<PAGE> 1
OUR TRADITION GROWS.
[GRAPHIC OF A WATERFRONT SCENE, SKIING, PINE TREE STATE PHOTO]
PEOPLES HERITAGE
FINANCIAL GROUP
NEW ENGLAND'S COMMUNITY BANK
1999 ANNUAL REPORT
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EXPANDING OUR REACH WHILE STAYING CLOSE TO OUR COMMUNITIES.
[GRAPHIC OF THE MAINE, MASSACHUSETTS AND CONNECTICUT]
The New England region is an area rich in heritage and tradition. At Peoples
Heritage Financial Group, we recognize this fact with our unique approach to
banking. By staying close to our communities and offering a growing set of
financial services, we have once again achieved record success. We produced
record earnings for the sixth consecutive year, expanded our reach through our
disciplined approach to acquisitions, and strengthened our franchise for the
future.
[GRAPHIC OF A CHURCH]
TABLE OF CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Performance 4
Strategy 6
Markets 8
Services 10
Outlook 12
Selected 5-year Consolidated Financial and Other Data 13
Management's Discussion and Analysis 14
Financial Statements 30
Corporate Directory 57
[GRAPHIC OF A BOAT]
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PEOPLES HERITAGE FINANCIAL GROUP, INC.
Peoples Heritage Financial Group, Inc. ended the year as a $13.9 billion
multi-state banking and financial services holding company headquartered in
Portland, Maine. Its subsidiaries include Peoples Heritage Bank, with the top
market share in Maine, Bank of New Hampshire with the leading market share in
New Hampshire, Family Bank, one of the six largest banks in Massachusetts, and
Glastonbury Bank & Trust Company in Connecticut. The Company and its affiliate
banks also operate subsidiaries in the fields of trust and investments,
insurance brokerage, and leasing. With the expected completion of the
acquisition of Banknorth Group, Inc., the Company will extend its banking
operations into Vermont and upstate New York and expand its franchises in
Massachusetts and New Hampshire.
Peoples Heritage Bank
75 branches throughout ME, No. 1 market position. 20% market share. $4.4 billion
in assets.
Bank of New Hampshire
78 branches throughout NH, No. 1 market position, 22% market share. $4.8 billion
in assets.
Family Bank
56 branches throughout MA, 4 in southern NH. Strong local market position. $4.4
billion in assets.
Glastonbury Bank & Trust Company
8 branches in north/central CT, $338 million in assets.
[MAP OF NEW HAMPSHIRE]
[PHOTO]
[BARCHART OPERATING RETURN ON AVERAGE EQUITY]
FINANCIAL HIGHLIGHTS
You could say our record-setting financial performance is something of a
tradition itself. As the numbers indicate, we ended the year with a continued
strengthening of our key financial ratios.
In 1999, Peoples Heritage Financial Group achieved its sixth consecutive record
earnings year with net income of $142.4 million. On an operating basis,
exclusive of special charges, net income rose 16% to $164.1 million, or $1.58
per diluted share, over 1998 operating earnings of $141.8 million, or $1.34 per
diluted share.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE
DATA)
<TABLE>
<CAPTION>
FOR THE YEAR 1999 1998 % Change 1997 1996 1995
----------- ----------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 446,247 $ 426,473 5% $ 404,924 $ 332,029 $ 298,816
Noninterest income
(excluding securities transactions) 128,907 112,782 14 91,800 68,665 56,990
Net income 142,422 112,824 26 103,672 87,341 70,209
SHARE DATA (2)
Earnings per share:
Basic $ 1.38 $ 1.09 27 $ 1.01 $ 0.91 $ 0.75
Diluted 1.37 1.07 28 0.99 0.89 0.73
Dividends per share (as declared by PHFG) 0.47 0.44 7 0.38 0.34 0.26
Book value per share at year end 8.33 8.68 -4 8.20 7.67 7.14
KEY PERFORMANCE RATIOS
Return on average assets 1.08% 0.97% 11 1.02% 1.09% 0.99%
Return on average equity 16.36 13.09 25 12.73 12.35 10.96
Excluding special charges:
Return on average assets (1) 1.24 1.22 2 1.18 1.18 1.04
Return on average equity (1) 18.85 16.45 15 14.64 13.45 11.53
AT YEAR END
Assets $13,919,528 $12,050,239 16 $11,401,860 $9,364,346 $7,477,894
Loans and leases 6,736,788 6,977,470 -3 7,258,560 5,911,986 4,715,182
Deposits 8,114,757 8,376,715 -3 8,034,776 7,129,538 5,910,325
Shareholders' equity 850,977 901,128 -6 846,255 795,714 692,401
</TABLE>
(1) Special charges consist of merger related and other restructuring charges
which on an after-tax basis were $21,690, $28,944, $15,547, $7,753, and $3,678
for 1999, 1998, 1997, 1996 and 1995, 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.
<PAGE> 4
DEAR SHAREHOLDERS:
[PHOTO OF CHAIRMAN WILLIAM RYAN]
1999 was our sixth annual record earnings year at Peoples Heritage
Financial Group and a period of tremendous achievement.
Thanks to our dedicated employees and successful community banking
strategy, we turned in an impressive performance across a wide range of
financial measures. Our return on equity and efficiency ratio were our best
ever. Our return on assets, earnings and earnings per share were all up
significantly over last year. We grew our trust, insurance and investment
advisory income. We experienced double digit growth in our consumer and
commercial loan business as we continued to shift our balance sheet to focus on
these higher yielding loans while reducing our dependence on lower yielding
mortgage loans.
In our first full year of operations since acquiring SIS Bancorp in
January of 1999, we successfully merged our operations while reducing
noninterest expenses by 4%. The acquisition nearly doubled our size in
Massachusetts, extended our reach into the western part of the state, and
introduced us to the Connecticut market.
In 1999, we also enjoyed our first full year of operations with the
former CFX Corporation which was acquired in April, 1998. CFX increased our
presence as the leading bank in New Hampshire.
In a major step to broaden our market leadership, in June of 1999 we
reached a definitive agreement to acquire Banknorth Group, Inc., one of the
Northeast's most respected financial services providers. Overwhelmingly approved
by shareholders of both organizations and expected to be completed in the Spring
of 2000, the acquisition will bring our assets to nearly $19 billion and make us
the third largest banking company based in New England.
In addition, the acquisition of Banknorth Group will expand our
franchise into Vermont and upstate New York and add to our franchises in New
Hampshire and Massachusetts. The acquisition will also truly establish us as a
Northeast banking leader, giving us the largest combined market share in Maine,
New Hampshire and Vermont.
Like our other acquisitions, Banknorth Group's community banking
approach makes the organization a smart strategic fit for us. Their seasoned
team of respected community bankers with a solid reputation for customer service
and community support mirrors our own approach. In fact, as we expanded our
franchise west into New Hampshire and Massachusetts, Banknorth expanded east
into the same markets. By combining our strengths, we gain a dominant market
position, gain new economies of scale and access to capital, and strengthen our
franchise for the future.
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As we have in the past, we will create new efficiencies by
consolidating operations, and at the same time, let these local banks operate
with the same customer contact people in place and local decision making. It's a
community-focused formula that continues to prove itself as we expand across the
Northeast.
While staying close to our communities, our customers will continue to
benefit from our expanded size and strength. The expected acquisition of
Banknorth Group will give us 300 branches and expand our network of ATMs to 400
so customers can access their funds throughout the Northeast. Our size ensures
local businesses will not outgrow us with our sophisticated cash management,
payroll services and credit card processing capabilities. We will continue to
share successful products across markets and cross-sell services as appropriate
to offer our customers a one-stop financial resource including banking,
insurance, investment and trust services.
In the Spring of 2000, we also expect to change the name of our
multi-state banking and financial services holding company from Peoples Heritage
Financial Group, Inc., to Banknorth Group, Inc. While we take great pride in the
Peoples Heritage name and will continue to use the name where it originated at
our Maine banking subsidiary, we believe the Banknorth name more accurately
reflects the diversified Northeast financial services holding company we are
becoming.
Looking ahead, I believe we can continue to succeed by combining our
operational discipline, personalized community banking approach, and the
strength of an increasingly sophisticated financial services network. By
maintaining our strategy and focus, we have grown from $3 billion in assets in
1992, to $14 billion in 1999, to an expected $19 billion once the acquisition of
Banknorth Group is complete. By expanding our franchise and increasing
profitability, we expect to continue increasing opportunities for both our
customers and shareholders.
I wish to personally thank our shareholders for continuing to support
us during a difficult period for bank stocks. I remain convinced that solid
performance will eventually be rewarded by a fair valuation. In addition,
thanks goes to our employees for all their incredibly hard work, talent and
commitment to our organization and its customers.
Thank you all for being a part of our success.
Sincerely yours,
/s/ William J. Ryan
William J. Ryan
Chairman, President and
Chief Executive Officer
"Thanks to our dedicated employees and successful community banking strategy, we
turned in an impressive performance across a wide range of financial measures."
[BARCHARTS - OPERATING EARNINGS PER SHARE AND NET INCOME]
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PERFORMANCE
TOKENS OF OUR SUCCESS.
RECORD EARNINGS
[NEW HAMPSHIRE GRAPHIC]
For the sixth year in a row, Peoples Heritage Financial Group achieved record
earnings. In 1999, annual net income reached $142.4 million, or $1.37 per
diluted share, up 26% over 1998's net income of $112.8 million or 1.07 per
diluted share.
STRONG PROFITS
In 1999, on an operating basis, exclusive of special charges, net income rose
16% to $164.1 million, or $1.58 per diluted share, over operating earnings of
$141.8 million, or $1.34 per diluted share, in 1998. Our operating earnings have
increased steadily year after year since 1992.
INCREASED DIVIDEND
In keeping with our commitment to return income to our shareholders in the form
of dividends, following the fourth quarter of 1999, we increased our quarterly
dividend by 9% over the dividend paid in the same quarter a year ago.
NET INTEREST INCOME
Despite the continued squeeze on margins, our net interest income was up 5% as a
result of strong consumer and commercial loan volume.
INCREASED FEE INCOME
Strong growth in our noninterest income included a customer service fee income
increase of 30% from 1998. In both Maine and New Hampshire, we continue to open
thousands of new accounts each month because of our attractive product mix. We
also enjoyed increased fees from our growth in areas beyond traditional banking
including a 56% increase in income from insurance commissions, a 37% increase in
income from investment advisory services, and 15% growth in trust income. By
increasing our fee income, we increase our growth potential and reduce our
reliance on margins which come under pressure from rising interest rates.
[PHOTO OF AN APPLE PIE]
[PHOTO OF THE ROCKY COAST]
REDUCED NONINTEREST EXPENSES
With our commitment to operational efficiency and successful merger strategy, we
reduced noninterest expenses 4% in 1999.
RETURN ON EQUITY
Our profitability rates have consistently improved each year. A key
[PHOTO OF A RED WAGON WITH A CHILD AND DOG]
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financial ratio, our operating Return on Average Equity (ROE), reached 18.85%
for the year, as compared to 16.45% for 1998. Our ROE topped 20% in the fourth
quarter of 1999.
RETURN ON ASSETS
Our operating Return on Average Assets (ROA) was 1.24% for the year, as compared
to 1.22% for 1998.
EFFICIENCY RATIO
Our efficiency ratio improved to 53.56% in the fourth quarter of the year, as
compared to 57.44% for the last quarter of 1998. We are pleased with the results
and expect to continue to improve our efficiency.
TOTAL ASSETS
Our assets at year end were $13.9 billion thanks largely to acquisitions and
strong growth in consumer and commercial lending. The expected completion of the
acquisition of the $4.6 billion Banknorth Group and continued internal growth
should bring our total assets to nearly $19 billion.
[MOHAWK TRAILPENNANT GRAPHIC]
LOAN GROWTH
1999 saw double digit growth in consumer and business lending, an important
contributor to our record earnings. Our competitive situation should provide
good opportunities to gain more small and mid-size business loan customers. We
believe there are particularly strong loan growth opportunities in
Massachusetts.
STRONG ASSET QUALITY
[TREE GRAPHIC]
Our balance sheet continues to improve each year. Nonperforming assets as a
percentage of total assets dropped to 0.40% at the end of 1999, compared to
0.56% at the end of 1998. Our credit quality standards and a strong economy
continue to bolster our asset quality strength.
CAPITAL POSITION
Our capital position remains well above the regulatory minimum for
well-capitalized banks.
[EFFICIENCY RATIO BARCHART]
[COUNTRY LANDSCAPE GRAPHIC]
[FIRE TRUCK GRAPHIC]
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STRATEGY
CLOSE TO OUR COMMUNITIES.
[MAN ON THE PHONE GRAPHIC]
[COUNTRY SETTING GRAPHIC]
GROWING PROFITABILITY
Our profitability continues to strengthen with our emphasis on commercial and
consumer lending, a commitment to achieving cost savings of 25% with our
acquisitions, and by increasing our fee income.
INCREASING MARKET SHARE
The expected acquisition of Banknorth Group will enhance our diversified loan
and fee revenue streams, provide $1 billion in Massachusetts assets, and expand
our franchise into Vermont and New York. The acquisition should also favorably
impact our loan mix, funding, net interest margin, and credit quality.
DOMINANT POSITION
Our strong market position is a result of both internal growth and our ongoing
track record of successful acquisitions. As one of the dominant financial
players in the Northeast, our challenge is to continue successfully expanding
our markets while deepening our market penetration by increasing the number of
customers we serve and the number of services utilized by each customer.
INTEGRATION TRACK RECORD
In just the past five years, we have executed 12 profitable bank acquisitions.
In addition to increasing revenue opportunities, we consistently achieve cost
savings as well.
[MASSACHUSETTS GRAPHIC]
INCREASED RETENTION RATE
In addition to expanding our depth of relationships with our customers, and
acquiring new customers, we drive revenues by promoting greater customer
retention. With customer satisfaction as the key to retention, our retention
rate has improved by 15% over past two years. This improvement represents
estimated annual revenue from increased deposit balances and checking account
fees of $2.6 million after two years.
MORE CROSS-SALES
We are steadily increasing the number of products sold to each customer by
improving cross-sell ratios. We have developed a strategic planning task force
focused on prioritizing and cross-selling products.
[CHAIRS ON PORCH GRAPHIC]
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Our goals include enabling our divisions to work more closely together,
increasing the emphasis on cross-sales through incentives, goal setting,
tracking and reporting. We are also improving cross-sales tools for our sales
force.
STRENGTHENING LOAN PORTFOLIO MIX
We continue to make significant progress in better balancing our loan portfolio
mix as we shift our business mix into higher yielding segments like commercial
and consumer lending. Residential mortgages now represent just 21% of our loans,
commercial business lending is 19%, commercial real estate represents 26% and
consumer loans have risen to over 30%.
MAXIMIZE GROWTH POTENTIAL
To optimize our growth, we will maintain a focus on our core competencies of
retail banking, commercial banking, mortgage banking and trust services. We will
seek to continue to expand fee income and be alert for profitable acquisition
opportunities.
OUR MARKET NICHE
We often say that we are too big to be small, but too small to be big. The fact
is, we offer more products and services than smaller banks and more service than
the biggest competitors. It is a niche that gives us a unique advantage and
opportunity to grow in our markets.
INVESTED IN OUR COMMUNITIES
In addition to our philanthropic activities and local community involvement,
Peoples Heritage Financial Group remains a leading mortgage originator and
small business lender in our markets.
