,845 19,620
Mortgage servicing
rights acquired
through acquisitions -- -- 3,700
Amortization charged
against mortgage
servicing fee income (14,159) (7,924) (5,938)
Impairment reserve charged
against mortgage servicing
fee income (11,055) -- --
Mortgage servicing
rights sold (75,910) (29,177) (3,619)
---------- ---------- ----------
Balance at December 31 $ 39,273 $ 59,702 $ 40,958
========== ========== ==========
Residential real estate
loans serviced
for investors $3,598,896 $5,381,003 $4,343,659
========== ========== ==========
- -----------------------------------------------------------------------------------
</TABLE>
The Company generally continues to service residential real estate mortgages
after the loans have been sold into the secondary market. The Company pays the
investor that purchased the loan a pass-through rate which is less than the
interest rate the Company receives from the borrower. The difference is retained
by the Company as a fee for servicing the residential real estate mortgages. The
Company capitalizes mortgage servicing rights at their allocated cost, based on
relative fair values upon sale of the related loans. The Company periodically
sells residential mortgage servicing rights to other servicers.
<PAGE> 48
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
8. INCOME TAXES
The current and deferred components of income tax expense follow:
- -----------------------------------------------------
1998 1997 1996
- -----------------------------------------------------
Current
Federal $22,643 $35,078 $30,932
State 1,733 2,439 1,942
Deferred
Federal 20,792 10,993 5,607
State 1,124 1,007 963
------- ------- -------
$46,292 $49,517 $39,444
======= ======= =======
- -----------------------------------------------------
The following table reconciles the expected federal income tax expense (computed
by applying the federal statutory tax rate to income before taxes) to recorded
income tax expense:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed federal tax expense $ 51,408 $ 49,648 $40,417
State income tax, net of federal benefits 1,857 2,240 1,888
Benefit of tax-exempt income (1,509) (1,245) (1,268)
Nondeductible merger expenses 2,345 1,409 1,495
Amortization of goodwill and other intangibles 2,785 2,131 1,115
Low income/rehabilitation credits (2,994) (2,890) (1,670)
Restructuring of legal entities within affiliated group (5,069) -- --
Increase in cash surrender value of life insurance (1,297) (765) (349)
Other, net (1,234) (1,011) (2,184)
-------- -------- -------
Recorded income tax expense $ 46,292 $ 49,517 $39,444
======== ======== =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities which are included in Other Assets and Other
Liabilities, respectively, at December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan and lease losses $ 32,129 $33,062
Reserve for mobile home dealers 1,404 1,812
Accrued pension expense 2,272 1,434
Difference of tax and book basis of OREO 229 623
Interest accrued and payments received on
non-performing loans for tax purposes 1,408 1,444
Unrealized depreciation on securities 413 --
Investment in leasehold residual -- 3,266
Alternative minimum tax credit carry forward -- 1,079
Compensation and employee benefits 3,785 2,136
Book reserves not yet realized for tax purposes 1,629 --
Difference in tax and book basis of premises and equipment 581 --
Other 665 1,939
-------- -------
Total gross deferred tax assets 44,515 46,795
-------- -------
Deferred tax liabilities:
Difference of tax and book basis of leases 16,753 13,311
Difference of tax and book basis of premises & equipment -- 1,907
Difference of tax and book basis of partnership investments 4,381 4,296
Difference of tax and book basis of loans 7,453 --
Mortgage servicing 13,648 3,520
Tax bad debt reserve 7,418 7,761
Unrealized appreciation of securities -- 3,054
Other 572 207
-------- -------
Total gross deferred tax liabilities 50,225 34,056
-------- -------
Net deferred tax asset (liability) $ (5,710) $12,739
======== =======
- ---------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 49
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
9. SPECIAL CHARGES
Special charges include merger expenses of $35.4 million and $11.4 million in
1998 and 1997, respectively, and $7.2 million of charges related to exiting the
lease securitization business (conducted through CFX Funding) in 1997.
In 1998, the Company recorded $24.6 million after-tax merger charges related
to the acquisition of CFX on April 10, 1998. Merger expenses represented
reorganization and restructuring costs net of an $8.1 million after-tax gain
from the sale of five CFX branches in connection with the transaction. The
after-tax reorganization and restructuring costs consisted of costs relating to
termination of employment contracts and severance obligations ($7.8 million),
professional fees ($7.4 million), writedown of assets ($10.4 million), data
processing/integration costs ($4.8 million) and charges related to CFX Funding
($2.3 million). At December 31, 1998 accrued but unpaid expenses related to the
CFX merger amounted to $1.2 million, pre-tax.
10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
The details of federal funds purchased and securities sold under repurchase
agreements were as follows:
- --------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------
1998 1997
- ------------------------------------------------------
Federal funds purchased $ -- $114,846
Securities sold under
repurchase agreements:
Short term 442,100 443,784
Long term 2,701 9,905
-------- --------
$444,801 $568,535
======== ========
- ------------------------------------------------------
A summary of securities sold under short term repurchase agreements follows:
- --------------------------------------------------------------------------------
At or for the Year Ended December 31,
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Balance outstanding at
end of period $444,801 $453,689 $301,432
Market value of collateral
at end of period 482,971 497,603 381,398
Amortized cost of collateral
at end of period 482,944 526,031 380,174
Average balance outstanding 433,621 387,607 233,591
Maximum outstanding
at any month end during
the period 444,801 477,536 330,731
Average interest rate
during the period 4.46% 4.45% 4.62%
Average interest rate at
end of period 4.15% 4.91% 4.30%
- ----------------------------------------------------------------------------
Securities sold under repurchase agreements generally have maturities of 270
days or less and are collateralized by mortgage-backed securities and U.S.
Government obligations. The long term agreement is a wholesale agreement
maturing June 26, 2000 and bears interest at 6.39%.
11. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
- --------------------------------------------------------------------------------
A summary of the borrowings from the Federal Home Loan Bank of Boston is as
follows:
- --------------------------------------------------------------------------------
December 31, 1998
- ----------------------------------------------------------------
Maturity Dates Principal Amounts Interest Rates
- ----------------------------------------------------------------
1999 $163,352 5.85% - 8.13%
2000 386,444 4.70% - 6.49%
2001 925,000 4.98% - 5.80%
2002 120 6.97% - 6.97%
2003 105,201 5.00% - 5.66%
2004-2018 121,400 3.60% - 7.72%
----------
$1,701,517
==========
- ----------------------------------------------------------------
44
<PAGE> 50
December 31, 1997
- ----------------------------------------------------------------
Maturity Dates Principal Amounts Interest Rates
- ----------------------------------------------------------------
1998 $367,048 5.19% - 7.04%
1999 315,207 5.02% - 6.38%
2000 701,406 4.70% - 6.49%
2001 2,079 5.20% - 6.14%
2002 2,327 5.20% - 6.97%
2003 2,440 5.00% - 6.14%
2004-2018 4,239 3.75% - 7.72%
----------
$1,394,746
==========
- ----------------------------------------------------------------
Short and long-term borrowings from the Federal Home Loan Bank of Boston, which
consist of both fixed and adjustable rate borrowings, are secured by a blanket
lien on qualified collateral, consisting primarily of loans with first mortgages
secured by one to four family properties, certain unencumbered investment
securities and other qualified assets. The Company has the ability to prepay
most of its borrowings without penalty. In addition, the Company has an existing
line of credit with the Federal Home Loan Bank of Boston of $125 million, none
of which was outstanding at December 31, 1998.
12. CAPITAL TRUST SECURITIES
On January 24, 1997, the Company sponsored the creation of Peoples Heritage
Capital Trust I (the "Trust") a statutory business trust created under the laws
of Delaware. The Company is the owner of all of the common securities of the
Trust. On January 31, 1997, the Trust issued $100 million of 9.06% Capital
Securities (the "Capital Securities," and with the common securities, the "Trust
Securities"), the proceeds from which were used by the Trust, along with the
Company's $3.1 million capital contribution for the Common Securities, to
acquire $103.1 million aggregate principal amount of the Company's 9.06% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company has,
through the Declaration of Trust establishing the Trust, Common Securities and
Capital Securities Guarantee Agreements, the Debentures and a related Indenture,
taken together fully irrevocably and unconditionally guaranteed all of the
Trust's obligations under the Trust Securities. Separate financial statements of
the Trust are not required pursuant to Staff Accounting Bulletin 53 of the
Securities and Exchange Commission.