[GRAPHIC - LITTLE GIRL]
SHAREHOLDER BUYBACK
Peoples Heritage repurchased four million shares in 1999 and early 2000.
Shareholders' equity at December 31, 1999 was $851.0 million.
[FEE INCOME BARCHART]
[GRAPHICS - SCHOOL BUS AND WHITE MOUNTAINS PENNANT]
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MARKETS
THE PLACES WE KNOW BEST.
[GRAPHIC - CONNECTICUT STATE CAPITAL]
THE NORTHEAST'S NO. 1 COMMUNITY BANK
The anticipated Banknorth Group acquisition will make us the third largest
banking company based in New England, and the Northeast's number one community
bank. While our market share will grow significantly, we will still maintain a
community banking approach in all the markets we serve - a proven formula for
success that continues to serve us well.
NO. 1 IN MAINE
Our "original" bank, Peoples Heritage Bank in Maine, continues to win awards for
small business lending and leads the way in providing home mortgages and
consumer loans in the state.
NO. 1 IN NEW HAMPSHIRE
1999 was our first full year of operations since acquiring the former CFX
Corporation which enhanced our number one market share in New Hampshire.
EXPANDED MASSACHUSETTS MARKETS
Our expanded reach with Banknorth will enhance our major banking presence in
Massachusetts, spanning from the suburbs of Boston to the Berkshires. The
acquisition will also give us the No. 2 market share in Worchester,
Massachusetts, New England's second largest city.
[GRAPHIC OPEN DOOR AND A YARD]
NO. 2 IN VERMONT
The Banknorth acquisition will boost us to the second largest market share in
Vermont. In addition, the Vermont market is quite similar to Maine where we
continue to enjoy great success - with similar market economies and comparable
customer demographics. We also see compatible management styles with Banknorth's
Vermont operations
[GRAPHIC - MAPLE CANDY]
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which should bolster our ability to quickly achieve efficiencies.
ENTERED CONNECTICUT
The purchase of SIS Bancorp, Inc. introduced us to the Connecticut market in
1999, expanding our market share and our opportunities.
UPSTATE NEW YORK
The anticipated Banknorth acquisition will introduce us to the upstate New York
market - a region with a demographic profile similar to the markets we know so
well in northern New England.
[GRAPHICS - OLDER GENTLEMAN, PAPERMAKING MACHINE AND BUOYS]
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SERVICES
SOMETHING FOR EVERYONE.
[GRAPHIC - MOHAWK TRAIL]
COMMERCIAL LENDING
In 1999, total commercial business loans reached $1.3 billion, more than
tripling in four years from $408 million in 1995. Our commercial lending
portfolio is strengthened by its diversification across a wide range of
industries. We also took advantage of major banking consolidations in
Massachusetts to enhance our own first-rate commercial lending team in the
state.
CONSUMER LENDING
Our consumer lending is up 12% for the year with strong growth in home equity
and auto loans. Our success is driven by our strong understanding of the unique
needs of auto dealerships and our fast turnaround time on loan applications.
EXPANDED BRANCH AND ATM NETWORKS
The anticipated Banknorth Group acquisition will boost our banking network to
more than 300 branches and expand our ATM count to 400 throughout the Northeast.
Our customers from all our banks enjoy no-fee ATM use throughout our multi-state
network.
PHONEBANK
Launched three years ago, our PhoneBank now handles over one million calls a
month through a combination of live support personnel and its Automatic Response
Unit (ARU). In keeping with our commitment to personalized service, while most
customers prefer to use the ARU for its quick convenience, we always first
provide the option to speak with a live customer representative.
[GRAPHIC - LADY WITH LAPTOP COMPUTER]
TRUST SERVICES
Trust income rose to $15 million in 1999, up from $1 million since 1995. On a
yearly basis, trust income rose 15% from 1998 to 1999. In addition, trust assets
under management are expected to double once the acquisition of Banknorth is
complete.
INSURANCE
Insurance commissions rose 56% from 1998 to 1999. We will continue to seek
opportunities to acquire insurance agencies within our market areas.
INVESTMENT PLANNING SERVICES
Income from our Heritage Investment Planning Group investment advisory services
grew 37% in 1999.
[GRAPHIC OF DOG THROUGH GLASS DOOR]
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THE BEST OF BOTH COMPANIES
The combination of Peoples Heritage Financial Group and Banknorth Group brings
important strengths from each organization. For example, Peoples Heritage adds
strength in consumer lending including indirect auto and home equity, breadth in
commercial lending, advanced systems and technology; and a widely diversified
product line. Complementing these strengths, Banknorth adds depth through its
extensive trust services, attractive margins, and its added markets.
MORTGAGE LENDING
In 1999, we discontinued our less-profitable correspondent mortgage lending
business and re-focused our efforts on originations in our own markets.
PUBLIC FINANCE
Public finance deposits grew to $626 million in 1999, compared to $525 million
in 1998, and up from $169 million at the start of 1997. In Maine, we hold 40% of
all public sector deposits - more than any other bank. In New Hampshire, we hold
the second largest share of public sector deposits after just three years in the
state. And in Massachusetts, we have quickly grown our public sector deposits
over 600% in just the last two years.
CASH MANAGEMENT SERVICES
Cash management fees grew more than 50% to $6.3 million in 1999, up from $4.1
million in 1998. In addition, in just those two years, we have grown our cash
management customer base from approximately 1,000 to 5,000 customers.
PRIVATE BANKING
Since its inception in mid-1996, we have grown our Private Banking division to
$17 million in deposits, $15 million in commercial loans, $15 million in home
equity lines, and $69 million in residential mortgages.
INTERNET BANKING
To make banking easier and more convenient for our customers, we plan to
leverage the power of the Internet through a major e-commerce initiative in late
2000. We expect to offer our customers a full range of Internet banking and
financial services.
[BARCHART OF NONPERFORMING ASSETS]
[GRAPHIC LIGHTHOUSE SUNSET, STOREFRONT AND PENNANT OF MAINE]
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OUTLOOK
OUR COMMITMENT IS OUR KEEPSAKE.
[GRAPHIC OMITTED]
Looking to the future, we expect to see more industry consolidation, an
increasing utilization of technology in everything we do, and increased
competition for customers. Our competition will also come from wider arenas such
as Internet banks and investment companies.
Despite these challenges, we remain enthusiastically optimistic about
our own prospects. Large community banks have the potential for great success
over the coming years. Peoples Heritage is uniquely positioned in our region to
serve a wide range of customers. We will continue to look for new ways to
increase our market share and profitability through internal growth as well as
through merger and acquisition activities that expand our franchise and breadth
of services.
Of course, our commitment to our customers will remain the same. We
will continue to serve our customers with a level of professionalism and
expertise that goes beyond the expected. We always strive to work in a way that
makes people want to work with us. We seek to embody pride, integrity, passion
and respect for others in everything we do.
In short, tomorrow looks as bright as the past six record earnings
years.
[GRAPHIC - "MAN OF THE MOUNTAINS", COUNTRYSIDE, BASKET OF SHELLS]
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------------------
RESULTS FOR THE YEAR 1999 1998 % Change 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 446,247 $ 426,473 5% $ 404,924 $ 332,029 $ 298,816
Provision for loan and lease losses 14,100 14,430 -2 6,391 8,810 14,235
Noninterest income
(excluding securities transactions) 128,907 112,782 14 91,800 68,665 56,990
Securities transactions 281 5,904 -95 2,571 3,495 1,613
Noninterest expenses
(excluding special charges) 317,528 321,826 -1 308,680 254,620 231,907
Special charges (1) 29,346 39,172 -25 23,559 9,627 4,958
Net income 142,422 112,824 26 103,672 87,341 70,209
- -----------------------------------------------------------------------------------------------------------------------------------
SHARE DATA (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.38 $ 1.09 27 $ 1.01 $ 0.91 $ 0.75
Diluted 1.37 1.07 28 0.99 0.89 0.73
Excluding special charges:
Diluted earnings per share (1) 1.58 1.34 18 1.14 0.97 0.77
Diluted cash earnings per share (1)(3) 1.69 1.45 17 1.22 1.03 0.80
Dividends per share 0.47 0.44 7 0.38 0.34 0.26
Book value per share at year end 8.33 8.68 -4 8.20 7.67 7.14
Tangible book value per share at year end 7.22 7.48 -4 6.96 6.89 6.28
Stock price:
High 20.25 26.75 -24 23.81 14.32 11.44
Low 14.31 12.81 12 12.94 9.50 5.88
Close 15.06 20.00 -25 23.00 14.00 11.38
Weighted average shares outstanding:
Basic 102,988,690 103,637,875 -1 102,219,049 96,068,639 94,100,917
Diluted 104,112,038 105,767,728 -2 104,722,008 98,112,141 95,988,365
- -----------------------------------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
- -----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.08% 0.97% 11 1.02% 1.09% 0.99%
Return on average equity 16.36 13.09 25 12.73 12.35 10.96
Net interest margin (4) 3.67 4.02 -9 4.35 4.45 4.55
Average equity to average assets 6.60 7.41 -11 8.05 8.78 9.04
Efficiency ratio (5) 54.05 58.00 -7 60.46 63.54 65.18
Tier 1 leverage capital ratio 6.60 7.50 -12 7.46 8.34 8.96
Dividend payout ratio (6) 34.12 37.37 -9 42.12 34.19 30.41
Excluding special charges:
Return on average assets (1) 1.24 1.22 2 1.18 1.18 1.04
Return on average equity (1) 18.85 16.45 15 14.64 13.45 11.53
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
- -----------------------------------------------------------------------------------------------------------------------------------
Assets $ 13,185,084 $ 11,633,615 13 $ 10,114,728 $ 8,049,357 $ 7,087,568
Loans and leases 6,988,007 7,959,667 -12 6,733,736 5,421,977 4,665,795
Earning assets 12,225,724 10,683,175 14 9,359,565 7,511,432 6,618,045
Deposits 8,187,612 8,221,969 0 7,393,762 6,249,138 5,686,211
Shareholders' equity 870,709 861,649 1 814,596 706,979 640,724
- -----------------------------------------------------------------------------------------------------------------------------------
AT YEAR END
- -----------------------------------------------------------------------------------------------------------------------------------
Assets $ 13,919,528 $ 12,050,239 16 $ 11,401,860 $ 9,364,346 $ 7,477,894
Loans and leases 6,736,788 6,977,470 -3 7,258,560 5,911,986 4,715,182
Debt and equity securities 5,702,341 3,231,364 76 2,600,057 2,269,365 1,792,615
Deposits 8,114,757 8,376,715 -3 8,034,776 7,129,538 5,910,325
Borrowings 4,788,564 2,554,214 87 2,282,102 1,311,558 775,765
Shareholders' equity 850,977 901,128 -6 846,255 795,714 692,401
Common shares outstanding (thousands) 102,182 103,802 -2 103,218 103,685 96,918
Nonperforming assets (7) 56,356 67,180 -16 77,112 72,709 82,428
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Special charges consist of merger related and other restructuring charges
which on an after-tax basis were $21,690, $28,944, $15,547, $7,753, and
$3,678 for 1999, 1998, 1997, 1996 and 1995, 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) Net interest income divided by average interest-earning assets, calculated
on a fully-taxable equivalent basis.
(5) Excludes distribution on securities of subsidiary trust, special charges
and securities transactions.
(6) Cash dividends paid divided by net income.
(7) Nonperforming assets consist of nonperforming loans, other real estate
owned and repossessed assets, net of related reserves where appropriate.
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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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 1999, 1998 and 1997 and financial
condition at December 31, 1999 and 1998. The Consolidated Financial Statements
and related notes should be read in conjunction with this review. Certain
amounts in years prior to 1999 have been reclassified to conform to the 1999
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, 1999, had 220 offices located in Maine, New Hampshire,
Massachusetts and Connecticut. The Company is the largest bank holding company
headquartered in northern New England and the fourth 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 four wholly-owned banking subsidiaries: Peoples Heritage Bank
("PHB"), Bank of New Hampshire ("BNH"), Family Bank, FSB ("Family"), which
conducts business in certain areas under the name SIS Bank, and Glastonbury Bank
& Trust ("GBT"). 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,
1999, PHB had consolidated assets of $4.4 billion and consolidated shareholder's
equity of $290 million. BNH is a New Hampshire-chartered commercial bank which
operates offices throughout New Hampshire. At December 31, 1999, BNH had
consolidated assets of $4.8 billion and consolidated shareholder's equity of
$253 million. Family is a federally-chartered savings bank which operates
offices in Massachusetts and southern New Hampshire. At December 31, 1999,
Family had consolidated assets of $4.4 billion and consolidated shareholder's
equity of $243 million. GBT is a Connecticut-chartered commercial bank which
operates offices in north-central Connecticut. At December 31, 1999, GBT had
consolidated assets of $338 million and consolidated shareholder's equity of $22
million. Each of PHB, BNH, Family and GBT 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
commercial business loans and leases, commercial real estate loans, residential
mortgage loans and a variety of consumer loans. In addition to keeping loans for
its own portfolio, the Company sells loans into 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 New England, developing new
financial products, services and delivery channels, closely managing yields on
earning assets and rates on interest-bearing liabilities, increasing noninterest
income through, among other things, expanded trust, investment advisory and
insurance brokerage services, and 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 financial 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 New England
The Company believes that New England has 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.
Pending and Completed Acquisitions
On June 1, 1999, the Company entered into a definitive agreement to acquire
Banknorth Group, Inc. ("Banknorth"). Banknorth is headquartered in Burlington,
Vermont and has 100 offices located throughout Vermont, Massachusetts, New
Hampshire and upstate New York. Under the terms of the definitive agreement,
shareholders of Banknorth will receive 1.825 newly issued shares of the
Company's common stock (subject to adjustment as provided in the agreement) for
each share of Banknorth common stock, plus cash in lieu of any fractional share
interests. The definitive agreement is subject to the approval of the
shareholders of both Banknorth and the Company, the receipt of requisite
regulatory approvals and other customary closing conditions. The acquisition is
expected to be accounted for using the pooling-of-interests method and close in
the second quarter of 2000. As of December 31, 1999, Banknorth had total assets
of $4.6 billion and total shareholders' equity of $341 million.
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 acquisition
of SIS 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.
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 their operations from the date of acquisition. The Company
recorded $9.3 mil-
14
<PAGE> 17
lion of goodwill in connection with these purchases. The acquired agencies have
been 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 in connection 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.
The Company incurred various merger related and restructuring charges in
connection with the foregoing acquisitions (collectively, "special charges"). On
an after-tax basis special charges amounted to $21.7 million, $28.9 million and
$15.5 million in 1999, 1998 and 1997, respectively. Special charges in 1999
included $5.3 million of after-tax costs to discontinue the correspondent
mortgage business. Special charges in 1997 included $4.4 million of after-tax
charges related to exiting the lease securitization business conducted through
CFX Funding, a subsidiary of CFX. 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 $142.4 million or $1.37 per diluted share in
1999, compared to $112.8 million or $1.07 per diluted share in 1998. Return on
average equity was 16.36%, compared to 13.09% in 1998. Excluding special
charges, the Company earned $1.58 per diluted share in 1999 compared to $1.34
per diluted share during 1998, an increase of 18%. Return on average equity
excluding special charges was 18.85% in 1999 compared to 16.45% in 1998. The
improved results were attributable to the successful assimilation of recent
acquisitions as well as strong noninterest income growth.
Total revenues increased 9% during 1999 as a result of increases in both
interest income and noninterest income. Net interest income increased 5% during
1999, as compared to 1998. The increase was attributable to a 14% increase in
average interest-earning assets, which was offset in part by a decrease in net
interest margin from 4.02% in 1998 to 3.67% in 1999. The decline in net interest
margin was attributable to unfavorable changes in asset mix. Noninterest income
excluding securities transactions increased 14% during 1999, primarily as a
result of increases in income from customer services, trust and investment
advisory services and insurance commissions.
Noninterest expenses, excluding special charges, decreased 1% during 1999
compared to a 9% increase in total revenues. The decrease in noninterest
expenses primarily resulted from a decrease in salaries and employee benefits
due to assimilation of recent acquisitions and lower distributions on the
securities of a subsidiary trust.
Net Interest Income
The Company's net interest income increased 5% during 1999 due primarily to
the positive impact of a 17 basis point decline in the total cost of funds.
Average earning assets increased by 14%. Commercial real estate, commercial
business and consumer loan product lines all experienced significant growth
while residential real estate loans declined. Residential real estate loans
declined largely due to the Company's discontinuance of the correspondent
mortgage business and the securitization of $633 million of residential loans in
a REMIC, which are now classified as securities held to maturity. Securities
increased due primarily to this securitization and additional declines in
residential mortgages, which were offset by investments in agency
mortgage-backed securities which carry a lower yield. Average securities
increased $2.5 billion, or 97% in 1999 compared to 1998. Average levels of loans
and leases decreased by $971.7 million, or 12.2%, in 1999 compared to 1998 as a
result of the decline in residential real estate loans. The net interest margin
declined to 3.67% in 1999 from 4.02% during 1998. The lower margin was largely
due to increased levels of securities as a percent of total earning assets,
purchases of bank owned life insurance (the earnings from which are recorded as
noninterest income) and an increase in average borrowings as a percent of total
average liabilities. Information on average balances, yields and rates for the
past three years can be found in Table 1. Table 2 shows the changes from 1998 to
1999 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, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/
(Dollars in Thousands) BALANCE INTEREST RATE Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (1) $ 6,988,007 $580,888 8.31% $ 7,959,667 $672,007 8.44%
Investment securities 5,106,436 322,881 6.32 2,593,640 163,151 6.29
Federal funds sold and other
short-term investments 131,281 6,375 4.86 129,868 5,452 4.20
------------ -------- ----------- --------
Total earning assets 12,225,724 910,144 7.44 10,683,175 840,610 7.87
-------- --------
Nonearning assets 959,360 950,440
------------ ------------
Total assets $ 13,185,084 $ 11,633,615
============ ============
Interest-bearing deposits:
Certificates of deposit $ 3,339,347 $166,634 4.99% $ 3,462,115 $187,908 5.43%
Brokered deposits 179,760 9,653 5.37 283,499 16,535 5.83
Other interest-bearing deposits 3,373,703 75,908 2.25 3,263,152 80,492 2.47
------------ -------- ------------ --------
Total interest-bearing deposits 6,892,810 252,195 3.66 7,008,766 284,935 4.07
Borrowed funds 3,988,276 209,493 5.25 2,307,034 126,051 5.46
------------ -------- ------------ --------
Total interest-bearing liabilities 10,881,086 461,688 4.24 9,315,800 410,986 4.41
-------- --------
Non-interest bearing deposits 1,294,802 1,213,203
Other liabilities 65,409 142,963
Securities of subsidiary trust 73,078 100,000
Shareholders' equity 870,709 861,649
------------ ------------
Total liabilities and
shareholders' equity $ 13,185,084 $ 11,633,615
============ ============
Net earning assets $ 1,344,638 $ 1,367,375
============ ============
Net interest income
(fully-taxable equivalent) 448,456 429,624
Less: fully-taxable
equivalent adjustments (2,209) (3,151)
-------- --------
Net interest income $446,247 $426,473
======== ========
Net interest rate spread
(fully-taxable equivalent) 3.20% 3.46%
Net interest margin
(fully-taxable equivalent) 3.67% 4.02%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------
Average Yield/
(Dollars in Thousands) Balance Interest Rate
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans and leases (1) $ 6,733,736 $590,943 8.78%
Investment securities 2,538,405 168,290 6.63
Federal funds sold and other
short-term investments 87,424 4,366 4.99
---------- --------
Total earning assets 9,359,565 763,599 8.16
--------
Nonearning assets 755,163
-----------
Total assets $10,114,728
===========
Interest-bearing deposits:
Certificates of deposit $ 3,227,858 $175,395 5.43%
Brokered deposits 155,281 9,324 6.00
Other interest-bearing deposits 3,026,668 76,759 2.54
----------- --------
Total interest-bearing deposits 6,409,807 261,478 4.08
Borrowed funds 1,705,603 94,868 5.56
----------- --------
Total interest-bearing liabilities 8,115,410 356,346 4.39
--------
Non-interest bearing deposits 983,955
Other liabilities 113,279
Securities of subsidiary trust 87,488
Shareholders' equity 814,596
-----------
Total liabilities and
shareholders' equity $10,114,728
===========
Net earning assets $ 1,244,155
===========
Net interest income
(fully-taxable equivalent) 407,253
Less: fully-taxable
equivalent adjustments (2,329)
--------
Net interest income $404,924
========
Net interest rate spread
(fully-taxable equivalent) 3.77%
Net interest margin
(fully-taxable equivalent) 4.35%
- --------------------------------------------------------------------------------------------
</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.
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, 1999 vs 1998 Year Ended December 31, 1998 vs 1997
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) $(10,348) $ (82,008) $ 1,237 $ (91,119) $(22,437) $107,586 $(4,085) $ 81,064
Investment securities 778 158,055 897 159,730 (8,613) 3,662 (187) (5,139)
Federal funds sold and other
short-term investments 858 59 6 923 (696) 2,120 (338) 1,086
-------- --------- ------- --------- -------- -------- ------- --------
Total earning assets (8,712) 76,106 2,140 69,534 (31,746) 113,368 (4,610) 77,011
-------- --------- ------- --------- -------- -------- ------- --------
Interest-bearing liabilities:
Deposits:
Regular savings and money
market access accounts (7,071) 2,727 (240) (4,584) (2,100) 5,997 (164) 3,733
Certificates of deposit (15,148) (6,663) 537 (21,274) (201) 12,729 (15) 12,513
Brokered deposits (1,312) (6,050) 480 (6,882) (268) 7,699 (221) 7,210
-------- --------- ------- --------- -------- -------- ------- --------
Total interest-bearing deposits (23,531) (9,986) 777 (32,740) (2,569) 26,425 (400) 23,456
Borrowed funds (4,869) 91,859 (3,548) 83,442 (1,677) 33,452 (591) 31,184
-------- --------- ------- --------- -------- -------- ------- --------
Total interest-bearing liabilities (28,400) 81,873 (2,771) 50,702 (4,246) 59,877 (991) 54,640
-------- --------- ------- --------- -------- -------- ------- --------
Net interest income
(fully taxable equivalent) $ 19,688 ($ 5,767) $ 4,911 $ 18,832 ($27,500) $ 53,491 ($3,619) $ 22,371
======== ========= ======= ========= ======== ======== ======= ========
</TABLE>
(1) Loans and leases include portfolio loans, leases, 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 1999 of $14.1
million, as compared to a $14.4 million provision in 1998. Net chargeoffs to
average loans outstanding was 0.24% in 1999 compared to 0.20% in 1998. The
slight increase was due to lower average levels of residential real estate
loans, which generally have low levels of charge-offs.
The allowance for loan and lease losses represented 1.58% of portfolio loans
and leases outstanding at December 31, 1999, as compared to 1.56% at December
31, 1998. The improvement resulted primarily from a decrease in the amount of
residential real estate loans in portfolio as discussed above. The ratio of the
allowance to nonperforming loans at December 31, 1999 was 235%, as compared to
195% at December 31, 1998. Management believes that improvement in this coverage
ratio is consistent with the change in the composition of the loan portfolio and
reduced levels of nonperforming loans, as discussed below.
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, 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 chargeoff 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 best judgment in
providing for 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 future 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) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $6,988,007 $7,959,667 $6,733,736 $5,421,977 $4,665,795
========== ========== ========== ========== ==========
Allowance at the beginning of period $ 110,561 $ 112,064 $ 106,769 $ 98,833 $ 102,976
Additions due to acquisitions -- -- 7,361 11,365 2,457
Charge-offs:
Real estate loans 5,477 9,054 5,117 17,806 21,128
Commercial business loans and leases 4,153 5,400 7,249 4,898 7,098
Consumer loans and leases 14,279 12,226 10,482 5,285 3,949
---------- ---------- ---------- ---------- ----------
Total loans charged off 23,909 26,680 22,848 27,989 32,175
---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate loans 2,466 6,026 8,523 12,291 6,914
Commercial business loans and leases 2,496 2,367 3,801 2,205 3,164
Consumer loans and leases 2,157 2,354 2,067 1,254 1,262
---------- ---------- ---------- ---------- ----------
Total loans recovered 7,119 10,747 14,391 15,750 11,340
---------- ---------- ---------- ---------- ----------
Net charge-offs 16,790 15,933 8,457 12,239 20,835
Provision for loan and lease losses 14,100 14,430 6,391 8,810 14,235
---------- ---------- ---------- ---------- ----------
Allowance at the end of the period $ 107,871 $ 110,561 $ 112,064 $ 106,769 $ 98,833
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.24% 0.20% 0.13% 0.23% 0.45%
Ratio of allowance to total portfolio loans
and leases at end of period 1.58% 1.56% 1.52% 1.77% 2.05%
Ratio of allowance to nonperforming
loans at end of period 235.07% 195.59% 171.02% 190.69% 152.34%
</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) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
PERCENT OF Percent of Percent of
LOANS IN EACH Loans in each Loans in each
CATEGORY TO Category to Category to
AMOUNT TOTAL LOANS Amount Total Loans Amount Total Loans
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $ 53,169 46.84% $ 55,487 54.35% $ 60,849 61.05%
Commercial business
loans and leases 36,469 18.87% 32,878 16.17% 24,650 13.61%
Consumer loans
and leases 18,233 34.29% 22,196 29.48% 19,323 25.34%
Unallocated allowance -- -- -- -- 7,242 --
-------- ------ -------- ------ -------- ------
$107,871 100.00% $110,561 100.00% $112,064 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------
Percent of Percent of
Loans in each Loans in each
Category to Category to
Amount Total Loans Amount Total Loans
-------- ------ ------- ------
<S> <C> <C> <C> <C>
Real estate loans $ 60,416 62.18% $60,455 63.30%
Commercial business
loans and leases 25,449 13.75% 18,484 14.25%
Consumer loans
and leases 14,647 24.07% 12,919 22.45%
Unallocated allowance 6,257 -- 6,975 --
-------- ------ ------- ------
$106,769 100.00% $98,833 100.00%
======== ====== ======= ======
</TABLE>
18
<PAGE> 21
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The unallocated component in the preceding 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 portfolio.
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 are the primary factors considered by
management in determining the adequacy of the allowance for loan and lease
losses. Loan terms and portfolio concentrations did not change significantly
during 1999, although residential mortgage loans decreased from 31% to 21% of
the loan portfolio at December 31, 1998 and 1999, respectively. At December 31,
1999, non-performing loans as a percent of total loans was 0.67%, as compared to
0.80% at December 31, 1998. At December 31, 1999, the Company's allowance as a
percentage of non-performing loans was 235% and has averaged 189% over the past
five years (based on year end data). At December 31, 1999, the Company's
allowance was 6.4 times the 1999 net charge-offs and has averaged 7.2 times net
charge-offs over the past five years (based on year end data). This decline was
due primarily to increased levels of consumer charge-offs and reduced levels of
recoveries.
Noninterest Income
Noninterest income was $129.2 million in 1999 compared to $118.7 million in
1998. The 9% increase in 1999 resulted primarily from increases of $12.4 million
in customer services income, $7.8 million in bank owned life insurance ("BOLI")
and $7.3 million in insurance commissions which were offset by a $10.9 million
decrease in mortgage banking services primarily due to the discontinuation of
the correspondent mortgage business.
Customer services income of $53.4 million increased 30% from 1998 and was
attributable to increased fees including ATM fees related to charging customers
for using our ATMs.
Mortgage banking services income of $16.3 million decreased 40% or $10.9
million during 1999. The decrease resulted from a $16.6 million, or 72%,
decrease in mortgage sales income, primarily from the discontinuance of the
correspondent mortgage lending business in January 1999 and a $5.2 million
decrease in net mortgage servicing income due to a 33% decrease in the average
total of mortgages serviced for others. See "Special Charges" below for a
discussion of the cost to discontinue the correspondent mortgage lending
business. The Company's portfolio of residential mortgages serviced for
investors was $3.6 billion at December 31,1999 as compared to $4.2 billion and
$6.1 billion at December 31, 1998 and 1997, respectively. Mortgage loans
serviced for others decreased in 1998 primarily as a result of the sale of
mortgage servicing rights of $75.9 million related to $2.8 billion of loans.
Gains on the sales of mortgage servicing rights totaled $2.6 million and $1.6
million in 1999 and 1998, respectively. Capitalized mortgage servicing rights
increased from $40.1 million at December 31, 1998 to $46.8 million at December
31, 1999 due primarily to lower impairment reserves as a result of rising
interest rates. See Note 7 to the Consolidated Financial Statements. Because
mortgage servicing rights are an interest-rate sensitive asset, the value of the
Company's mortgage servicing rights and the related mortgage banking income may
be adversely impacted if mortgage interest rates decline and actual or expected
loan prepayments increase. To mitigate the prepayment risk associated with
adverse changes in interest rates and the resultant impairment to capitalized
mortgage servicing rights and effects on mortgage banking income, the Company
has established a hedge program against a portion of its capitalized mortgage
servicing rights to help protect its value and mortgage banking income.
Notwithstanding the foregoing, there can be no assurance that significant
declines in interest rates will not have a material impact on the Company's
mortgage servicing rights and mortgage banking income or that the hedge program
will be successful in mitigating the effects of such a decline.
- --------------------------------------------------------------------------------
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 indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
At or for the Year Ended December 31,
- -------------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997
<S> <C> <C> <C>
Residential mortgages
serviced for investors $ 3,621,848 $ 4,243,181 $6,149,111
=========== =========== ==========
Residential mortgage
sales income $ 6,517 $ 23,123 $ 13,766
Residential mortgage
servicing income, net 5,981 11,143 12,533
Impairment adjustment for
mortgage servicing rights
income (expense) 5,160 (11,086) --
Valuation adjustment -- --
interest rate floor
income (expense) (3,950) 2,380 --
Gains on sale of mortgage
servicing rights 2,634 1,642 2,380
----------- ----------- ----------
Mortgage banking
services income $ 16,342 $ 27,202 $ 28,679
=========== =========== ==========
</TABLE>
Trust income of $14.6 million increased 15% during 1999 primarily due to
increased assets under management. Assets under management were $3.2 billion and
$3.0 billion at December 31, 1999 and 1998, respectively, an increase of 7%.
Investment advisory services income of $5.3 million increased 37% during 1999.