<PAGE> 51
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY
In April 1998, the stockholders of the Company approved an increase in the
authorized number of shares of Common Stock from 100,000,000 to 200,000,000, and
in May 1998, the Company declared a two-for-one split for each share of Common
Stock then outstanding and for all then outstanding options to purchase shares
of Common Stock. All references in the Consolidated Financial Statements to the
number of shares and per share amounts have been adjusted retroactively for the
recapitalization and the stock split.
Regulatory Capital Requirements.
Bank regulatory agencies have established capital adequacy standards which are
used extensively in their monitoring and control of the industry. These
standards relate capital to level of risk by assigning different weighting to
assets and certain off-balance sheet activity. The Company must maintain a
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Actual Capital Requirements Excess
- --------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As Of December 31, 1998
Total capital (to risk weighted assets) $813,166 13.10% $496,458 8.00% $316,708 5.10%
Tier 1 capital (to risk weighted assets) 735,467 11.85% 248,229 4.00% 487,238 7.85%
Tier 1 leverage capital ratio (to average assets) 735,467 7.54% 389,644 4.00% 345,823 3.54%
As of December 31, 1997
Total capital (to risk weighted assets) 762,391 12.65% 482,056 8.00% 280,335 4.65%
Tier 1 capital (to risk weighted assets) 687,421 11.41% 241,028 4.00% 446,393 7.41%
Tier 1 leverage capital ratio (to average assets) 687,421 7.51% 366,124 4.00% 321,297 3.51%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the Company and each of its banking subsidiaries
were well-capitalized and in compliance with all applicable regulatory capital
requirements and had capital ratios in excess of federal and regulatory
risk-based and leverage requirements.
- --------------------------------------------------------------------------------
Dividend Limitations.
Dividends paid by subsidiaries are the primary source of funds available to the
Company for payment of dividends to its shareholders. The Banks are subject to
certain requirements imposed by state and federal banking laws and regulations.
These requirements, among other things, establish minimum levels of capital and
restrict the amount of dividends that may be distributed by the Banks to the
Company.
Stockholder Rights Plan.
In 1989, the Company's Board of Directors adopted a Stockholder
Rights Plan declaring a dividend of one preferred Stock Purchase Right for each
outstanding share of Common Stock. The rights will remain attached to the Common
Stock and are not exercisable except under limited circumstances relating to
acquisition of, the right to acquire beneficial ownership of, or tender offer
for 20% or more of the outstanding shares of Common Stock. The Rights have no
voting or dividend privileges and, until they become exercisable, have no
dilutive effect on the earnings of the Company. The Rights expire in ten years
unless extended by the Board of Directors.
14. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET RISKS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans, standby letters of credit,
recourse arrangements on serviced loans and forward commitments to sell loans.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans, the contract or notional
amounts do not represent exposure to credit loss. The Company controls the
credit risk of its forward commitments to sell loans through credit approvals,
limits and monitoring procedures.
45
<PAGE> 52
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Financial instruments with off-balance sheet risk at December 31, 1998 and
1997 follow:
- --------------------------------------------------------------------------------
Contract or Notional Amount at December 31,
1998 1997
- -------------------------------------------------------------------------
Financial instruments with notional or
contract amounts which represent
credit risk:
Commitments to originate loans,
unused lines, standby letters of
credit and unadvanced portions
of construction loans $1,685,341 $1,461,747
Loans serviced with recourse 24,176 32,603
Loans sold with credit enhancements 3,294 8,713
Leases serviced with credit enhancements 6,227 19,200
Financial instruments with notional or
contract amounts which exceed the amount
of credit risk:
Forward commitments to sell loans 249,450 717,650
Interest rate floors - notional amount 120,000 90,000
fair value 3,433 881
Treasury put options - notional amount -- 50,000
fair value -- 156
Treasury call options - notional amount -- 12,500
fair value -- 371
- -------------------------------------------------------------------------
Commitments to originate loans, unused lines of credit and unadvanced portions
of construction loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Because many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company has retained credit risk on certain residential mortgage loans
sold with full or partial recourse and on certain residential mortgage loans
whose servicing rights were acquired during 1990.
Forward commitments to sell residential mortgage loans are contracts which
the Company enters into for the purpose of reducing the market risk associated
with originating loans for sale. Risks may arise from the possible inability of
the Company to originate loans to fulfill the contracts, in which case the
Company would normally purchase loans from correspondent banks or in the open
market to deliver against the contract.
At December 31, 1998, the Company was committed to invest up to $8.7 million
in real estate development limited partnerships. At December 31, 1998 and 1997
the Company had $18.8 million and $13.2 million, respectively, invested in such
partnerships, which are included in other assets.
Legal Proceedings.
The Company and certain of its subsidiaries have been named as defendants in
various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, based upon the opinions of
counsel, any such liability will not have a material effect on the consolidated
financial position or results of operations or liquidity of the Company and its
subsidiaries.
Lease Obligations.
The Company leases certain properties used in operations under terms of
operating leases which include renewal options. Rental expense under these
leases approximated $8.3 million, $6.5 million, and $5.5 million for the years
ended 1998, 1997 and 1996, respectively.
Approximate minimum lease payments over the remaining terms of the leases at
December 31, 1998 follow:
- --------------------------------------------------------------------------------
1999 $ 7,645
2000 6,907
2001 6,423
2002 4,555
2003 3,499
2004 and after 19,772
-------
$48,801
=======
- --------------------------------------------------------
46
<PAGE> 53
15. STOCK BASED COMPENSATION PLANS
Profit Sharing Employee Stock Ownership Plan.
In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan which
is designed to invest primarily in Common Stock of the Company. Substantially
all employees are eligible to participate in the Plan following one year of
service. Employees may not make contributions to the Plan but may receive a
discretionary contribution from the Company based on their pro-rata share of
eligible compensation. For 1998, 1997 and 1996, the Company contributed 3%, 3%
and 4% of eligible compensation, respectively. The approximate expense of this
contribution for 1998, 1997 and 1996 was $2.1 million, $1.3 million and $1.5
million, respectively.
Stock Option Plans.
In 1995, the Company adopted a stock option plan for non-employee directors. The
maximum number of shares which may be granted under the plan is 530,000 shares,
of which 110,000 were granted in 1998 at $24.31 per share, 59,000 were granted
in 1997 at $15.82 per share and 40,000 were granted in 1996 at $10.44 per
<PAGE> 54
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
share. 18,500 shares had been issued upon exercise of the stock options
cumulatively through December 31, 1998.
The Company has adopted various stock option plans for key employees. These
plans include a stock option plan adopted in 1996 (the "1996 Option Plan") and a
stock option plan adopted in 1986 (the "1986 Option Plan"). The 1986 Option
Plan, as amended, authorized the issuance of 3,340,000 shares of common stock,
substantially all of which have been issued. The 1996 Option Plan, as amended,
authorizes grants of options to purchase up to 6,000,000 shares of common stock.
Stock options are granted with an exercise price equal to the stock's fair
market value at the date of the grant and expire 10 years from the date of the
grant. At December 31, 1998, there were 3,798,675 additional shares available
for grant under the 1996 Option Plan.
The per share weighted-average fair value of stock options granted by the
company during 1998, 1997 and 1996 was $5.78, $11.16 and $5.34 on the date of
the grants using the Black Scholes option-pricing model with the following
average assumptions:
- --------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Expected dividend yield 2.50% 2.50% 2.50%
Risk-free interest rate 5.50% 5.82% 6.06%
Expected life 5.00 YEARS 5.00 Years 5.56 Years
Volatility 32.87% 32.90% 34.5%
- -----------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no cost has been recognized for its stock options in the
financial statements. Had the Company determined cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------
Net income
As reported $100,590 $92,335 $76,033
Proforma $ 97,732 $89,581 $74,769
Basic earnings per share
As reported $ 1.14 $ 1.06 $ 0.94
Proforma $ 1.11 $ 1.02 $ 0.92
Diluted earnings per share
As reported $ 1.12 $ 1.04 $ 0.92
Proforma $ 1.09 $ 1.00 $ 0.90
- -----------------------------------------------------------------------
Pro forma net income reflects only stock options granted since January 1, 1995.