Insurance commission income was $20.3 million and $13.0 million in 1999 and
1998, respectively. This 56% increase reflects the Company's acquisitions of
insurance agencies in Massachusetts and New Hampshire in the fourth quarter of
1998 and were accounted for using the purchase method.
BOLI income was $11.5 million and $3.7 million in 1999 and 1998,
respectively. The increase related to additional purchases of BOLI in the first
quarter of 1999. The cash surrender value of BOLI was $228.4 million at December
31, 1999 compared to $66.9 million at December 31, 1998. This increase reflects
both additional purchases of BOLI and increases in cash surrender value. BOLI
covers certain employees of the Company's bank subsidiaries. Most of the
Company's BOLI is invested in the 'general account' of quality insurance
companies. Substantially all such companies were rated AA or better by Standard
and Poors at December 31, 1999.
Net securities gains amounted to $281 thousand and $5.9 million
19
<PAGE> 22
during 1999 and 1998, 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 $7.5 million and $11.3 million during
1999 and 1998, respectively, and consisted primarily of loan fee income. Other
noninterest income in 1998 included a $1.0 million gain on sale of a credit card
portfolio
Noninterest Expense
Noninterest expense was $346.9 million in 1999 compared to $361.0 million in
1998. The $14.1 million or 3.9% decrease was largely attributable to a decrease
in special charges ($9.8 million), a decrease in distributions on securities of
subsidiary trust ($2.4 million) and a decrease in other noninterest expense
($4.4 million). These decreases were offset by increases in data processing
expenses ($2.6 million) due primarily to Year 2000 costs. Excluding special
charges, noninterest expense decreased 1%. The efficiency ratio improved to
54.05% during 1999 from 58.00% in 1998 primarily as a result of the efficiencies
created by the assimilation of recent acquisitions, as well as operating
improvements.
Salaries and benefits expense of $163.6 million decreased 1% during 1999.
This decrease was due primarily to the integration of the recent acquisitions.
Data processing expense increased 10% to $28.0 million in 1999 from $25.4
million during 1998. The increase was attributable to the implementation of
system upgrades to accommodate increased volumes and expenditures for Year 2000
initiatives. See "Impact of the Year 2000" for further discussion.
Occupancy expense and equipment expense each increased 2% during 1999.
Amortization of goodwill and deposit premiums increased 1% during 1999 due
primarily to amortization of goodwill related to purchases of insurance agencies
in late 1998. Advertising and marketing expense decreased 12% during 1999
reflecting the synergies from recent acquisitions.
Other noninterest expense, which is comprised primarily of general and
administrative expenses, decreased $3.0 million or 6% during 1999 through cost
savings realized from the assimilation of recent acquisitions.
Special Charges
Special charges consist of merger-related expenses of $22.0 million, $39.2
million and $16.4 million during 1999, 1998 and 1997, respectively, as well as
$7.4 million of costs related to the discontinuation of the correspondent
mortgage lending business in 1999 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 $21.7 million, $28.9 million and
$15.5 million for the years ended 1999, 1998 and 1997, respectively. See Note 9
to the Notes to the Consolidated Financial Statements.
Taxes
The Company's effective tax rate was 33.6% in 1999 compared to 33.5% in 1998.
Comprehensive Income
The Company's comprehensive income amounted to $38.9 million and $103.2 million
during 1999 and 1998, respectively. Comprehensive income differed from the
Company's net income in these periods because of a $103.5 million increase in
net unrealized loss on securities during 1999 and a $9.6 million increase in net
unrealized loss on securities during 1998. For additional information, see the
Consolidated Financial Statements.
COMPARISON OF 1998 AND 1997
The Company reported net income of $112.8 million for 1998, or $1.07 per diluted
share, compared with net income of $103.7 million, or $0.99 per diluted share,
reported in 1997. Return on average assets and return on average equity were
0.97% and 13.09%, respectively, for 1998, compared with 1.02% and 12.73%,
respectively, in 1997. Excluding the impact of special charges, net income and
diluted earnings per share were $141.8 million and $1.34, respectively, for 1998
and $119.2 million and $1.14, respectively, for 1997. Return on average assets
and return on average equity were 1.22% and 16.45%, respectively, for 1998 and
1.18% and 14.64%, respectively, for 1997, excluding special charges.
Net interest income on a fully taxable-equivalent basis totaled $429.6
million compared with $407.3 million in 1997. The 6% increase in 1998 reflected
strong loan growth.
The provision for loan and lease losses was $14.4 million in 1998 compared to
a $6.4 million provision in 1997 as a result of significant loan growth in
commercial and consumer loans and the Company's estimate of future potential
losses. The ratio of the allowance to nonperforming loans at December 31, 1998
was 196% compared to 171% at December 31, 1997. The allowance for loan and lease
losses represented 1.56% of total loans at December 31, 1998 compared to 1.52%
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.
Noninterest income was $118.7 million and $94.4 million for the years ended
December 31, 1998 and 1997, respectively. Increases of $6.5 million in customer
services income and $11.1 million in insurance commissions contributed to the
$24.3 million or 26% increase in 1998. Customer services income of $41.0 million
reflected a 19% growth from 1997. In 1998, the Company recorded a full year of
insurance commissions compared to 1997 since the Company entered the insurance
business in the fourth quarter of 1997.
Noninterest expense was $361.0 million for 1998 compared with $332.2 million
for 1997, a 9% increase. The 1998 increase was primarily attributable to an
increase in special charges, higher data processing expense and higher
intangible amortization due to recent purchase acquisitions. The efficiency
ratio, which excludes special charges and dividends on the capital securities of
Peoples Heritage Capital Trust I, improved from 60.46% in 1997 to 58.00% in
1998.
Average earning assets increased $1.3 billion or 14% in 1998 primarily due to
internal growth in loans and loans held for sale. Average interest-bearing
liabilities increased 15% in 1998 in order to fund the growth in assets.
20
<PAGE> 23
FINANCIAL CONDITION
The Company's consolidated total assets increased by $1.9 billion, or 16%, from
$12.1 billion at December 31, 1998 to $14.0 billion at December 31, 1999.
Shareholders' equity totaled $851 million at December 31, 1999 compared to $901
million at December 31, 1998, an decrease of 6%. The decrease is shareholders'
equity was primarily due to a $103.5 million increase in net unrealized loss on
available for sale securities. Excluding unrealized losses, equity increased
$53.3 million, or 6%, due to net income for the period, which was offset in part
by the cost of stock repurchases and dividends paid on common stock.
Average earning assets increased $1.5 billion or 14% in 1999 primarily as a
result of increased securities portfolio. Average loans decreased by 12% in 1999
mostly due to the securitization of $633 million of residential real estate
loans which were classified as securities held to maturity at December 31, 1999.
In 1998, average earning assets increased 15% excluding the impact of loan
growth resulting from purchase acquisitions and required divestitures. See Table
1 for more information on loan growth. Average loans as a percentage of average
earning assets was 57% in 1999 and 75% in 1998.
Investment Securities and Other Earning Assets
The average balance of the securities portfolio was $5.1 billion in 1999 and
$2.6 billion in 1998. The increase was primarily in mortgage-backed securities
and was due to a program undertaken by the Company to offset lower residential
real estate loans and increase balance sheet leverage. 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 bonds and
notes consist of asset-backed securities, corporate bonds and trust preferred
securities. Other equity securities consist of corporate preferred stock with no
stated maturity.
- --------------------------------------------------------------------------------
TABLE 6 - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
- --------------------------------------------------------------------------------
The following table sets forth the Company's investment securities at the dates
indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Government and federal agencies $ 534,720 $ 352,422 $ 522,742
Tax-exempt bonds and notes 19,570 36,461 28,865
Other bonds and notes 240,754 3,201 82,780
Mortgage-backed securities 3,823,658 2,232,978 1,272,696
Collateralized mortgage obligations 453,930 200,774 308,864
----------- ----------- ----------
Total debt securities 5,072,632 2,825,836 2,215,947
Federal Home Loan Bank of Boston stock 221,335 123,706 99,565
Other equity securities 28,803 39,234 50,816
----------- ----------- ----------
Total equity securities 250,138 162,940 150,381
----------- ----------- ----------
Net unrealized gain (loss) (161,761) (2,645) 12,538
----------- ----------- ----------
Fair value of securities available for sale $ 5,161,009 $ 2,986,131 $2,378,866
=========== =========== ==========
Securities held to maturity:
U.S. Government and federal agencies $ -- $ -- $ 10,121
Tax-exempt bonds and notes -- -- 13,470
Other bonds and notes -- 330 745
Asset-backed securities -- 65,350 46,046
Mortgage-backed securities -- 168,554 147,516
Real estate mortgage investment conduit 541,332 -- --
Collateralized mortgage obligations -- 10,999 3,293
----------- ----------- ----------
Amortized cost of securities held to maturity $ 541,332 $ 245,233 $ 221,191
=========== =========== ==========
Fair value of securities held to maturity $ 519,725 $ 245,555 $ 221,891
=========== =========== ==========
Excess of fair value of securities held to maturity
over recorded value (recorded value over fair value) ($ 21,607) $ 322 $ 700
=========== =========== ==========
Fair value of securities held to maturity as a % of
amortized cost 96.0% 100.1% 100.3%
</TABLE>
21
<PAGE> 24
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 7 - MATURITIES OF SECURITIES
- --------------------------------------------------------------------------------
The following table sets forth the scheduled maturities and fully-taxable
equivalent weighted average yields of the Company's debt securities available
for sale at December 31, 1999.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Cost Maturing in
- ---------------------------------------------------------------------------------------------------------------------
More than One More than Five
Less than One Year to Five Years to Ten Years
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and federal agencies $45,408 4.86% $412,095 5.73% $ 9,000 7.99%
Tax-exempt bonds and notes 2,630 6.56% 6,026 6.64% -- --
Other bonds and notes 675 6.89% 13,662 7.37% 98,910 7.22%
Mortgage-backed securities 911 5.48% 12,519 6.42% 147,419 6.74%
Collateralized mortgage obligations 106 5.01% 7,679 5.78% 12,756 6.48%
------- ---- -------- ---- -------- ----
Total $49,730 4.99% $451,981 5.81% $268,085 6.95%
======= ==== ======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Amortized Cost Maturing in
- -------------------------------------------------------------------------------------------------------
More than
Ten Years Total
- -------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies $ 68,217 5.71% $ 534,720 5.69%
Tax-exempt bonds and notes 10,914 8.01% 19,570 7.39%
Other bonds and notes 127,507 7.81% 240,754 7.54%
Mortgage-backed securities 3,662,809 6.48% 3,823,658 6.49%
Collateralized mortgage obligations 433,389 6.43% 453,930 6.42%
---------- ---- ---------- ----
Total $4,302,836 6.51% $5,072,632 6.45%
========== ==== ========== ====
</TABLE>
The following table sets forth the maturities and weighted average yields of the
Company's debt securities held to maturity at December 31, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Amortized Cost Maturing in
- ----------------------------------------------------------------------------------------------------------------------------------
More than One More than Five More than
Less than One Year 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>
Real estate mortgage investment conduit $0 0.00% $0 0.00% $0 0.00% $541,332 7.30% $541,332 7.30%
== ==== == ==== == ==== ======== ==== ======== ====
</TABLE>
Securities available for sale are carried at fair value and had an unrealized
loss of $161.8 million at December 31, 1999 as compared to an unrealized loss of
$2.6 million at December 31, 1998. These unrealized losses do not impact net
income or regulatory capital but are recorded as adjustments to shareholders'
equity, net of related deferred income taxes. Unrealized 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. The
Company does not consider any of the unrealized losses to be other than
temporary.
The assets in the REMIC generally consist of residential mortgages with
original maturities in excess of 10 years. Although the REMIC has a five year
term, the REMIC security has been included in the above table based on the
maturity characteristics of the underlying assets.
Loans
Residential real estate loans (including loans held for sale) averaged $1.9
billion in 1999 compared to $3.2 billion in 1998, a decrease of 42%. The
decrease in the 1999 average balance resulted primarily from the discontinuation
of the correspondent mortgage business in January 1999 and the securitization of
$633 million of residential real estate loans.
Commercial real estate loans averaged $1.7 billion in 1999 and $1.6 billion
in 1998, an 8% 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 $1.2 billion in 1999 and $1.1 billion in
1998, an increase of 13%. All of these loans are originated through
subsidiaries. Commercial business leases are direct equipment leases, primarily
office equipment, and amounted to $51.2 million at December 31, 1999.
Consumer loans and leases averaged $2.2 billion in 1999 and $2.0 billion in
1998, an increase of 7%. The growth in consumer loans was primarily in indirect
automobile 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 automobile lease receivables. Automobile
lease receivables acquired through the CFX acquisition totaled $59.8 million at
December 31, 1999 compared to $96.9 million at December 31, 1998. The Company
had classified these 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.
22
<PAGE> 25
Peoples Heritage Financial Group, Inc. and Subsidiaries
TABLE 8 - SCHEDULED CONTRACTUAL AMORTIZATION OF LOANS AT DECEMBER 31, 1999
The following table sets forth the scheduled contractual amortization of the
Company's loan portfolio at December 31, 1999, 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>
Residential Commercial Commercial Consumer
Real Estate Real Estate Business Loans Loans and
(Dollars in Thousands) Loans Loans and Leases Leases Total
- ---------------------- ----- ----- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 113,798 $ 773,287 $ 727,551 $ 793,658 $2,408,294
After one year
through five years 179,951 551,962 372,103 1,268,375 2,372,391
Beyond five years 1,116,745 470,514 191,717 284,998 2,063,974
---------- ---------- ---------- ---------- ----------
Total $1,410,494 $1,795,763 $1,291,371 $2,347,031 $6,844,659
========== ========== ========== ========== ==========
Interest rate terms on amounts
due after one year
Fixed $ 807,116 $ 758,009 $ 385,989 $1,402,042 $3,353,156
Adjustable 489,580 264,467 177,831 151,331 1,083,209
</TABLE>
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,
------------
1999 1998 1997
---- ---- ----
% of % of % of
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans
- ---------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans $1,410,494 20.60% $2,230,615 31.47% $2,908,834 39.47%
Commercial real estate loans:
Permanent first mortgage loans 1,674,369 24.46 1,463,222 20.64 1,459,330 19.80
Construction and development 121,394 1.78 158,668 2.24 131,275 1.78
---------- ------ ---------- ------ ---------- ------
Total 1,795,763 26.24 1,621,890 22.88 1,590,605 21.58
---------- ------ ---------- ------ ---------- ------
Commercial loans and leases 1,291,371 18.87 1,146,242 16.17 1,003,129 13.61
Consumer loans and leases 2,347,031 34.29 2,089,284 29.48 1,868,056 25.34
---------- ------ ---------- ------ ---------- ------
Total loans receivable 6,844,659 100.00% 7,088,031 100.00% 7,370,624 100.00%
====== ====== ======
Allowance for loan and
lease losses 107,871 110,561 112,064
---------- ---------- ----------
Net loans receivable $6,736,788 $6,977,470 $7,258,560
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
% of % of
(Dollars in Thousands) Amount Loans Amount Loans
- ---------------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Residential real estate loans $2,340,743 38.89% $1,838,423 38.19%
Commercial real estate loans:
Permanent first mortgage loans 1,316,450 21.88 1,144,794 23.78
Construction and development 85,078 1.41 64,092 1.33
---------- ------ ---------- ------
Total 1,401,528 23.29 1,208,886 25.11
---------- ------ ---------- ------
Commercial loans and leases 827,766 13.75 686,129 14.25
Consumer loans and leases 1,448,718 24.07 1,080,577 22.45
---------- ------ ---------- ------
Total loans receivable 6,018,755 100.00% 4,814,015 100.00%
====== ======
Allowance for loan and
lease losses 106,769 98,833
---------- -------------
Net loans receivable $5,911,986 $ 4,715,182
========== =============
</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 21% of the total
loan portfolio at December 31, 1999, down from 31% at the end of 1998. The
decrease in 1999 resulted primarily from the securitization of $633 million of
residential real estate loans, as well as increased levels of prepayments,
particularly early in the year. 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, 1999, 0.78% of the
Company's residential loans were nonperforming, as compared to 0.44% at December
31, 1998. In dollar terms, residential nonperforming loans have only increased
$1.1 million. However, many of the higher quality loans have been sold,
securitized or have prepaid.
The Company's commercial real estate loan portfolio accounted for 26%
of the total loan portfolio at December 31,1999, compared to 23% at December 31,
1998. 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. At December 31, 1999,
0.82% of the Company's commercial real estate loans were nonperforming, as
compared to 1.23% at December 31, 1998.
23
<PAGE> 26
Peoples Heritage Financial Group, Inc. and Subsidiaries
The Company's commercial business loan portfolio accounted for 19% of
the total loan portfolio at December 31, 1999, compared to 16% at December 31,
1998. 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
economy of New England. 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, 1999, 1.16% of the Company's commercial business loans were nonperforming,
as compared to 1.38% at December 31, 1998.
Consumer loans and leases accounted for 34% of the Company's total loan
portfolio at December 31, 1999, compared to 29% at December 31, 1998. The
Company has a diversified consumer loan portfolio which included $910.0 million
of automobile loans and leases, $930.0 million of home equity loans, $167.2 of
mobile home loans, $137.9 million of education loans and $35.1 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, 1999, 0.22% of
the Company's consumer loans were nonperforming, as compared to 0.52% at
December 31, 1998.
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 0.40% at December 31, 1999 compared to 0.56% at December 31, 1998.
In addition, total nonperforming assets as a percentage of total loans and other
nonperforming assets was 0.82% and 0.95% at December 31, 1999 and 1998,
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 collectibility of interest and/or principal is
doubtful. At December 31, 1999, the Company had $10.5 million of accruing loans
which were 90 days or more delinquent, as compared to $22.0 million and $8.8
million of such loans at December 31, 1998 and 1997, respectively. The increase
at year end 1998 was primarily attributable to an increase in residential real
estate loans over 90 days delinquent, which were well secured and in the process
of collection.
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 $16.8 million during 1999, as compared to $15.9 million in
1998. Net charge-offs in 1999 represented 0.24% of average loans and leases
outstanding, as compared to 0.20% in 1998. Decreased gross charge-offs in 1999
compared to 1998 were primarily due to real estate loans, while decreased
recoveries related primarily to commercial real estate loans. See Table 3.
TABLE 10 - NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING
The following table sets forth net charge-offs to average loans outstanding by
type of loan during the periods indicated.
<TABLE>
<CAPTION>
Net Charge-offs to
Average Loans Outstanding
-------------------------
1999 1998
---- ----
<S> <C> <C>
Real estate loans 0.08% 0.07%
Commercial business
loans and leases 0.14 0.28
Consumer loans and leases 0.56 0.49
Total 0.24 0.20
</TABLE>
See Table 3 for more information concerning charge-offs and recoveries during
each of the past five years.
24
<PAGE> 27
Peoples Heritage Financial Group, Inc. and Subsidiaries
TABLE 11 - FIVE YEAR SCHEDULE OF NON-PERFORMING ASSETS
The following table sets forth information regarding nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $11,046 $ 9,917 $16,534 $12,098 $15,451
Troubled debt restructurings - - - - -
------- ------ ------- ------- -------
Total 11,046 9,917 16,534 12,098 15,451
------- ------ ------- ------- -------
Commercial real estate loans:
Nonaccrual loans 13,699 19,944 21,124 21,928 25,570
Troubled debt restructurings 1,002 6 3,428 4,332 7,925
------- ------ ------- ------- -------
Total 14,701 19,950 24,552 26,260 33,495
------- ------ ------- ------- -------
Commercial business loans and leases:
Nonaccrual loans 14,944 14,920 15,669 11,400 9,892
Troubled debt restructurings 82 874 114 615 1,897
------- ------ ------- ------- -------
Total 15,026 15,794 15,783 12,015 11,789
------- ------ ------- ------- -------
Consumer loans:
Nonaccrual loans 5,115 10,865 8,658 5,618 4,143
Troubled debt restructurings - - - - -
------- ------ ------- ------- -------
Total 5,115 10,865 8,658 5,618 4,143
------- ------ ------- ------- -------
Total nonperforming loans:
Nonaccrual loans 44,804 55,646 61,985 51,044 55,056
Troubled debt restructurings 1,084 880 3,542 4,947 9,822
------- ------ ------- ------- -------
Total 45,888 56,526 65,527 55,991 64,878
------- ------ ------- ------- -------
Other nonperforming assets:
Other real estate owned, net
of related reserves 7,642 7,030 8,367 14,611 15,997
Repossessions, net of related reserves 2,826 3,624 3,218 2,107 1,553
------- ------ ------- ------- -------
Total 10,468 10,654 11,585 16,718 17,550
------- ------ ------- ------- -------
Total nonperforming assets $56,356 $67,180 $77,112 $72,709 $82,428
======= ======= ======= ======= =======
Accruing loans 90 days overdue $10,484 $21,962 $8,786 $8,466 $4,999
======= ======= ====== ======= =======
Total nonperforming loans as a
percentage of total loans 0.67% 0.80% 0.89% 0.93% 1.35%
Total nonperforming assets as a
percentage of total assets 0.40% 0.56% 0.68% 0.78% 1.10%
Total nonperforming assets as a
percentage of total loans
and other non-performing assets 0.82% 0.95% 1.04% 1.20% 1.71%
</TABLE>
25
<PAGE> 28
Peoples Heritage Financial Group, Inc. and Subsidiaries
Deposits
Average interest-bearing deposits decreased 2% during 1999 to $6.9 billion.
Average retail certificates of deposit decreased $123 million during 1999 to
$3.3 billion. The average rate paid on certificates of deposit decreased in 1999
from 5.43% in 1998 to 4.99%. 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 $180 million and $283 million in
1999 and 1998, respectively. The average rate paid on brokered deposits was
5.37% in 1999 compared to 5.83% in 1998. Other interest-bearing deposits
(savings, NOW and money market accounts) increased 3% in 1999 to $3.4 billion
from $3.3 billion in 1998. The average rate paid on these deposits declined from
2.47% in 1998 to 2.25% in 1999.
Average demand deposit accounts increased 7% in 1999 to $1.3 billion from
$1.2 billion in 1998. The increase in demand deposits was 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, 1999-1998 Change
----------------------------------------------- -------------------------
(Dollars in Thousands) 1999 1998 1997 Amount Percent
- ---------------------- ---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Demand deposits $1,311,112 $1,305,737 $1,155,327 $ 5,375 0.41%
Money market access/NOW accounts 2,232,891 2,073,793 1,824,397 159,098 7.67%
Savings accounts 1,237,092 1,284,074 1,353,249 (46,982) (3.66%)
Certificates of deposit 3,159,864 3,455,541 3,451,813 (295,677) (8.56%)
Brokered deposits 173,798 257,570 249,990 (83,772) (32.52%)
---------- ---------- ---------- --------- ------
Total deposits $8,114,757 $8,376,715 $8,034,776 ($261,958) (3.13%)
========== ========== ========== ========= ======
</TABLE>
TABLE 13 - MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER
31, 1999
The following table sets forth the scheduled maturity of certificates of deposit
of $100,000 or more at December 31, 1999.
<TABLE>
<CAPTION>
(Dollars in Thousands) Balance Percent
- ---------------------- ------- -------
<S> <C> <C>
3 months or less $252,580 38.21%
Over 3 to 6 months 181,092 27.39
Over 6 to 12 months 144,229 21.82
More than 12 months 83,167 12.58
-------- ------
$661,068 100.00%
======== ======
</TABLE>
Other Funding Sources
Average borrowed funds for 1999 were $4.0 billion, compared with $2.3 billion in
1998. The increase funded higher levels of investment securities. The Company's
primary sources of funds, other than deposits, are securities sold under
repurchase agreements and advances from the Federal Home Loan Bank of Boston
("FHLB"). Average FHLB borrowings increased because growth in average earning
assets 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, 1999, FHLB borrowings amounted to
$3.7 billion. The Company's additional borrowing capacity with the FHLB at
December 31, 1999 was approximately $842 million. See Note 11 to the
Consolidated Financial Statements.
At December 31, 1999 and 1998, securities sold under repurchase
agreements amounted to $1.1 billion and $592.0 million, respectively, and were
collaterallized by mortgage-backed securities and U.S. Government obligations.
See Note 10 to the Consolidated Financial Statements.
26
<PAGE> 29
Peoples Heritage Financial Group, Inc. and Subsidiaries
RISK MANAGEMENT
The Company considers risk management to be an utmost priority. The
primary goal of the risk management program is to determine how certain existing
or emerging issues facing the Company or the financial services industry affect
the nature and extent of risks. Based on a periodic self-evaluation, the Company
determines key issues and develops plans and or objectives to address risk. The
Board and management believe that there are seven applicable "risk categories,"
consisting of credit risk, interest rate risk, liquidity risk, transaction risk,
compliance risk, strategic risk and reputation risk. Each risk category is
viewed from a quantity of risk perspective (high, medium or low) coupled with a
quality of risk perspective. In addition, an aggregate level of risk is assigned
to the Company as a whole as well as the direction of risk (stable, increasing
or decreasing). Each risk category and the overall risk level is compared to
regulatory views on a regular basis and then reported to the Board of Directors
(the "Board") with an accompanying explanation as to why any differences exist.
The risk program includes risk identification, risk measurement, risk control
and risk monitoring.
The Board has established the overall strategic direction of the
Company. It approves the overall risk policies of the Company and oversees the
overall risk management process for the Company. The Board has delegated
authority to three Board Committees consisting of Audit, Board Risk Management
and Asset Review Committees and has charged each Committee with overseeing key
risks. The Executive Risk Management Committee, which reports to the Board,
evaluates the seven key risk areas of the Company and makes recommendations to
the Board Risk Management Committee.
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 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 and sets strategic directives
that guide the day-to-day asset-liability management activities of the Company.
The LFMC also reviews and approves all major risk, liquidity and capital
management programs.
Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign
exchange rates, commodity prices, and other market-driven rates or prices. The
Company has no trading operations and thus is only exposed to non-trading market
risk.
Interest-rate risk, including mortgage prepayment risk, is by far the
most significant non-credit risk to which the Company 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,
(iv) the rate of amortization of capitalized mortgage servicing rights and
premiums paid on securities, (v) the amount of unrealized gains and losses on
securities available for sale and (vi) the value of 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 interest rates
and spreads, the growth or shrinkage of product balances and the behavior of the
Company's deposit and loan customers. The most material assumption relates to
the prepayment of mortgage assets (including mortgage loans, securities and
mortgage servicing rights). The risk of prepayment tends to increase when
interest rates fall. Since future prepayment behavior of loan customers is
uncertain, the resultant interest rate sensitivity of loan assets cannot be
determined exactly. Complicating management's efforts to measure interest rate
risk is the uncertainty of the maturity, repricing and/or runoff of some of the
Company's assets and liabilities.
To cope with these uncertainties, management gives careful attention to
its assumptions. For example, many of the Company's interest-bearing deposit
products (e.g. interest checking, savings and money market deposits) have no
contractual maturity and based on historical experience have only a limited
sensitivity to movements in market rates. Because management believes it has
some control with respect to the extent and timing of rates paid on non-maturity
deposits, certain assumptions regarding rate changes are built in to the model.
In the case of prepayment of mortgage assets, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.
The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments, mainly fixed-rate
portfolio securities and borrowed fund maturities. When appropriate, the Company
will utilize off-balance sheet interest rate instruments such as interest-rate
swaps, forward-rate agreements, options, options on swaps and exchange traded
futures and options. The Company owns an interest-rate floor with a notional
amount of $10 million, expiring in 2000, which was purchased to protect certain
rate sensitive assets against falling interest rates. The Company has no direct
or contingent liability as a result of this floor.
The Board's policy on interest-rate risk simulation specifies that if
interest rates were to shift immediately up or down 200 basis points, estimated
net interest income for the subsequent 12 months should decline by less than
10%. The Company was in compliance with this limit at December 31, 1999. The
Company also monitors gradual changes in market interest rates, which it
believes better represents its exposure to net interest income. The following
table reflects the estimated percentage exposure of the Company's net interest
income for the 12 months following the date indicated assuming a gradual shift
in market interest rates of 100 and 200 basis points, respectively.
27
<PAGE> 30
Peoples Heritage Financial Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Increase Rate Increase Rate Decrease Rate Decrease
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1999 (3.11%) (2.22%) 1.65% 0.90%
======== ======= ======= =======
December 31, 1998 (0.27%) 0.03% (0.70%) (1.61%)
======== ======= ======== ========
</TABLE>
The results implied in the above table indicate estimated changes in simulated
net interest income for the subsequent 12 months assuming a gradual shift up or
down in market rates of 100 and 200 basis points across the entire yield curve.
Assuming a downward shift in rates, savings, money market and NOW accounts have
implied interest rate floors and it is assumed that the related interest expense
on these accounts will not decrease in proportion to the downward shift in
rates. Assuming an upward shift in rates of 200 basis points, the simulated
increase in interest income would be less than the simulated increase in
interest expense as the Company's fixed-rate earning assets exceed its
fixed-cost paying liabilities. It should be emphasized, however, that the
results are dependent on material assumptions such as those discussed above.
The Company uses interest rate floors and various cash instruments to
mitigate the prepayment risk associated with mortgage servicing rights (see
"Non-Interest Income" for further details). At December 31, 1999, the Company
had $200 million notional amount in CMT floors and $20 million in U.S. Treasury
obligations and $20 million in principal only strips. 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.
The following table sets forth the net exposure at the date indicated of the
carrying value of mortgage servicing rights and identified hedge instruments
assuming an immediate shift by the indicated amount in market interest rates.
<TABLE>
<CAPTION>
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, 1999
Mortgage servicing rights ($20,400) ($7,700) $6,100 $8,600
Interest rate floors 8,000 2,600 (1,000) (1,100)
Other cash instruments 14,380 5,400 (3,700) (6,664)
-------- ------- ------- ------
Net exposure $1,980 $300 $1,400 $836
======== ======= ======= ======
</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 and hedge instruments 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 1999 were (i) the increases in market interest rates,
(ii) changes in the composition of mortgage assets, (iii) increase and
diversification of assets and off-balance sheet interest-rate instruments used
to hedge mortgage servicing rights and (iv) changes in the composition of
interest-bearing deposits and borrowings.
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 U.S. dollar. Movements in equity prices may
have an indirect but modest impact on earnings by affecting the volume of
activity or the amount of fees from investment-related businesses.