Therefore, the full impact of calculating cost for stock options under SFAS No.
123 is not reflected in the pro forma net income amounts presented above because
cost is reflected over the options' vesting period and cost for options granted
prior to January 1, 1995 is not considered.
Stock Option Activity
- ----------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------
Balance at December 31, 1996 5,252,198 $ 6.57
Granted 1,013,538 16.20
Exercised 1,374,606 4.79
Forfeited 65,856 9.50
---------
Balance at December 31, 1997 4,825,274 9.02
Granted 1,099,875 19.16
Exercised 1,188,174 6.57
Forfeited 46,470 16.57
---------
BALANCE AT DECEMBER 31, 1998 4,690,505 12.90
=========
- ----------------------------------------------------------------------
47
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The range of per share prices for outstanding and exercisable stock options at
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Outstanding Weighted Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
up to $5.00 351,052 3.4 years $ 2.78 351,052 $ 2.78
$5.01 - $10.00 911,630 5.3 6.81 699,488 6.70
$10.01 - $15.00 1,422,660 7.3 11.13 1,047,660 11.00
$15.01 - $20.00 1,660,113 9.2 17.75 623,788 17.47
Over $20.00 345,050 9.5 23.20 115,000 24.35
--------- ---------
4,690,505 7.4 12.90 2,836,988 10.89
========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Employee Stock Purchase Plan.
The Company has an Employee Stock Purchase Plan covering all full-time employees
with one year of service. The maximum number of shares which may be issued under
the Employee Stock Purchase Plan is 1,352,000 shares. Employees have the right
to authorize payroll deductions up to 10% of their salary. As of December 31,
1998, 790,289 shares had been purchased under this plan.
Restricted Stock Plan.
In 1990, the Company adopted a Restricted Stock Plan under which up to $10,000
of the annual fee payable to each non-employee Director of the Company and
participating subsidiaries is payable solely in shares of Common Stock.
Directors of the Company and certain participating subsidiaries who are not
full-time employees of the Company or any of its subsidiaries are eligible to
participate. Shares issued were 6,420, 3,840 and 6,360 in 1998, 1997 and 1996,
respectively.
16. RETIREMENT AND OTHER BENEFIT PLANS PENSION PLAN.
The Company and its subsidiaries have noncontributory defined benefit plans
covering most permanent, full-time employees. Benefits are based on career
average earnings and length of service. The Company's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes.
The Company has adopted supplemental retirement plans for several key
officers. These plans were designed to offset the impact of changes in the
Pension Plans which reduced benefits for highly paid employees. The Company has
also entered into deferred compensation agreements with certain key officers.
The cost of these agreements is accrued but not funded. The Company purchased
corporate-owned life insurance policies on the lives of certain retirees. The
death benefits are payable to the Company and will assist in the funding of the
deferred compensation liability. The Company will recover the costs of premium
payments from the cash value of these policies.
Post Retirement Benefits Other Than Pensions.
The Company and its subsidiaries sponsor post-retirement benefit programs which
provide medical coverage and life insurance benefits to employees and directors
who meet minimum age and service requirements.
The Company and its subsidiaries recognize costs related to post retirement
benefits under the accrual method, which recognizes costs over the employee's
period of active employment. The impact of adopting SFAS No. 106 is being
amortized over a twenty year period beginning January 1, 1993.
48
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following tables set forth the funded status and amounts recognized in the
Company's Consolidated Balance Sheets at December 31, 1998 and 1997 for the
pension plans and other post retirement benefit plans:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Pension Plans Other Post Retirement Benefits
- --------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $48,994 $ 46,526 $ 5,973 $ 6,049
Service cost 2,714 2,163 88 58
Interest cost 3,510 2,911 425 418
Assumption changes 3,654 4,591 299 247
Actuarial (gain) loss (19) (4,805) 269 599
Curtailment gain (446) -- -- --
Acquisitions -- 253 -- (876)
Benefits paid (3,507) (2,645) (514) (522)
------- -------- ------- -------
Benefit obligation at end of year $54,900 $ 48,994 $ 6,540 $ 5,973
======= ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $53,533 $ 48,148 -- --
Actual return on plan assets 8,100 7,336 -- --
Employer contribution 213 694 513 522
Benefits paid (3,508) (2,645) (513) (522)
------- -------- ------- -------
Fair value of plan assets at end of year $58,338 $ 53,533 $ -- $ --
======= ======== ======= =======
Funded status $ 3,438 $ 4,539 $(6,540) $(5,973)
Unrecognized net actuarial (gain) loss (5,192) (5,247) (276) (844)
Unrecognized prior service cost 1,529 1,577 1,725 1,866
Unrecognized net transition obligation (1,700) (2,013) 2,241 2,391
------- -------- ------- -------
Prepaid (accrued) benefit cost $(1,925) $ (1,144) $(2,850) $(2,560)
======= ======== ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.50% 7.00% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% -- --
Rate of compensation increase 4.50% 4.50% -- --
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 2,714 $ 2,163 $ 2,130 $ 88 $ 58 $127
Interest cost 3,510 2,911 2,981 425 418 417
Expected return on plan assets (4,418) (3,450) (4,321) -- -- --
Net amortization and deferral (366) (332) 896 290 258 263
Curtailment gain (446) -- -- -- -- --
------- ------- ------- ---- ---- ----
Net periodic benefit cost $ 994 $ 1,292 $ 1,686 $803 $734 $807
======= ======= ======= ==== ==== ====
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Multi-Employer Pension Plan.
During 1996, CFX Corporation and certain subsidiaries terminated their defined
benefit pension plans, and transferred plan assets to a multi-employer plan in
amounts that would effectively settle the plans' accumulated benefit obligations
as of January 1, 1996. As a result, CFX recognized settlement and curtailment
gains totaling $877,000 in 1996. The multi-employer plan is a defined benefit
pension plan that covered all former eligible employees of CFX Corporation, CFX
Bank (excluding former employees of Community and Portsmouth) and Safety Fund
National Bank. Pension and expense attributable to the plan for the years ended
December 31, 1998, 1997 and 1996 was $377,000, $396,000 and $479,000,
respectively.
Thrift Incentive Plan.
The Company has a contributory Thrift Incentive Plan covering substantially all
permanent employees after completion of one year of service. The Company matches
employee contributions based on a predetermined formula and may make additional
discretionary contributions. The total expense for 1998, 1997 and 1996 was $2.4
million, $2.2 million, and $1.7 million, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value estimates are made as of a specific point in
time based on the characteristics of the financial instruments and relevant
market information. Where available, quoted market prices are used. In other
cases, fair values are based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and judgments made regarding risk
characteristics of various financial instruments, discount rates, estimates of
future cash flows, future expected loss experience and other factors. Changes in
assumptions could significantly affect these estimates. Derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
certain cases, could not be realized in an immediate sale of the instrument.
Also, because of differences in methodologies and assumptions used to estimate
fair values, the Company's fair values should not be compared to those of other
banks.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the Company. For certain assets and
liabilities, the information required under SFAS No. 107 is supplemented with
additional information relevant to an understanding of the fair value. Also,
fair values are presented for certain assets that are not financial instruments
under the definition in SFAS No. 107.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments and certain non-financial
instruments:
CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS, SHORT-TERM
INVESTMENTS AND FEDERAL FUNDS SOLD. For these cash and cash equivalents, which
have maturities of 90 days or less, the carrying amounts reported in the balance
sheet approximate fair values.
SECURITIES AND LOANS HELD FOR SALE. Fair values are based on quoted bid
market prices, where available. Where quoted market prices for an instrument are
not available, fair values are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instrument being valued. Fair values are calculated based on the value of one
unit without regard to premiums or discounts that might result from selling all
of the Company's holdings of a particular security in one transaction.
LOANS AND LEASES. The fair values of commercial, commercial real estate,
residential real estate, and certain consumer loans and leases are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of
credit the carrying value approximates fair value.
For nonperforming loans and certain loans where the credit quality of the
borrower has deteriorated significantly, fair values are estimated by
discounting cash flows at a rate commensurate with the risk associated with
those cash flows.
MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage
servicing rights is based on the expected present value of future mortgage
servicing income, net of estimated servicing costs, considering market consensus
loan prepayment predictions.
DEPOSITS. The fair value of deposits with no stated maturity is equal to the
carrying amount. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered
on the deposit products of similar maturities.
The fair value estimates for deposits do not include the benefit that
results from the low-cost funding provided by the deposit liabilities compared
to the cost of alternative forms of funding ("deposit base intangibles")
BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON,
SUBORDINATED CAPITAL NOTES AND OTHER BORROWINGS. The fair value of the Company's
long-term borrowings is estimated based on quoted market prices for the issues
for which there is a market, or by discounting cash flows based on current rates
available to the Company for similar types of borrowing arrangements. For
short-term borrowings that mature or reprice in 90 days or less, carrying value
approximates fair value.
OFF-BALANCE SHEET INSTRUMENTS:
COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY
LETTERS OF CREDIT. In the course of originating loans and extending credit and
standby letters of credit, the Company will charge fees in exchange for its
lending commitment. While these commitment fees have value, the Company has not
estimated their value due to the short-term nature of the underlying
commitments.
FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward
commitments to sell loans reflects the value of
50
<PAGE> 58
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
origination fees and excess servicing recognizable upon sale of loans net of any
cost to the Company if it fails to meet its sale obligation. Of the $249.5
million of forward sales commitments at December 31, 1998, the Company had
$500.1 million loans available to sell at that date as well as sufficient loan
originations subsequent to December 31, 1998 to fulfill the commitments.
Consequently, the Company has no unmet sales obligation to value and due to the
short-term nature of the commitments has not estimated the value of the fees and
servicing.
LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing
arrangements with investors, the Company has recourse obligation to those
serviced loan portfolios. In the event of foreclosure on a serviced loan, the
Company is obligated to repay the investor to the extent of the investor's
remaining balance after application of proceeds from the sale of the underlying
collateral. To date, losses related to these recourse arrangements have been
insignificant and while the Company cannot project future losses, the fair value
of this recourse obligation is deemed to be likewise insignificant.
- --------------------------------------------------------------------------------
A summary of the fair values of the Company's significant financial instruments
at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 610,355 $ 610,355 $ 437,658 $ 437,658
Securities - available for sale 2,334,575 2,334,575 1,802,758 1,802,758
Securities - held to maturity -- -- 28,184 28,495
Loans held for sale 500,134 500,679 398,369 400,363
Loans and leases, net 6,098,487 6,161,696 6,434,238 6,494,632
Mortgage servicing rights 39,273 40,213 59,702 71,172
Liabilities:
Deposit (with no stated maturity) 4,032,208 4,032,208 3,575,977 3,575,977
Time deposits 2,949,037 2,962,289 3,171,442 3,196,199
Borrowings 2,166,329 2,169,553 1,982,190 1,981,973
- -----------------------------------------------------------------------------------------------------
</TABLE>
51
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
18. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
Balance Sheets 1998 1997
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 7,605 $ 38,304
Interest bearing deposits with subsidiaries 21,857 31,227
Securities available for sale 39 55
Investment in subsidiaries 807,210 732,686
Goodwill and other intangibles 14,689 16,528
Amounts receivable from subsidiaries 13,767 6,994
Other assets 14,280 14,577
-------- --------
Total assets $879,447 $840,371
======== ========
Liabilities and shareholders' equity:
Amounts payable to subsidiaries $ 8,953 $ 25
Subordinated debentures supporting mandatory
redeemable trust securities 105,705 107,446
Other liabilities 2,865 12,117
Shareholders' equity 761,924 720,783
-------- --------
Total liabilities and shareholders' equity $879,447 $840,371
======== ========
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------
Statements of Income 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating income:
Dividends from subsidiaries $ 65,230 $62,296 $84,873
Other operating income 2,324 4,336 1,885
-------- ------- -------
Total operating income 67,554 66,632 86,758
Operating expenses:
Interest on borrowings 9,375 9,070 609
Amortization of intangibles 1,838 1,864 1,864
Merger expenses 19,006 354 37
Other operating expenses 6,947 7,432 3,504
-------- ------- -------
Total operating expenses 37,166 18,720 6,014
Income before income taxes and equity in
undistributed net income of subsidiaries 30,388 47,912 80,744
Income tax expense (benefit) (9,894) (3,097) 85
-------- ------- -------
Income before equity in undistributed
net income of subsidiaries 40,282 51,009 80,659
Equity in undistributed net income of subsidiaries (1) 60,308 41,326 (4,626)
-------- ------- -------
Net income $100,590 $92,335 $76,033
======== ======= =======
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts in parenthesis represent the excess of dividends over net income
from subsidiaries.
52
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $100,590 $ 92,335 $ 76,033
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Undistributed net income from subsidiaries (60,308) (41,326) 4,626
Amortization of goodwill and other intangibles 1,839 1,864 1,864
Securities losses (gains) (23) (113) (1)
(Increase) decrease in amounts receivable from subsidiaries (6,773) (7,330) (3,273)
Decrease (increase) in other assets 297 (3,822) (2,701)
Increase (decrease) in amounts payable to subsidiaries 8,928 (163) 56
Increase (decrease) in other liabilities (9,252) 6,617 (3,309)
Other, net 37 (3,309) (2,080)
-------- -------- --------
Net cash provided by operating activities $ 35,335 $ 59,413 $ 77,761
-------- -------- --------
Cash flows from investing activities:
Net decrease (increase) in interest bearing
deposits with bank subsidiaries $ 9,370 $ (9,818) $ 223
Sales of available for sale securities 16 185 1,047
Purchase of available for sale securities -- (7) --
Sales of held to maturity securities -- 4,337 16,857
Purchase of held to maturity securities -- (4,017) (16,601)
Capital contribution to subsidiary (12,000) (55,000) (13,200)
-------- -------- --------
Net cash (used) provided by investing activities $ (2,614) $(64,320) $(11,674)
-------- -------- --------
Cash flows from financing activities:
Issuance of notes payable (net) -- 103,093 --
Payment of notes payable (1,741) (2,177) (1,306)
Other shareholders' equity, net -- 1,687 (226)
Dividends paid to shareholders (37,857) (40,285) (29,350)
Treasury stock acquired (38,003) (35,917) (61,370)
Treasury stock sold 14,181 12,609 5,355
-------- -------- --------
Net cash provided (used) by financing activities $(63,420) $ 39,010 $(86,897)
-------- -------- --------
Net increase (decrease) in cash due from banks $(30,699) $ 34,103 $(20,810)
Cash and due from banks at beginning of year 38,304 4,201 25,011
-------- -------- --------
Cash and due from banks at end of year $ 7,605 $ 38,304 $ 4,201
======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure information:
Interest paid on borrowings $ 9,060 $ 5,156 $ 609
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
19. SUBSEQUENT EVENT (UNAUDITED)
As discussed in Note 2, the Company acquired SIS Bancorp on January 1, 1999 in a
transaction accounted for under the pooling-of-interest method. The following
unaudited pro forma data summarizes the combined results of operations of the
Company and SIS as if the combination had been consummated on December 31, 1998.
- --------------------------------------------------------------------------------
Year ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net interest income $427,257 $404,565 $331,979
======== ======== ========
Net income $112,824 $103,672 $ 87,341
======== ======== ========
Diluted earnings per share $ 1.07 $ 0.99 $ 0.89
======== ======== ========
Excluding special charges:
Net income $141,768 $119,219 $ 95,094
======== ======== ========
Diluted earnings per share $ 1.34 $ 1.14 $ 0.97
======== ======== ========
- --------------------------------------------------------------------------------
This unaudited proforma information may not be indicative of the results
that would actually have occurred if the merger had been in effect on the date
indicated or which may be obtained in the future. The proforma information does
not give effect to merger related charges or anticipated cost savings in
connection with the merger.