28
<PAGE> 31
Peoples Heritage Financial Group, Inc. and Subsidiaries
LIQUIDITY
On a parent-only basis, the Company does not have substantial commitments or
debt service requirements. At December 31, 1999, such commitments consisted
primarily of $68.8 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, 1999, shareholders' equity totaled $851.0 million or 6.11% of
total assets, as compared to $901.1 million or 7.48% at December 31, 1998. The
6% decrease was primarily due to the $103.5 million net unrealized loss on
securities available for sale, $54 million of stock repurchases (2,941,800
shares) and $49 million in dividends to shareholders, which were partially
offset by the Company's net income during 1999.
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 $912.5 million or 6.60% of average assets at
December 31, 1999, compared to $875.7 million or 7.50% of average assets at
December 31, 1998. 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, 1999, each
of the Company's banking subsidiaries was deemed to be "well capitalized" under
the regulations of the applicable federal banking agency and in compliance with
applicable state regulatory capital requirements.
YEAR 2000
The Company has not experienced any significant disruptions to its financial or
operating activities caused by a failure of its computerized systems resulting
from Year 2000 issues. Management does not expect Year 2000 issues to have a
material adverse effect on the Company's operations or financial results in
2000.
The Company does not separately track the internal costs incurred for
the Year 2000 expenses, except for the dedicated salary of the project
coordinator. The vast majority of internal costs related 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 $2.0 million in incremental costs in 1999 for Year 2000 work. All
Year 2000 costs were expensed as incurred and were funded out of the Company's
operating cash flow.
IMPACT ON NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("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. In May 1999, the FASB issued an exposure
draft to amend SFAS No. 133 to defer the effective date to January 1, 2001.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of 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.
29
<PAGE> 32
Peoples Heritage Financial Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
(In Thousands, Except Number of Shares and Per Share Data) 1999 1998
- ---------------------------------------------------------- ---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 398,759 $ 415,435
Federal funds sold and other short-term investments 203,789 283,878
Securities available for sale, at market value 5,161,009 2,986,131
Securities held to maturity, market value $519,725 in 1999
and $245,555 in 1998 541,332 245,233
Loans held for sale, market value $67,220 in 1999
and $518,299 in 1998 67,220 517,754
Loans and leases 6,844,659 7,088,031
Less: Allowance for loan and lease losses 107,871 110,561
----------- -----------
Net loans and leases 6,736,788 6,977,470
----------- -----------
Premises and equipment 141,739 144,574
Goodwill and other intangibles 113,264 124,363
Mortgage servicing rights 46,829 40,088
Bank owned life insurance 228,423 66,944
Other assets 280,376 248,369
----------- -----------
Total assets $13,919,528 $12,050,239
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Savings accounts $ 1,237,092 $ 1,284,074
Money market access and NOW accounts 2,232,891 2,073,793
Certificates of deposit (including certificates of $100 or more of
$661,068 in 1999 and $679,330 in 1998) 3,159,864 3,455,541
Brokered deposits 173,798 257,570
Demand deposits 1,311,112 1,305,737
----------- -----------
Total deposits 8,114,757 8,376,715
Securities sold under repurchase agreements 1,089,316 591,970
Borrowings from the Federal Home Loan Bank of Boston 3,667,399 1,936,585
Other borrowings 31,849 25,659
Other liabilities 96,455 118,182
----------- -----------
Total liabilities 12,999,776 11,049,111
----------- -----------
Company obligated, mandatorily redeemable securities of subsidiary trust
holding solely parent junior subordinated debentures 68,775 100,000
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,
106,647,389 issued in 1999 and 106,648,585 in 1998 1,066 1,066
Paid-in capital 509,009 509,473
Retained earnings 530,002 447,438
Unearned compensation (1,690) (2,027)
Accumulated other comprehensive income (loss):
Net unrealized loss on securities available for sale (105,149) (1,651)
Treasury stock at cost (4,465,600 shares in 1999 and 2,845,731 shares in 1998) (82,261) (53,171)
----------- -----------
Total shareholders' equity 850,977 901,128
----------- -----------
$13,919,528 $12,050,239
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
30
<PAGE> 33
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) 1999 1998 1997
- ---------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans and leases $ 579,196 $ 669,991 $ 590,000
Interest and dividends on securities 328,739 167,468 171,270
----------- ---------- ----------
Total interest and dividend income 907,935 837,459 761,270
----------- ---------- ----------
Interest expense:
Interest on deposits 252,195 284,935 261,478
Interest on borrowed funds 209,493 126,051 94,868
----------- ---------- ----------
Total interest expense 461,688 410,986 356,346
----------- ---------- ----------
Net interest income 446,247 426,473 404,924
Provision for loan and lease losses 14,100 14,430 6,391
----------- ---------- ----------
Net interest income after provision
for loan and lease losses 432,147 412,043 398,533
----------- ---------- ----------
Noninterest income:
Customer services 53,402 40,982 34,525
Mortgage banking services 16,342 27,202 28,679
Trust services 14,605 12,713 10,365
Investment advisory services 5,318 3,877 2,256
Insurance commissions 20,289 13,006 1,899
Bank owned life insurance 11,479 3,705 2,251
Net securities gains 281 5,904 2,571
Other noninterest income 7,472 11,297 11,825
----------- ---------- ----------
129,188 118,686 94,371
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 163,621 164,888 156,197
Data processing 28,043 25,399 19,833
Occupancy 27,278 26,811 24,741
Equipment 21,068 20,621 21,641
Amortization of goodwill and deposit premiums 11,778 11,611 8,743
Distributions on securities of subsidiary trust 6,678 9,060 8,351
Advertising and marketing 9,456 10,805 10,998
Special charges 29,346 39,172 23,559
Other noninterest expense 49,606 52,631 58,176
----------- ---------- ----------
346,874 360,998 332,239
----------- ---------- ----------
Income before income tax expense 214,461 169,731 160,665
Applicable income tax expense 72,039 56,907 56,993
----------- ---------- ----------
Net income $ 142,422 $ 112,824 $ 103,672
=========== =========== ==========
Weighted average shares outstanding:
Basic 102,988,690 103,637,875 102,219,049
Diluted 104,112,038 105,767,728 104,722,008
Earnings per share:
Basic $1.38 $1.09 $1.01
Diluted 1.37 1.07 0.99
</TABLE>
See accompanying notes to Consolidated Financial Statements.
31
<PAGE> 34
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
(In Thousands, Except Compen- Other
Number of Shares Par Paid-in Retained sation Treasury Comprehensive
and Per Share Data) Value Capital Earnings ESOP Stock Income(Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 1,044 $ 483,508 $ 319,253 $ (3,693) $ (5,758) $ 1,360 $ 795,714
Net income -- -- 103,672 -- -- 103,672
Unrealized gains on securities,
net of reclassification adjustment (1) -- -- -- -- -- 6,578 6,578
Comprehensive income 110,250
Common stock issued for
employee benefit plans 7 4,846 -- -- -- -- 4,853
Treasury stock issued for
employee benefit plans -- 23 (1,042) (98) 9,474 -- 8,357
Treasury stock purchased -- -- -- -- (40,110) -- (40,110)
Common stock issued for acquisitions -- -- 2,572 -- 6,731 -- 9,303
Payment in lieu of fractional shares -- (5) -- -- -- -- (5)
Decrease in unearned compensation -- 901 -- 668 -- -- 1,569
Cash dividends paid -- -- (43,669) -- -- -- (43,669)
Common stock dividends declared 1 1,761 (1,769) -- -- -- (7)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1997 1,052 491,034 379,017 (3,123) (29,663) 7,938 846,255
Net income -- -- 112,824 -- -- -- 112,824
Unrealized losses on securities,
net of reclassification adjustment (1) -- -- -- -- -- (9,589) (9,589)
Comprehensive income 103,235
Cancellation of CFX treasury
shares at acquisition (1) (1,879) -- -- 1,880 -- --
Common stock issued for
employee benefit plans 11 10,387 -- (545) -- -- 9,853
Treasury stock issued for
employee benefit plans -- -- (2,244) -- 12,615 -- 10,371
Treasury stock purchased -- -- -- -- (38,003) -- (38,003)
Common stock issued for
acquisitions 5 8,601 -- -- -- -- 8,606
Payment in lieu of fractional
shares (1) (46) -- -- -- -- (47)
Decrease in unearned
compensation -- 1,376 -- 1,641 -- -- 3,017
Cash dividends paid -- -- (42,159) -- -- -- (42,159)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1998 1,066 509,473 447,438 (2,027) (53,171) (1,651) 901,128
Net income -- -- 142,422 -- -- -- 142,422
Unrealized losses on securities
net of reclassification adjustment (1) -- -- -- -- -- (103,498) (103,498)
Comprehensive income 38,924
Premium on repurchase of
trust preferred securities -- (1,801) -- -- -- -- (1,801)
Treasury stock issued for
employee benefit plans -- -- (11,258) -- 24,655 -- 13,397
Treasury stock purchased -- -- -- -- (53,745) -- (53,745)
Payment in lieu of
fractional shares -- (4) -- -- -- -- (4)
Decrease in unearned
compensation -- 1,341 -- 337 -- -- 1,678
Cash dividends paid -- -- (48,600) -- -- -- (48,600)
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1999 $ 1,066 $ 509,009 $ 530,002 ($ 1,690) ($ 82,261) ($105,149) $ 850,977
========= ========= ========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Disclosure of reclassification amount (all amounts net of tax): 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period ($103,315) ($5,751) $8,249
Less: reclassification adjustment
for net gains included in net income 183 3,838 1,671
--------- ------- ------
Net unrealized gains (losses) on securities ($103,498) ($9,589) $6,578
========= ======= ======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
32
<PAGE> 35
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 142,422 $ 112,824 103,672
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan and lease losses 14,100 14,430 6,391
Provision for depreciation 19,538 19,196 19,025
Amortization of goodwill and other intangibles 11,778 11,611 8,743
Provision for deferred tax expense 1,363 21,450 13,295
ESOP and restricted stock expense 1,678 3,017 1,569
Net (gains) losses realized from sales of
securities and consumer loans (281) (5,904) (2,484)
Net (gains) losses realized from sales
of loans held for sale (a component of
mortgage banking services) 2,532 (18,500) (11,796)
Earnings from bank owned life insurance (11,479) (3,705) (2,251)
Net decrease (increase) in mortgage
Servicing rights (6,741) 20,550 (19,268)
Proceeds from sales of loans held for sale 901,164 5,196,974 3,225,097
Residential loans originated and purchased
or sale (453,162) (5,289,607) (3,420,896)
Net decrease (increase) in interest and
dividends receivable and other assets (21,058) (31,032) (56,156)
Net increase (decrease) in other liabilities 21,476 (17,281) (11,801)
----------- ----------- -----------
Net cash provided (used) by operating activities 623,330 34,023 (146,860)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities and
principal repayments
of securities held to maturity 91,403 96,327 103,499
Purchase of securities held to maturity -- (148,553) (72,018)
Proceeds from sales of securities available
for sale 27,461 632,328 331,535
Proceeds from maturities and principal
repayments of securities available
for sale 1,441,536 1,099,653 909,318
Purchases of securities available for sale (3,558,053) (2,320,488) (1,535,534)
Net (increase) decrease in loans and leases (406,153) 266,310 (1,109,716)
Proceeds from sales of loans -- -- 36,502
Net additions to premises and equipment (16,703) (18,011) (18,342)
Purchase of bank owned life insurance (150,000) -- --
Payment for acquisitions, net of
cash acquired -- -- (28,261)
----------- ----------- -----------
Net cash used in investing activities (2,570,509) (392,434) (1,383,017)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits (261,958) 341,939 551,062
Net increase in securities sold under
repurchase agreements 497,346 28,490 80,472
Proceeds from Federal Home Loan
Bank of Boston borrowings 4,760,000 3,585,930 1,884,655
Payments on Federal Home Loan
Bank of Boston borrowings (3,029,187) (3,228,212) (1,174,560)
Net increase (decrease) in other borrowings 6,190 750 (8,584)
Proceeds from issuance (repurchase) of
securities of subsidiary trust (33,026) -- 98,361
Issuance of common stock 13,394 18,563 13,198
Purchase of treasury stock (53,745) (38,003) (40,110)
Cash dividends paid to shareholders (48,600) (42,159) (43,669)
----------- ----------- -----------
Net cash provided by financing activities 1,850,414 667,298 1,360,825
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (96,765) 308,887 (169,052)
Cash and cash equivalents at beginning of period 699,313 390,426 559,478
Cash and cash equivalents at end of period $ 602,548 $ 699,313 $ 390,426
=========== =========== ===========
</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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fair value of assets acquired $0 $10,615 $21,424
Less liabilities assumed - 2,009 12,122
---- -------- -------
Net effect on capital $0 $8,606 $9,302
==== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
For the years ended December 31, 1999, 1998 and 1997, interest of $458,913,
$418,509 and $349,112 and income taxes of $53,285, $35,273 and $43,026 were
paid, respectively. During 1999, $632,735 of loans were transferred to
securities held to maturity. During 1999 and 1998, $245,233 and $28,184 of
investment securities were transferred to securities available for sale,
respectively.
- --------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
33
<PAGE> 36
Peoples Heritage Financial Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts expressed in thousands, except share data)
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Peoples Heritage Financial Group, Inc.
(the "Company") and its subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry. The Company's
principal business activities are retail, commercial and mortgage banking as
well as trust, investment advisory and insurance brokerage services, and are
conducted through the Company's direct and indirect subsidiaries located in
Maine, New Hampshire, Massachusetts and Connecticut, consisting of Peoples
Heritage Bank, Bank of New Hampshire, Family Bank, FSB and Glastonbury Bank &
Trust, 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.
The Consolidated Financial Statements have been restated to reflect the
Company's acquisition of SIS Bancorp, Inc. on January 1, 1999 which was
accounted for as a pooling-of-interests. In accordance with accounting
requirements for pooling-of-interests business combinations, the financial
statements of PHFG and SIS have been combined based on historical financial
statements as previously reported by each company. See Note 2 - "Acquisitions".
Assets held in a fiduciary capacity by subsidiary trust departments are not
assets of the Company and, accordingly, are not included in the Consolidated
Balance Sheets.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan and lease losses,
deferred tax assets and the valuation of mortgage servicing rights.
Cash and Cash Equivalents
The Company is required to comply with various laws and regulations of the
Federal Reserve Bank which require that the Company maintain certain amounts of
cash on deposit and is restricted from investing those amounts.
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks 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 and comprehensive income. 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.
34
<PAGE> 37
Peoples Heritage Financial Group, Inc. and Subsidiaries
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 uncollectable. 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
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 impairment. An assessment of
recoverability is performed prior to any writedown of the asset. If
circumstances suggest that their value may be 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 that 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 which are
accounted for as trading instruments and are carried at fair value. 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 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, 401(k), and Other Employee Benefit 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
35
<PAGE> 38
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.
The Company has 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. The Company sponsors a leveraged employee stock ownership plan
(the "ESOP"). The Company is required to make annual contributions to the ESOP
equal to the ESOP's debt service and the unallocated shares are pledged as
collateral for the debt. As the debt is repaid, shares are released from
collateral and allocated to eligible employees. The Company accounts for this
ESOP in accordance with AICPA SOP 93-6 "Employers' Accounting for Employee Stock
Ownership Plans." Accordingly, the debt of the ESOP is recorded as long-term
debt and the shares pledged as collateral are reported as unearned compensation
on the balance sheet. As shares are released from collateral, the Company
records compensation expense equal to the current market price of the shares,
and the shares are treated as outstanding for purposes of calculating earnings
per share.