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $177,650 $177,657 $177,723 $179,927 $177,504 $163,402 $153,889 $146,956
Interest expense 86,199 86,336 86,887 88,106 85,893 76,067 69,460 65,855
Provision for loan
and lease losses 3,721 3,721 2,983 2,998 1,163 1,423 1,020 942
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan
and lease losses 87,730 87,600 87,853 88,823 90,448 85,912 83,409 80,159
Noninterest income 27,279 25,677 26,934 24,905 26,179 20,493 17,931 18,065
Special charges -- -- 34,474 900 7,560 11,031 -- --
Noninterest expenses 67,447 66,534 68,208 72,356 72,714 66,093 62,674 60,672
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 47,562 46,743 12,105 40,472 36,353 29,281 38,666 37,552
Income tax expense 14,968 14,097 3,795 13,432 12,412 10,848 13,214 13,043
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 32,594 $ 32,646 $ 8,310 $ 27,040 $ 23,941 $ 18,433 $ 25,452 $ 24,509
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share
Basic $ 0.37 $ 0.37 $ 0.09 $ 0.31 $ 0.27 $ 0.22 $ 0.29 $ 0.28
Diluted 0.37 0.37 0.09 0.30 0.27 0.21 0.29 0.27
Operating earnings per share (1):
Basic $ 0.37 $ 0.37 $ 0.37 $ 0.31 $ 0.33 $ 0.29 $ 0.29 $ 0.28
Diluted 0.37 0.37 0.36 0.31 0.32 0.29 0.29 0.27
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings before special charges.
54
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Peoples Heritage Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Peoples Heritage
Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Heritage
Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 19, 1999
55
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES
56
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
FINANCIAL GROUP, INC.
BOARD OF DIRECTORS
[PICTURE OF HERITAGE FINANCIAL GROUP]
WILLIAM J. RYAN (1),(4),(6)
Chairman of the Board
President & Chief Executive Officer
Chairman, Governance & Nominating Committee
Peoples Heritage Financial
Group, Inc.
President & Chief Executive Officer
Peoples Heritage Bank
ROBERT A. MARDEN (1),(4)
Vice Chairman of the Board
Chairman, Executive/
ALCO Committee
Attorney-at-Law
Marden, Dubord, Bernier & Stevens
PAMELA P. PLUMB (1),(3),(4)
Vice Chairman of the Board
Pamela Plumb & Associates
Former President -
National League of Cities
ROBERT P. BAHRE (1)
President & Chief Executive Officer
New Hampshire International Speedway
P. KEVIN CONDRON (1)
President & CEO
The Granite Group
EVERETT W. GRAY (2),(3),(5)
Retired Attorney
Real Estate Investor
ANDREW W. GREENE (1),(3),(5)
Chief Executive Officer
Legacy Co. Services, Inc.
KATHERINE M. GREENLEAF (1),(4)
Chairman, Human Resources Committee
Principal, Katherine M. Greenleaf Consulting
DOUGLAS S. HATFIELD, JR. (3)
Attorney
Hatfield, Moran & Barry, PA
DAVID D. HINDLE (6)
Retired President &
Chief Executive Officer
Family Bank
PHILIP A. MASON (2),(4)
Attorney
Mason & Martin, LLP
JOHN M. NAUGHTON
Retired Executive
Massmututal Life Insurance Co.
SETH A. RESNICOFF, MD (5)
Surgeon
MALCOLM W. PHILBROOK, JR. (1),(2),(5),(6)
Chairman, Audit Committee Attorney & President
Crockett, Philbrook & Crouch, P.A.
CURTIS M. SCRIBNER (1),(2),(4),(5),(6)
Chairman, Asset Review
President
C. M. Scribner & Company
DANA S. LEVENSON (1),(3),(5)
President
Quatro Realty Corp.
Partner
Levenson Business Group
PAUL R. SHEA (3),(6)
Retired President & CEO
Bank of New Hampshire Corp.
JOHN E. VEASEY (2)
President
Cedardale, Inc.
(1) Executive/ALCO Committee
(2) Audit Committee
(3) Human Resources Committee
(4) Governance & Nominating Committee
(5) Asset Review Committee
(4) Liquidity & Funds Management Committee
- --------------------------------------------------------------------------------
PEOPLES HERITAGE BANK
BOARD OF DIRECTORS
[PEOPLES HERITAGE LOGO]
[PICTURE OF BOARD OF DIRECTORS]
ROBERT A. MARDEN (1),(3),(6)
Chairman of the Board
Attorney-at-Law
Marden, Dubord, Bernier & Stevens
WILLIAM J. RYAN (1),(3),(4)
Chairman,
President & Chief Executive Officer
Peoples Heritage Financial
Group, Inc.
President & Chief Executive Officer
Peoples Heritage Bank
WILLARD B. ARNOLD III (1),(3),(4)
Chairman, Nominating Committee
Retired Sales Executive
EARL B. AUSTIN, JR. (1),(2),(4)
Accountant
Earl B. Austin, JL & Assoc., P.A.
MEG BAXTER (2),(4)
President
United Way of Greater Portland
CHARLES BELLEGARDE, JR. (2),(4),(6)
Consultant & President
Charles Bellegarde & Son, Inc.
CYNTHIA FOSS BOWMAN, M.D.
Medical Director, Clinical Lab
Maine General Medical Center
SCOTT B. BULLOCK
President & Chief Executive Officer
Maine General Medical Center
PETER B. CHAPMAN (2),(3),(5),(6)
President & Chief Executive Officer
Paris Farmers Union
EVERETT W. GRAY (1),(2),(3),(6)
Retired Attorney
Real Estate Investor
GUY A. HARTNETT (1),(3),(5)
President, Treasurer, Owner
One-Right Systems, Inc.
President
Lydimap Corp.
GALEN N. HOGAN (2),(4)
President, Treasurer,
Chief Executive Officer
Hogan Tire Co.
DAVID M. MACMAHON (2),(6)
President
Gates Formed-Fibre Products, Inc.
MALCOLM W. PHILBROOK, JR. (1),(3),(4),(6)
Vice Chairman of the Board
Chairman, Executive Committee
Chairman, Liquidity & Funds Management Committee
Chairman, Trust Committee
Attorney & President
Crockett, Philbrook & Crouch P.A.
CURTIS M. SCRIBNER (1),(4)
Chairman
Asset Review Committee
Principal
C.M. Scribner & Company
SHELTON S. WHITE, JR. (4)
Retired President
H.E. Callahan Construction Co.
(1) Executive Committee
(2) Audit Committee
(3) Nominating Committee
(4) Liquidity & Funds Management Committee
(5) Asset Review Committee
(6) Trust Committee
57
<PAGE> 65
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
FINANCIAL GROUP, INC.
SENIOR MANAGEMENT
WILLIAM J. RYAN
Chairman, President & Chief
Executive Officer
PETER J. VERRILL, CPA
Executive Vice President &
Chief Operating Officer &
Chief Financial Officer
F. WILLIAM MARSHALL, JR.
Vice Chairman
R. SCOTT BACON
Executive Vice President
Bank of New Hampshire
CHRISTOPHER W. BRAMLEY
Executive Vice President
Family/SISBank
JOHN W. FRIDLINGTON
Executive Vice President
Commercial Lending
THOMAS P. HOGAN
Executive Vice President
Consumer Lending
CAROL L. MITCHELL, ESQ.