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.
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 adjusted to exclude
the weighted average number of unallocated shares held by the ESOP. 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
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. The Company's primary business is banking, which provides over 90%
of its revenues and profits. Banking services are provided within the framework
of four community banks which have similar economic characteristics, products
and services, distribution channels and regulatory environments. Accordingly
disaggregated segment information is not presented.
36
<PAGE> 39
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.
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 have been
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.
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 $29.3 million, $39.2 million and
$23.6 million in 1999, 1998 and 1997, respectively. For additional information,
see Note 9 - Special Charges.
Pending Acquisition
On June 1, 1999 the Company entered into a definitive agreement to acquire
Banknorth Group, Inc. ("Banknorth"). Banknorth is headquartered in Burlington,
Vermont and has 100 offices located throughout Vermont, Massachusetts, New
Hampshire and upstate New York. At December 31, 1999, Banknorth had total assets
of $4.6 billion and total shareholders' equity of $341 million. Under the terms
of the definitive agreement, shareholders of Banknorth will receive 1.825 newly
issued shares of the Company's common stock (subject to adjustment as provided
in the agreement) for each share of Banknorth common stock, plus cash in lieu of
any fractional share interests. The definitive agreement is subject to the
approval of the shareholders of both Banknorth and the Company, the receipt of
requisite regulatory approvals and other customary closing conditions. The
acquisition is expected to be accounted for using the pooling-of-interests
method and close in the second quarter of 2000.
37
<PAGE> 40
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
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
DECEMBER 31, 1999
U. S. Government obligations and obligations
of U.S. Government agencies and corporations $ 534,720 $ 18 ($ 16,494) $ 518,244
Tax-exempt bonds and notes 19,570 71 (149) 19,492
Other bonds and notes 240,754 42 (5,930) 234,866
Mortgage-backed securities 3,823,658 1,089 (121,976) 3,702,771
Collateralized mortgage obligations 453,930 176 (15,718) 438,388
---------- ---------- ---------- ----------
Total debt securities 5,072,632 1,396 (160,267) 4,913,761
Federal Home Loan Bank of Boston stock 221,335 -- -- 221,335
Other equity securities 28,803 65 (2,955) 25,913
---------- ---------- ---------- ----------
Total equity securities 250,138 65 (2,955) 247,248
---------- ---------- ---------- ----------
Total securities available for sale $5,322,770 $ 1,461 ($ 163,222) $5,161,009
========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998:
U. S. Government obligations and obligations
of U.S. Government agencies and corporations $ 352,422 $ 701 ($ 815) $ 352,308
Tax-exempt bonds and notes 36,461 895 -- 37,356
Other bonds and notes 3,201 42 -- 3,243
Mortgage-backed securities 2,232,978 3,439 (7,863) 2,228,554
Collateralized mortgage obligations 200,774 882 (679) 200,977
---------- ---------- ---------- ----------
Total debt securities 2,825,836 5,959 (9,357) 2,822,438
Federal Home Loan Bank of Boston stock 123,706 -- -- 123,706
Other equity securities 39,234 1,311 (558) 39,987
---------- ---------- ---------- ----------
Total equity securities 162,940 1,311 (558) 163,693
---------- ---------- ---------- ----------
Total securities available for sale $2,988,776 $ 7,270 ($ 9,915) $2,986,131
========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY:
DECEMBER 31, 1999:
Real Estate investment conduit $541,332 $ 0 ($21,607) $519,725
-------- -------- -------- --------
Total securities held to maturity $541,332 $ 0 ($21,607) $519,725
======== ======== ======== ========
DECEMBER 31, 1998:
Other bonds and notes $ 330 $ 0 ($ 4) $ 326
Asset backed securities 65,350 328 (104) 65,574
Mortgage-backed securities 168,554 541 (521) 168,574
Collateralized mortgage obligations 10,999 90 (8) 11,081
-------- -------- -------- --------
Total securities held to maturity $245,233 $ 959 ($ 637) $245,555
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 41
Peoples Heritage Financial Group, Inc. and Subsidiaries
The amortized cost and market values of debt securities available for sale at
December 31, 1999 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, 1999, the Company had $251.4 million of securities available for
sale with call provisions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
Amortized Cost Market Value Amortized Cost Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Due in one year or less $ 49,730 $ 49,613 $ 0 $ 0
Due after one year through five years 451,981 445,068 -- --
Due after five years through
ten years 268,085 259,807 -- --
Due after ten years 4,302,836 4,159,273 541,332 519,725
---------- ---------- ---------- ----------
Total debt securities $5,072,632 $4,913,761 $ 541,332 $ 519,725
========== ========== ========== ==========
</TABLE>
- ------------------------------------------------------------------------------
A summary of realized gains and losses on securities available for sale for
1999, 1998 and 1997 follows:
- ------------------------------------------------------------------------------
Gross Realized
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gains Losses
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $633 $352
1998 5,927 23
1997 5,322 2,751
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4. LOANS AND LEASES
The Company's lending activities are conducted principally in New England. 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:
<TABLE>
<CAPTION>
December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate mortgages $1,410,494 $2,230,615
Commercial real estate mortgages:
Commercial real estate 1,750,942 1,463,222
Construction and development 44,821 158,668
---------- ----------
1,795,763 1,621,890
Commercial business loans and leases 1,291,371 1,146,242
Consumer loans and leases 2,347,031 2,089,284
---------- ----------
Total loans and leases $6,844,659 $7,088,031
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
Loans and leases include unearned income and net deferred loan costs of $12.8
million and $11.4 million at December 31, 1999 and 1998, respectively.
39
<PAGE> 42
Peoples Heritage Financial Group, Inc. and Subsidiaries
The following table sets forth information regarding nonperforming loans and
accruing loans 90 days or more overdue at the dates indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate mortgages:
Nonaccrual loans $11,046 $ 9,917
Commercial real estate loans:
Nonaccrual loans 13,699 19,944
Troubled debt restructurings 1,002 6
------- -------
Total 14,701 19,950
Commercial business loans and leases:
Nonaccrual loans 14,944 14,920
Troubled debt restructurings 82 874
------- -------
Total 15,026 15,794
Consumer loans:
Nonaccrual loans 5,115 10,865
Total nonperforming loans:
Nonaccrual loans 44,804 55,646
Troubled debt restructurings 1,084 880
------- -------
Total $45,888 $56,526
======= =======
Accruing loans which are 90 days overdue $10,484 $21,962
======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The ability and willingness of 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 1999 if nonperforming
loans at December 31, 1999 had been performing in accordance with their original
terms approximated $4.4 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, 1999 and 1998, total impaired loans were $44.0 million and
$47.2 million, of which $20.4 million and $21.9 million had related allowances
of $3.6 million and $7.6 million, respectively. During the years ended December
31, 1999 and 1998, the income recognized related to impaired loans was $3.9
million and $3.7 million respectively, and the average balance of outstanding
impaired loans was $50.6 million and $44.0 million, respectively. The Company
recognizes interest on impaired loans on a cash basis when the ability to
collect the principal balance is not in doubt; otherwise, cash received is
applied to the principal balance of the loan.
40
<PAGE> 43
Peoples Heritage Group, Inc. and Subsidiaries
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of changes in the allowance for loan and lease losses follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 110,561 $ 112,064 $ 106,769
Allowance on acquired loans -- -- 7,361
Provisions charged to operations 14,100 14,430 6,391
Loans and leases charged off (23,909) (26,680) (22,848)
Recoveries 7,119 10,747 14,391
--------- --------- ---------
Balance at end of period $ 107,871 $ 110,561 $ 112,064
========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 15,701 $ 17,537
Buildings and leasehold improvements 140,697 148,762
Furniture, fixtures and equipment 139,896 137,450
-------- --------
296,294 303,749
Less accumulated depreciation
and amortization 154,555 159,175
-------- --------
$141,739 $144,574
======== ========
- --------------------------------------------------------------------------------------------------------
</TABLE>
7. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31, 1999,
1998 and 1997 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Mortgage Valuation Total
Servicing Allowance
Rights
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of
December 31, 1996 $ 41,370 $ 0 $ 41,370
Mortgage servicing
rights capitalized 55,952 -- 55,952
Mortgage servicing rights acquired
through acquisition 586 -- 586
Amortization charged against
mortgage servicing fee income (8,093) -- (8,093)
Impairment reserve charged
against mortgage servicing
fee income -- -- --
Mortgage servicing rights sold (29,177) -- (29,177)
-------- -------- --------
Balance as of
December 31, 1997 $ 60,638 -- $ 60,638
Mortgage servicing
rights capitalized 80,816 -- 80,816
Amortization charged against
mortgage servicing fee income (14,370) -- (14,370)
Impairment reserve charged
against mortgage servicing
fee income -- (11,086) (11,086)
Mortgage servicing rights sold (75,910) -- (75,910)
-------- -------- --------
Balance as of
December 31, 1998 $ 51,174 (11,086) $ 40,088
Mortgage servicing
rights capitalized 14,268 -- 14,268
Amortization charged against
mortgage servicing fee income (11,021) -- (11,021)
Reduction of impairment reserve
(credit to mortgage servicing
fee income) -- 5,160 5,160
Mortgage servicing rights sold (1,666) -- (1,666)
-------- -------- --------
Balance as of
December 31, 1999 $ 52,755 ($ 5,926) $ 46,829
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential real estate loans
serviced for investors $3,621,848 $4,243,181 $6,149,111
========== ========== ===========
- -----------------------------------------------------------------------------------------------------
</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.
41
<PAGE> 44
Peoples Heritage Financial Group, Inc. and Subsidiaries
8. INCOME TAXES
The current and deferred components of income tax expense follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $66,416 $31,209 $38,183
State 4,260 2,338 3,700
Deferred
Federal 1,337 19,448 14,060
State 26 3,912 1,050
-------- --------- -------
$72,039 $56,907 $56,993
======== ========= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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>
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed federal tax expense $ 75,061 $ 59,406 $ 56,233
State income tax, net of federal benefits 2,786 4,063 3,088
Benefit of tax-exempt income (1,847) (1,778) (1,440)
Nondeductible merger expenses 1,635 2,691 1,854
Amortization of goodwill and other intangibles 3,270 2,785 2,131
Low income/rehabilitation credits (3,000) (2,994) (2,890)
Restructuring of legal entities within affiliated group -- (5,069) --
Increase in cash surrender value of life insurance (4,018) (1,297) (765)
Other, net (1,848) (900) (1,218)
-------- -------- --------
Recorded income tax expense $ 72,039 $ 56,907 $ 56,993
======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</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, 1999 and 1998 follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 39,305 $ 40,115
Reserve for mobile home dealers 806 1,404
Accrued pension expense 1,115 4,902
Difference of tax and book basis of OREO 129 229
Interest accrued and payments received on
non-performing loans for tax purposes 760 1,408
Compensation and employee benefits 6,143 3,840
Book reserves not yet realized for tax purposes 478 1,629
Unrealized depreciation on securities 56,612 995
Employee stock awards -- 501
Investment tax credit carryforward -- 2,245
Other 158 1,134
-------- --------
Total gross deferred tax assets 105,506 58,402
======== ========
Deferred tax liabilities:
Leases 16,896 16,753
Premises and equipment 7,817 784
Partnership investments 5,364 8,223
Loans 6,790 7,198
Mortgage servicing 10,362 13,648
Tax bad debt reserve 977 8,660
Other 350 440
-------- --------
Total gross deferred tax liabilities 48,556 55,706
-------- --------
Net deferred tax asset (liability) $ 56,950 $ 2,696
======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 45
Peoples Heritage Financial Group, Inc. and Subsidiaries
9. SPECIAL CHARGES
Special charges include merger expenses of $22.0 million, $39.2 million and
$16.4 million in 1999, 1998 and 1997, respectively, and $7.4 million of costs to
discontinue the correspondent mortgage lending business in 1999 and $7.2 million
of charges related to exiting the lease securitization business (conducted
through CFX Funding) in 1997. Special charges recorded in 1999 totaled $29.4
million (pre-tax) and $21.7 million (post-tax). The total pre-tax charges
consisted of $33.2 million recorded in the first quarter of 1999 less reversal
of previous merger charges of $3.9 million recorded in the fourth quarter of
1999. The $3.9 million reversal relates mainly to lower than anticipated
payments for: severance, losses on lease residuals, legal fees and claims
related to guarantees on a securitized lease portfolio and to higher than
anticipated pension curtailment gain in connection with the SIS and CFX
acquisitions.
The following table summarizes special charges recorded in 1999 by
type and shows the balance in the accrued liability account as of December 31,
1999 and 1998. These special charges related to the acquisitions of CFX and SIS
and the discontinuance of the correspondent mortgage business.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SIS MERGER
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Cash
Original Amount Reductions
Balance Expense Expense Included in Cash Applied Balance at
12/31/98 Recorded Adjustment Expense Reallocations Payments to Reserve 12/31/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Severance costs $ -- $ 10,890 $ (500) $ 10,390 $ (613) $ (9,777) $ -- $ --
Pension curtailment gain (4,000) (869) (4,869) -- 4,869 --
Data processing/
systems integration -- 4,669 -- 4,669 (395) (4,274) -- --
Professional fees -- 2,978 -- 2,978 219 (3,197) -- --
Asset write-downs/
lease terminations -- 1,800 -- 1,800 749 (577) (1,612) 360
Customer communications -- 1,100 -- 1,100 13 (1,113) -- --
Fund charitable foundation -- 3,000 -- 3,000 -- (3,000) -- --
Other exit costs -- 1,621 -- 1,621 27 (1,648) -- --
-------- -------- -------- -------- -------- -------- -------- --------
$ -- $ 22,058 $ (1,369) $ 20,689 $ -- $(23,586) $ 3,257 $ 360
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CFX MERGER
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Cash
Original Amount Reductions
Balance Expense Expense Included in Cash Applied Balance at
12/31/98 Recorded Adjustment Expense Reallocations Payments to Reserve 12/31/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Severance costs $ 32 $455 $ -- $455 $(385) $(102) $ -- $ --
Pension curtailment
gain -- -- (515) (515) -- -- 515 --
Data processing/
systems integration -- 507 -- 507 -- (507) -- --
Professional fees -- 336 -- 336 -- (336) -- --
Asset write-downs/
lease terminations -- 2,267 (1,156) 1,111 (100) (308) (297) 406
Customer communications -- 48 -- 48 -- (48) -- --
Other exit costs 1,131 200 (849) (649) 485 (105) -- 862
-------- -------- -------- -------- -------- -------- -------- --------
$ 1,163 $3,813 $(2,520) $1,293 $-- $(1,406) $218 $1,268
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
DISCONTINUANCE OF THE CORRESPONDENT LENDING BUSINESS
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Cash
Original Amount Reductions
Balance Expense Expense Included in Cash Applied Balance at
12/31/98 Recorded Adjustment Expense Reallocations Payments to Reserve 12/31/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Severance and salary
costs $ -- $1,986 $ -- $1,986 $264 $(2,250) $ -- $ --
Professional fees -- 1,793 -- 1,793 (678) (1,115) -- --
Asset write-downs -- 1,293 -- 1,293 -- -- (1,293) --
Correspondent losses -- 957 -- 957 988 (1,945) -- --
Other exit costs -- 1,335 -- 1,335 (574) (761) -- --
-------- -------- -------- -------- -------- -------- -------- --------
$ -- $7,364 $ -- $7,364 $ -- $(6,071) $(1,293) $ --
======== ======== ======== ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 46
Peoples Heritage Financial Group, Inc. and Subsidiaries
The severance payments made in connection with the SIS merger covered
approximately 100 employees whose positions were eliminated as a result of the
merger. Property and asset write-downs related to the SIS merger related mainly
to duplicate facilities and fixed assets. Special charges were also recorded by
SIS during the fourth quarter of 1998 totaling $3.8 million, which were related
mainly to certain employee benefits which were fully vested as a result of the
merger and certain professional fees. The special charges recorded in 1999 for
CFX related mainly to higher write-downs of duplicate facilities and fixed
assets and additional systems integration costs. The special charges recorded in
connection with discontinuing the correspondent mortgage business included
severance payments to terminated employees, professional and legal fees,
write-off of remaining goodwill applicable to a prior acquisition of a mortgage
company, and losses on sales of certain loans orginated by correspondents.