Executive Vice President
General Counsel, Clerk
& Secretary
WENDY P. SUEHRSTEDT
Executive Vice President
Retail Delivery
HALL THOMPSON
Executive Vice President
Investments
BETH WARN
Executive Vice President
Retail Mortgage Lending
TOBY COOK
President
People Heritage Leasing
BRIAN ARSENAULT
Senior Vice President
Corporate Communications and
Investor Relations
GEORGE BACIGALUPO
Senior Vice President
Asset Based Lending
JULIE BENAVIDES
Senior Vice President
Loan Review
ROBERT CALDWELL
Senior Vice President
Chief Information Officer
MAURICE GALLANT
Senior Vice President
Audit
CYNTHIA HAMILTON
Senior Vice President
Director, Human Resources
JOSEPH W. HANSON
Senior Vice President
Operations Division Manager
MARK LAWLER
Senior Vice President
Commercial Workout
JOHN OPPERMAN
Senior Vice President
Legal Affairs
RICHARD TARDIF
Senior Vice President
Director, General Services
BRIAN WOOD
Senior Vice President
Marketing Director
- --------------------------------------------------------------------------------
PEOPLES HERITAGE BANK
SENIOR MANAGEMENT
WILLIAM J. RYAN
President & Chief
Executive Officer
CAROL L. MITCHELL, ESQ.
Executive Vice President &
General Counsel
Legal Affairs, Human Resources, Facilities
THOMAS P. HOGAN
Executive Vice President
Consumer Lending
GARY L. ROBINSON
Executive Vice President
Trust and Investment Group
MARY A. SCHNOBRICH
Executive Vice President
Retail Banking
HALL THOMPSON
Executive Vice President
Investments
RICHARD S. VAIL
Executive Vice President
Commercial Lending
ANNE T. DUNNE
President
Heritage Investment
Planning Services
NORMAND J. ALBERT
Senior Vice President
Commercial Lending
LEIGH A. BAGLEY
Senior Vice President
Marketing
STEPHEN J. BOYLE
Senior Vice President
Chief Financial Officer
MAURICE C. GALLANT, JR.
Senior Vice President
Audit
CYNTHIA H. HAMILTON
Senior Vice President
Human Resources
ROGER C. LEVESQUE
Senior Vice President
Commercial Lending
THEODORE N. SCONTRAS
Senior Vice President
Public Finance
MICHAEL P. STONE
Senior Vice President and
Private Banking Manager
Private Banking
- --------------------------------------------------------------------------------
OXFORD BANK & TRUST
A DIVISION OF PEOPLES HERITAGE BANK
SENIOR MANAGEMENT
EDWARD L. DILWORTH, JR.
Division President
NEIL R. ELDER
Senior Vice President
58
<PAGE> 66
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
BANKING CENTERS
ASHLAND
10 Main Street
AUBURN
223 Center Street
Great Falls Plaza
600 Center Street (Supermarket)
AUGUSTA
101 Western Ave
BANGOR
1067 Union Street
74 Hammond Street
353 Main Street (Supermarket)
46 Springer Drive (Supermarket)
BIDDEFORD
299 Elm Street
510 Alfred Street (Supermarket)
BREWER
508 Wilson Street
BRIDGTON
84 Main Street
BRUNSWICK
35 Elm Street (Supermarket)
Merrymeeting Plaza (Supermarket)
CAMDEN
89 Elm Street
CARIBOU
Downtown Mall
EAGLE LAKE
Church Street
EASTON
Main Street
ELLSWORTH
204 Main Street
FAIRFIELD
112 Main Street
FALMOUTH
200 U.S. Route #1
FARMINGTON
60 Main Street
Mt Blue Shopping Center (Drive up)
Shop 'N Save Plaza (Supermarket)
FORT FAIRFIELD
206 Main Street
FORT KENT
4 Pleasant Street
GRAY
Gray Plaza, Rt. # 26
HOULTON
6 North Street
KENNEBUNK
56 Portland Road
KITTERY
30 State Road
LEWISTON
217 Main Street
664 Main Street
790 Lisbon Street
LIMESTONE
222 Main Street
LINCOLN
Lincoln Plaza
LISBON FALLS
38 Main Street
MARS HILL
37 Main Street
NEWPORT
99 Main Street
NORTH WINDHAM
756 Roosevelt Trail
770 Roosevelt Trail (Supermarket)
OAKLAND
27 Main Street
PITTSFIELD
60 Main Street
PORTLAND
One Portland Square
481 Congress Street
Westgate Shopping Center
449 Forest Avenue
883 Forest Avenue
Northgate Shopping Center
PRESQUE ISLE
551 Main Street
ROCKLAND
34 School Street
SACO
Saco Valley
Shopping Center (Supermarket)
180 Main Street
SANFORD
Lower Main Street
273 Main Street
SCARBOROUGH
4 Shop 'N Save Drive
417 Payne Road (Supermarket)
SEARSPORT
Main Street
SOUTH PORTLAND
Millcreek Shopping Center (Supermarket)
9 Market Street
250 Maine Mall Road
STANDISH
111 Ossipee Trail (Supermarket)
THOMASTON
115 Main Street
VAN BUREN
29 Main Street
WASHBURN
12 Main Street
WATERVILLE
182 Main Street
Shaw's Plaza (Supermarket)
WELLS
107 Wells Plaza (Supermarket)
WESTBROOK
835 Main Street
YARMOUTH
Shop 'N Save Plaza,
U.S. Route #1
YORK
127 Long Sands Road
- ----------------------------
OXFORD BANK & TRUST
BANKING CENTERS
CASCO
Leach Hill Road
MECHANIC FALLS
80 Lewiston Street
OXFORD
1586 Main Street
SOUTH PARIS
45 Main Street
WEST PARIS
233 Main Street
59
<PAGE> 67
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
BOARD OF DIRECTORS
[BANK OF NEW HAMPSHIRE LOGO]
[PICTURE OF NEW HAMPSHIRE BOARD OF DIRECTORS]
DAVIS P. THURBER
Chairman of the Board
EUGENE E. GAFFEY
Vice Chairman of the Board
Retired Justice
Hinsdale Municipal Court
R. SCOTT BACON
President & Chief Executive Officer
JOHN N. BUXTON
Chief Financial Officer
St. Paul's School
ARTHUR E. COMOLLI, DMD
General Dentistry (Retired)
RAYMOND G. COTE
President (Retired)
Harvey Construction Co., Inc.
JOSEPH A. DESMOND
Chairman & Chief Executive Officer
The Concord Group Insurance Companies
RALPH GABARRO
Chief Executive Officer
Mayo-Regional Hospital,
Quorum Health Resources, Inc.
PETER J. GRIFFIN
Director
Great Bay Marine, Inc.
ELIZABETH S. HAGER
Executive Director
United Way of Merrimack
DONALD G. HAYES
President
Ricci Supply Company, Inc.
ROBERT A. HILL
President (Retired)
Capitol Plumbing & Heating Supply Co., Inc.
DIANA JURIS
Vice President and
Chief Operating Officer
Nashua Motor Express
LUCIA P. KITTREDGE
President
Kapala Kittredge Associates
DANA S. LEVENSON
President
Quatro Realty Corp.
Partner
Levenson Business Group
JOHN E. MENARIO
Assistant to the President
Peoples Heritage Financial
Group, Inc.
JOHN M. PARSONS
Treasurer
MH Parsons & Son Lumber Co.
WALTER R. PETERSON
Former Governor
State of New Hampshire
Emeritus
President
Franklin Pierce College
PETER PRUDDEN, JR.
Senior Account Executive
Moore Business Forms, Inc.
PAUL R. SHEA
Retired President & Chief Executive Officer
Bank of New Hampshire
L. WILLIAM SLANETZ
President (Retired)
Perkins Lumber Co., Inc.
GERRY S. WEIDEMA
Partner
Weidema & Lavin, CPAs
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
SENIOR OFFICERS
R. SCOTT BACON
President & CEO
HAROLD R. ACRES
Senior Executive Vice President
Chief Lending Officer
MARK A. COLLINS
Executive Vice President
Retail Banking & Small Business
ROBERT B. ESAU
Executive Vice President
Trust Services
DONNA F. CLARICO
Senior Vice President
Financial Services
MAUREEN F. DONOVAN
Senior Vice President
Human Resources
PAUL E. DUFFY
Senior Vice President
Commercial Lending
CORNELIUS J. JOYCE
Senior Vice President
Retail Lending
DAVID H. MCARDLE
Senior Vice President
Loan Administration
LEE K. ROBATOR
Senior Vice President
Commercial Lending
STEVEN C. WEBB
Senior Vice President
Commercial Lending
60
<PAGE> 68
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
LOCATIONS
ALLENSTOWN
Routes 3 & 28
AMHERST
Route 101A
BARRINGTON
Route 125 & Province Road
BEDFORD
184 Route 101
141 South River Road
BRISTOL
Central Square
BROOKLINE
Route 13, Gazebo Square
CONCORD
216 Loudon Road
143 North Main Street
43 North Main Street
277 Sheep Davis Drive
CONTOOCOOK
884 Main Street
CONWAY
51 White Mountain Highway
DOVER
353 Central Avenue
Shaw's Plaza,
845 Central Avenue
EPSOM
Epsom Circle
FRANKLIN
952 Central Street (Supermarket)
GILFORD
1458 Lakeshore Drive (Supermarket)
GLEN
Junction Routes 16 & 302
GOFFSTOWN
3 Elm Street
GREENLAND
95 Ocean Road
GREENVILLE
67 Main Street
HAMPTON
40 High Street
HENNIKER
60 Maple Street
HILLSBOROUGH
School Street
HINSDALE
Route 119
HOOKSETT
1323 Hooksett Road
HUDSON
80 Derry Road
JAFFREY
28 Main Street
KEENE
100 Main Street
194 West Street
828 Court Street
LACONIA
277 Union Avenue
LITTLETON
76 Main Street
LOUDON
Route 106
MANCHESTER
70 Bay Street
300 Franklin Street
2 South Beech Street
293 South Main Street
1255 South Willow
MARLBOROUGH
Route 101
MERRIMACK
300 Daniel Webster Highway
32 Daniel Webster Highway
MILFORD
57 South Street
MOUNT VERNON
10 North Main Street
NASHUA
191 Main Street
300 Main Street
4 Northwest Boulevard
225 Daniel Webster Highway
Nashua Mall
NEW BOSTON
Route 13 Central Square
NEW ISPWICH
564 Turnpike Road
NEWINGTON
2033 Woodbury Avenue
NEWMARKET
72 Exeter Street
NORTH CONWAY
2561 Main Street
Mountain Valley Mall
NORTH HAMPTON
46 Lafayette Road
NORTH SWANZEY
37 Monadnock Highway
NORTHWOOD
Route 4
PETERBOROUGH
120 Grove Street
PLYMOUTH
Tenney Mt. Highway (Supermarket)
PORTSMOUTH
1500 Lafayette Road
333 State Street
Pease Tradeport
RINDGE
Route 202
ROCHESTER
1 Merchants Plaza
RYE
500 Washington Road
STRATHAM
28 Portsmouth Avenue
SUNCOOK
50 Glass Street
TILTON
10 Sherwood Drive
TROY
Central Square
WALPOLE
8 North Meadow Plaza
WEARE
1361 South Stark Highway
WEST CHESTERFIELD
Route 9
WEST OSSIPEE
Junction Routes 16 & 25
WILTON/LYNEBOROUGH
905 Elm Street
WINCHESTER
Warwick Road
61
<PAGE> 69
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAMILY BANK / SIS BANK
BOARD OF DIRECTORS
[FAMILY BANK LOGO]
[PICTURE OF FAMILY BANK BOARD OF DIRECTORS]
F.WILLIAM MARSHALL, JR.
Chairman of the Board,
Family Bank, FSB
Vice Chairman,
Peoples Heritage
Financial Group, Inc.
DAVID D. HINDLE
Vice Chairman of the Board,
Family Bank, FSB and Director,
Peoples Heritage
Financial Group, Inc.
CHRISTOPHER W. BRAMLEY
President and Chief
Executive Officer
TERESITA ALICEA, ESQ.
Senior Partner
Alicea and Nagel
MARY E. BOLAND, ESQ.
Senior Partner
Egan, Flanagan & Cohen, P.C.
NELSON D. BLINN, CPA
Principal
Blinn & Farrell, CPAs
P. KEVIN CONDRON
President
The Granite Group
WILLIAM B. HART, JR.
President
Dunfey Group
THOMAS O'BRIEN
Dean, Eugene M. Isenberg School
of Management, University of
Massachusetts
KENNETH L. PAUL
Vice President
Process Engineering, Inc.
GARY P. SHANNON, ESQ.
Senior Partner
Doherty, Wallace, Pillsbury & Murphy, P.C.
STEPHEN A. SHATZ, ESQ.
President
Shatz, Schwartz & Fentin, P.C.
NICOLA S. TSONGAS
Director of External Affairs and College Advancement
Middlesex Community College
JOHN E. VEASEY
President
Cedardale, Inc.
- --------------------------------------------------------------------------------
FAMILY BANK / SIS BANK
SENIOR OFFICERS
CHRISTOPHER W. BRAMLEY
President and Chief
Executive Officer
FRANK W. BARRETT
Commercial Division
Executive Vice President
JAMES W. GRIBBONS, SR.
Trust Division
Executive Vice President
RONALD G. TROMBLEY
Retail Division
Executive Vice President
- --------------------------------------------------------------------------------
- ------------------------
MASSACHUSETTS
BRANCH OFFICES
HAVERHILL
Main Office,
153 Merrimack Street
102 Plaistow Road,
Route 125
ANDOVER
77 Main Street
ATHOL
2156 Main Street
BOXFORD
7 Elm Street
BRADFORD
860 South Main Street
CHELMSFORD
41 Drum Hill Road
66-2 Drum Hill Road (Supermarket)
DRACUT
1255 Bridge Street
FITCHBURG
470 Main Street
367 Summer Street
GARDNER
90 Pearson Blvd.
GEORGETOWN
62 Central Street
GROVELAND
280 Main Street
LEOMINISTER
721 Central Street
25 Water Tower Plaza (Supermarket)
LOWELL
45 Central Street,
33 Mammouth Road
350 Westford Street
LUNENBURG
Lunenburg Crossing
333 Mass. Avenue (Supermarket)
MIDDLETON
230 South Main Street,
Route 114
ORANGE
30 East Main Street
TOPSFIELD
16 Main Street
TYNGSBORO
One Pondview Place,
Middlesex Road
WESTBOROUGH
21 East Main Street
WEST PEABODY
636 Lowell Street (Supermarket)
WORCESTER
200 Commercial Street
430 West Boylston Street
137 Shewsbury Street
50 South West Commons, Rte. 20 (Supermarket)
62
<PAGE> 70
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
FAMILY BANK
LOCATIONS (CONTINUED)
- ---------------------
NEW HAMPSHIRE
BRANCH OFFICES
HAMPSTEAD
10 Main Street,
Route 121
KINGSTON
Carriage Town Plaza
53 Church Street
PLAISTOW
47 Plaistow Road, Route 125
SEABROOK
270 Lafayette Road, Route 1
- ---------------------
SIS BRANCH OFFICES
AGAWAM
40 Springfield Street
AMHERST
11 Amity Street
CHICOPEE
693 Memorial Drive
153 Meadow Street
EAST LONGMEADOW
465 North Main Street
EAST SPRINGFIELD
1360 Carew Street
HOLYOKE
50 Holyoke Street
LONGMEADOW
847 Williams Street
LUDLOW
52 East Street
549 Center Street
NORTHAMPTON
175 Main Street
SPRINGFIELD
412 Boston Road
619 Chestnut Street
441 Cooley Street
1800 Boston Street
561 Sumner Avenue
1441 Main Street
958 State Street
300 Cooley Street
807 Wilbraham
SOUTH HADLEY
501 Newton
WEST SPRINGFIELD
969 Riverdale Street
1425 Westfield Street
WESTFIELD
60 Main Street
303 East Main Street
- --------------------------------------------------------------------------------
GLASTONBURY BANK & TRUST COMPANY
BOARD OF DIRECTORS
[GLASTONBURY BANK LOGO]
[PICTURE OF GLASTONBURY BOARD OF DIRECTORS]
RONALD E. BOURBEAU
Chairman of the Board
REB Realty
J. GILBERT SOUCIE
President
Glastonbury Bank & Trust
LOREN J. ANDREO
Andy's Foodtown
CAMILLE S. BUSHNELL
The Prudential CT Realty
JOHN J. CARSON
University of Hartford
HARVEY A. KATZ
Kane, Hartley & Katz, P.C.
F. WILLIAM MARSHALL, JR.
Chairman of the Board
Family Bank, FSB
GRACE C. NOME
Connecticut Foods
MARK A. SHEPTOFF
Sheptoff & Reuber Co., P.C.
JAMES UCCELLO
First Realty of Glastonbury
- --------------------------------------------------------------------------------
GLASTONBURY BANK & TRUST COMPANY
LOCATIONS
COLCHESTER
64 Norwich Avenue
EAST HARTFORD
29 Main Street
GLASTONBURY (Headquarters)
2461 Main Street
730 Hebron Avenue
PORTLAND
255 Main Street
ROCKY HILL
38 Town Line Road
SOUTH GLASTONBURY
902 Main Street
WETHERSFIELD
171 Silas Deane Highway
63
<PAGE> 71
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The 1999 Annual Meeting of the Shareholders of Peoples Heritage Financial
Group, Inc. will be held at 10:30 a.m. on Tuesday, April 27, 1999 at the
Portland Marriott at Sable Oaks, 200 Sable Oaks Drive, South Portland, Maine.
CORPORATE HEADQUARTERS
One Portland Square
Portland, Maine
Mailing Address:
P.O. Box 9540
Portland, ME 04112-9540
Contact:
Brian S. Arsenault, Senior Vice President,
Corporate Communications
207-761-8517
1-800-462-3666 Outside Maine
1-800-462-6606 Outside Greater Portland
or
Peter J. Verrill
Chief Operating Officer and
Chief Financial Officer
207-761-8507
WEB SITE
www.phbk.com
STOCK LISTING
Peoples Heritage Financial Group, Inc. is traded over the counter on the
NASDAQ National Market System under the symbol: PHBK.
FORM 10-K AND OTHER REPORTS
Peoples Heritage will send a copy of its 1998 Annual Report and Form 10-K to
shareholders upon request. Requests should be addressed to Investor Relations
at the Corporate Headquarters.
TRANSFER AGENT
Shareholder inquiries regarding change of address or title should be directed
to :
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: 718-921-8206
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
RESEARCH COVERAGE
Recent research coverage on Peoples Heritage Financial Group, Inc. is
available from: BT Alex.Brown Inc., First Albany Corp., Fox-Pitt, Kelton,
Inc., Friedman Billings Ramsey & Co., Johnston, Lemon & Co., Keefe, Bruyette
& Woods, Inc., Legg Mason Wood Walker, Inc., Lehman Brothers, Inc., Maine
Securities Corp., Merrill Lynch, Pierce, Fenner & Smith, Parker/Hunter
Incorporated, Southeast Research Partners, Inc., Tucker Anthony, Inc.,
MARKET MAKERS
The following companies have generally been market makers for Peoples
Heritage Financial Group, Inc. Common Stock as of December 31, 1998:
Adams, Harkness & Hill, Inc.
Advest, Inc.
Arthur W. Wood Company
Bear, Stearns & Co., Inc.
BT Alex.Brown Inc.
Cantor Fitzgerald & Co.
Carl P. Sherr & Co.
Capital Resources, Inc.
CIBC Oppenheimer & Co., Inc.
Everen Securities, Inc.
First Albany Corporation
Fox-Pitt Kelton, Inc.
Friedman Billings Ramsey & Co.
Herzog, Heine, Geduld, Inc.
Jeffries & Company, Inc.
Johnston Lemon & Co., Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
Legg Mason Wood Walker, Inc.
Lehman Brothers Inc.
Mayer & Schweitzer, Inc.
MacAllister Pitfield MacKay
Merrill Lynch, Pierce, Fenner & Smith
Moors & Cabot, Inc.
PaineWebber, Inc.
Ryan Beck & Co., Inc.
Salomon Securities Corp.
Sherwood Securities Corp.
Troster Singer Corp.
Tucker Anthony Incorporated
Weeden and Co., Inc.
- --------------------------------------------------------------------------------
COMMON STOCK PRICES
Market prices for Peoples Heritage Financial Group, Inc.'s common stock and
dividends per quarter during 1998 and 1997 are as follows:
- --------------------------------------------------------------------------------
DIVIDENDS DECLARED MARKET PRICES
1998 QUARTERS PER SHARE HIGH LOW
- -------------------------------------------------------------
First $.11 $24.66 $18.69
Second .11 26.75 21.56
Third .11 26.25 15.69
Fourth .11 21.25 12.81
- -------------------------------------------------------------
1997 Quarters
- -------------------------------------------------------------
First $ .09 $16.25 $12.94
Second .09 19.00 13.00
Third .095 21.56 18.00
Fourth .105 23.81 18.94
- -------------------------------------------------------------
As of December 31, 1998, the Company had approximately 11,418 shareholders of
record and 87,545,968 shares outstanding. These numbers do not reflect the
number of individuals or institutional investors holding stock in nominee
name through banks, brokerage firms and others.
64
<PAGE> 72
PEOPLES HERITAGE FINANCIAL GROUP, INC.
ONE PORTLAND SQUARE
POST OFFICE BOX 9540
PORTLAND, MAINE 04112-9540
<PAGE> 1
EXHIBIT 21
Information relating to certain of the subsidiaries of Peoples Heritage
Financial Group, Inc. as of December 31, 1998 is set forth below. All of the
indicated subsidiaries are directly or indirectly wholly-owned by Peoples
Heritage Financial Group, Inc.
Direct Subsidiaries:
JURISDICTION OF INCORPORATION
NAME
Peoples Heritage Bank Maine
Bank of New Hampshire Corporation New Hampshire
Peoples Heritage Merger Corp. Maine
Peoples Heritage Capital Trust I Delaware
Indirect Subsidiaries:
JURISDICTION OF INCORPORATION
NAME
Bank of New Hampshire(1) New Hampshire
Family Bank, FSB(2) United States
Heritage Investment Planning Group, Inc. (3) Maine
Peoples Heritage Leasing Corp. (3) Maine
MPN Holdings (holding company for Maine
insurance brokerage subsidiaries) (3)
- --------------------------
(1) Subsidiary of Bank of New Hampshire Corporation.
(2) Subsidiary of Peoples Heritage Merger Corp.
(3) Subsidiary of Peoples Heritage Bank.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Peoples Heritage Financial Group, Inc.:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (Nos. 33- 22205, 33-22206, 33-80310, 333-17467, 333-46367, 333-49999,
333-70095 and 333-72909), on Form S-3 (Nos. 333-34931, 333-64845 and 333-67961)
and on Form S-4 (No. 333-61757) of Peoples Heritage Financial Group, Inc. of our
report, dated January 19, 1999, incorporated by reference in the December 31,
1998 Annual Report on Form 10-K of Peoples Heritage Financial Group, Inc.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 360,271
<INT-BEARING-DEPOSITS> 115,520
<FED-FUNDS-SOLD> 134,564
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,334,575
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,186,392
<ALLOWANCE> 87,905
<TOTAL-ASSETS> 10,102,459
<DEPOSITS> 6,981,245
<SHORT-TERM> 2,166,329
<LIABILITIES-OTHER> 92,961
<LONG-TERM> 0
100,000
0
<COMMON> 904
<OTHER-SE> 761,020
<TOTAL-LIABILITIES-AND-EQUITY> 10,102,459
<INTEREST-LOAN> 597,975
<INTEREST-INVEST> 114,981
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 712,956
<INTEREST-DEPOSIT> 241,007
<INTEREST-EXPENSE> 106,520
<INTEREST-INCOME-NET> 347,527
<LOAN-LOSSES> 13,423
<SECURITIES-GAINS> 5,817
<EXPENSE-OTHER> 309,919
<INCOME-PRETAX> 146,882
<INCOME-PRE-EXTRAORDINARY> 146,882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,590
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 4.11
<LOANS-NON> 52,939
<LOANS-PAST> 21,574
<LOANS-TROUBLED> 65
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 89,983
<CHARGE-OFFS> 24,552
<RECOVERIES> 9,051
<ALLOWANCE-CLOSE> 87,905
<ALLOWANCE-DOMESTIC> 87,905
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