Write-downs to estimated fair value were based on independent appraisals where
practical and on management estimates for the remaining assets.
10. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The details of securities sold under short term repurchase agreements follows:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
---------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance outstanding at
end of period $1,089,316 $ 591,970 $ 566,988
Market value of collateral
at end of period 1,241,053 642,697 616,905
Amortized cost of collateral
at end of period 1,284,438 643,512 645,431
Average balance outstanding 567,100 571,834 541,545
Maximum outstanding
at any month end
during the period 1,089,316 619,866 666,669
Average interest rate
during the period 4.45% 4.74% 4.80%
Average interest rate at
end of period 4.75% 4.51% 5.06%
</TABLE>
Securities sold under repurchase agreements generally have maturities of 270
days or less and are collateralized by mortgage-backed securities and U.S.
Government obligations.
11. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
A summary of the borrowings from the Federal Home Loan Bank of Boston is as
follows:
<TABLE>
<CAPTION>
December 31, 1999
- -----------------------------------------------------------
Maturity Dates Principal Amounts Interest Rates
<S> <C> <C>
2000 $ 524,445 4.70% - 6.49%
2001 522,000 5.38% - 6.36%
2002 2,090,120 5.12% - 6.97%
2003 140,201 5.00% - 5.69%
2004 235,268 5.30% - 7.11%
2005-2018 155,365 3.60% - 7.72%
----------
$3,667,399
==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
- -----------------------------------------------------------
Maturity Dates Principal Amounts Interest Rates
<S> <C> <C>
1999 $ 230,352 4.84% - 8.13%
2000 439,444 4.70% - 6.49%
2001 968,044 4.98% - 6.23%
2002 10,415 6.70% - 6.97%
2003 115,201 5.00% - 5.69%
2004-2016 173,129 3.60% - 7.72%
----------
$1,936,585
==========
</TABLE>
Callable borrowings of $50 million are shown in their respective periods
assuming that the callable debt is redeemed at the initial call date while other
borrowings are shown in the periods corresponding to their scheduled maturity
date.
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 had
existing lines of credit with the Federal Home Loan Bank of Boston of $155.6
million, none of which was outstanding at December 31, 1999.
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 (the "Common Securities"). 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
Trust's 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.
44
<PAGE> 47
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. Certain of
these standards relate capital to level of risk by assigning different
weightings to assets and certain off-balance sheet activity. The Company must
maintain a minimum total risk-based, Tier 1 risk-based 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, 1999
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $1,015,125 12.38% $ 656,097 8.00% $ 359,028 4.38%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS) 912,544 11.13% 328,048 4.00% 584,496 7.13%
TIER 1 LEVERAGE CAPITAL RATIO (TO AVERAGE ASSETS) 912,544 6.60% 552,173 4.00% 360,371 2.60%
As of December 31, 1998
Total capital (to risk weighted assets) 968,974 13.02% 595,426 8.00% 373,548 5.02%
Tier 1 capital (to risk weighted assets) 875,723 11.77% 297,713 4.00% 578,010 7.77%
Tier 1 leverage capital ratio (to average assets) 875,723 7.50% 467,096 4.00% 408,627 3.50%
</TABLE>
At December 31, 1999 and 1998, 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. On July 27, 1999 the Board of Directors amended
and restated the Stockholder Rights Plan to, among other things, extend the
expiration date of the rights to September 25, 2009.
Earnings per share
The following table presents a reconciliation of earnings per share as of the
dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands, except For the Year Ended December 31,
per share amounts) 1999 1998 1997
<S> <C> <C> <C>
Net income $ 142,422 $ 112,824 $ 103,672
============ ============ ============
Weighted average
shares outstanding
Basic: 102,998,690 103,637,875 102,219,049
Effect of dilutive
securities:
Stock options 1,113,348 2,129,853 2,502,959
------------ ------------ ------------
Diluted 104,112,038 105,767,728 104,722,008
============ ============ ============
Net income per share:
Basic $ 1.38 $ 1.09 $ 1.01
Diluted 1.37 1.07 0.99
</TABLE>
45
<PAGE> 48
Peoples Heritage Financial Group, Inc. and Subsidiaries
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.
Financial instruments with off-balance sheet risk at December 31, 1999 and
1998 follow:
<TABLE>
<CAPTION>
Contract or Notional Amount at December 31,
1999 1998
<S> <C> <C>
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 $2,066,735 $2,044,542
Loans serviced with recourse 22,295 24,176
Loans sold with credit enhancements 706 3,294
Leases serviced with credit enhancements 4,933 6,227
Financial instruments with notional or
contract amounts which exceed
the amount of credit risk:
Forward commitments to sell loans 48,000 266,227
Interest rate floors - notional amount 200,000 120,000
fair value 1,355 3,433
</TABLE>
Commitments to originate loans, unused lines of credit and unadvanced
portions of construction loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Because many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company has 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, 1999, the Company was committed to invest up to $12.1 million
in real estate development limited partnerships. At December 31, 1999 and 1998
the Company had $20.6 million and $18.8 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, 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 $11.7 million, $9.4 million, and $7.5 million for the years
ended 1999, 1998 and 1997, respectively.
Approximate minimum lease payments over the remaining terms of the leases at
December 31, 1999 follow:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 10,328
2001 10,194
2002 8,966
2003 6,298
2004 5,919
2005 and after 30,347
-------
$72,052
=======
</TABLE>
46
<PAGE> 49
Peoples Heritage Financial Group, Inc. and Subsidiaries
15. STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plans
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 1999, 1998 and 1997, the Company contributed 2%, 3%
and 4% of eligible compensation, respectively. The approximate expense of this
contribution for 1999, 1998 and 1997 was $1.8 million, $2.1 million and $1.3
million, respectively.
Stock Option Plans
In 1995, the Company adopted a stock option plan for non-employee directors
which was amended and restated in 1997. The maximum number of shares which may
be granted under the plan is 530,000 shares, of which 114,000 were granted in
1999 at $18.06 per share, 110,000 were granted in 1998 at $24.31 per share and
59,000 were granted in 1997 at $15.82 per share. A total of 26,500 shares had
been issued upon exercise of the stock options granted pursuant to this plan
through December 31, 1999.
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 and other stock awards covering 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, 1999, there were 2,959,705
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 1999, 1998 and 1997 was $8.35, $5.69 and $9.63 and on the date of
the grants using the Black Scholes option-pricing model with the following
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected dividend yield 2.74% 2.50% 2.50%
Risk-free interest rate 5.53% 5.50% 5.82%
Expected life 5.00 YEARS 5.00 Years 5.00 Years
Volatility 61.92% 32.87% 32.90%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no cost has been recognized for its stock options in the
financial statements. Had the Company determined cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income
As reported $ 142,422 $ 112,824 $ 103,672
Proforma $ 138,152 $ 108,684 $ 99,949
Basic earnings per share
As reported $ 1.38 $ 1.09 $ 1.01
Proforma $ 1.34 $ 1.05 $ 0.98
Diluted earnings per share
As reported $ 1.37 $ 1.07 $ 0.99
Proforma $ 1.33 $ 1.03 $ 0.95
</TABLE>
Proforma 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 is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Balance at December 31, 1997 6,363,599 $ 8.56
Granted 1,328,813 18.92
Exercised 1,835,985 6.64
Forfeited 49,845 16.60
---------
Balance at December 31, 1998 5,806,582 $ 12.19
Granted 1,137,720 $ 17.56
Exercised 1,205,901 7.70
Forfeited 204,725 16.60
---------
BALANCE AT DECEMBER 31, 1999 5,533,676 $ 14.09
=========
</TABLE>
47
<PAGE> 50
Peoples Heritage Financial Group, Inc. and Subsidiaries
The range of per share prices for outstanding and exercisable stock options at
December 31, 1999 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 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
<S> <C> <C> <C> <C> <C>
up to $5.00 295,788 2.6 years $ 2.73 290,788 $2.78
$5.01 - $10.00 848,442 4.5 6.80 848,442 6.80
$10.01 - $15.00 1,238,712 6.0 11.12 923,712 11.02
$15.01 - $20.00 2,842,334 8.2 17.75 1,519,901 17.94
Over $20.00 308,400 7.1 23.26 214,075 23.53
--------- ---------
5,533,676 6.8 14.09 3,796,918 12.92
========= =========
</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,
1999, 893,591 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 7,376, 6,420 and 3,840 in 1999, 1998 and 1997,
respectively.
16. RETIREMENT AND OTHER BENEFIT PLANS
Pension Plans
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 also
has 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
<PAGE> 51
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, 1999 and 1998 for the
pension plans and other post retirement benefit plans:
<TABLE>
<CAPTION>
Pension Plans Other Post Retirement Benefits
1999 1998 1999 1998
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 67,388 $ 60,145 $ 6,540 $ 5,973
Service cost 4,857 3,754 131 88
Interest cost 4,938 4,308 495 425
Assumption changes (12,921) 3,654 (833) 299
Actuarial (gain) loss 7,543 459 1,248 269
Curtailment gain (6,358) (446) -- 0
Acquisitions 3,253 -- -- 0
Benefits paid (5,507) (4,486) (616) (514)
-------- -------- -------- --------
Benefit obligation at end of year $ 63,193 $ 67,388 $ 6,965 $ 6,540
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 69,231 $ 64,412 -- --
Actual return on plan assets 12,115 8,817 -- --
Employer contribution 481 488 616 514
Benefits paid (5,507) (4,486) (616) (514)
Administrative expenses (232) -- -- --
-------- -------- -------- --------
Fair value of plan assets at end of year $ 76,088 $ 69,231 -- --
======== ======== ======== ========
Funded status $ 12,895 $ 1,843 ($ 6,965) ($ 6,540)
Unrecognized net actuarial (gain) loss (20,689) (8,751) 127 (276)
Unrecognized prior service cost 1,181 1,529 1,585 1,725
Unrecognized net transition obligation (1,664) (2,008) 2,092 2,241
-------- -------- -------- --------
Prepaid (accrued) benefit cost ($ 8,277) ($ 7,387) ($ 3,161) ($ 2,850)
======== ======== ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.75% 6.50% 7.75% 6.50%
Expected return on plan assets 8.50% 8.50% -- --
Rate of compensation increase 4.50% 4.50% -- --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 4,857 $ 3,754 $ 2,995 $ 131 $ 88 $ 58
Interest cost 4,938 4,308 3,631 495 425 418
Expected return on plan assets (5,712) (5,288) (4,201) -- -- --
Net amortization and deferral (420) (564) (511) 302 290 258
Curtailment gain -- (446) -- -- -- --
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 3,663 $ 1,764 $ 1,914 $ 928 $ 803 $ 734
======= ======= ======= ======= ======= =======
</TABLE>
Curtailment gains of $5.4 million in 1999 were recorded as a reduction of
special charges relating to the SIS and CFX acquisitions
Multi-Employer Pension Plan
An acquired company participated in a multi-employer pension plan in 1998 and
1997. The plan was fully funded in 1998 and there is no future obligation
relative to the plan. Pension expense attributable to the plan for the years
ended December 31, 1999, 1998 and 1997 was $0, $377,000 and $396,000,
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 1999, 1998 and 1997 was $2.4
million, $2.6 million, and $2.3 million, respectively.
49
<PAGE> 52
Peoples Heritage Financial Group, Inc. and Subsidiaries
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 AND
OTHER BORROWINGS. The fair value of the Company's long-term borrowings is
estimated based on quoted market prices for the issues for which there is a
market, or by discounting cash flows based on current rates available to the
Company for similar types of borrowing arrangements. For short-term borrowings
that mature or reprice in 90 days or less, carrying value approximates fair
value.
OFF-BALANCE SHEET INSTRUMENTS:
COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY
LETTERS OF CREDIT. In the course of originating loans and extending credit and
standby letters of credit, the Company will charge fees in exchange for its
lending commitment. While these commitment fees have value, the Company has not
estimated their value due to the short-term nature of the underlying
commitments.
FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward
commitments to sell loans reflects the value of origination fees and servicing
rights recognizable upon sale of loans net of any cost to the Company if it
fails to meet its sale obligation. Of the $48 million of forward sales
commitments at December 31, 1999, the Company had $67.2 million in loans
available to sell at that date as well as sufficient loan originations
subsequent to December 31, 1999 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.
50
<PAGE> 53
Peoples Heritage Financial Group, Inc. and Subsidiaries
A summary of the fair values of the Company's significant financial instruments
at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 602,548 $ 602,548 $ 699,313 $ 699,313
Securities - available for sale 5,161,009 5,161,009 2,986,131 2,986,131
Securities - held to maturity 541,332 519,725 245,233 245,555
Loans held for sale 67,220 67,220 517,754 518,299
Loans and leases, net 6,736,788 6,654,369 6,977,470 7,026,124
Mortgage servicing rights 46,829 51,654 40,088 41,177
Liabilities:
Deposit (with no stated maturity) 4,905,178 4,905,178 4,861,555 4,861,555
Time deposits 3,209,579 3,215,771 3,515,160 3,530,573
Borrowings 4,788,564 4,762,295 2,554,214 2,559,940
</TABLE>
51
<PAGE> 54
Peoples Heritage Financial Group, Inc. and Subsidiaries
18. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
<TABLE>
<CAPTION>
December 31,
Balance Sheets 1999 1998
<S> <C> <C>
Assets:
Cash and due from banks $ 5,455 $ 7,605
Interest bearing deposits with subsidiaries 55,669 21,857
Securities available for sale 32,357 39
Investment in subsidiaries 812,779 946,414
Goodwill and other intangibles 12,888 14,689
Amounts receivable from subsidiaries 61,485 13,767
Other assets 29,063 14,280
---------- ----------
Total assets $1,009,696 $1,018,651
========== ==========
Liabilities and shareholders' equity
Amounts payable to subsidiaries $ 28,720 $ 8,953
Subordinated debentures supporting mandatory redeemable trust securities 103,093 105,705
Other liabilities 26,906 2,865
Shareholders' equity 850,977 901,128
---------- ----------
Total liabilities and shareholders' equity $1,009,696 $1,018,651
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
Statements of Income 1999 1998 1997
<S> <C> <C> <C>
Operating income:
Dividends from subsidiaries $ 180,948 $ 69,532 $ 69,873
Other operating income 3,588 2,324 4,336
--------- --------- ---------
Total operating income 184,536 71,856 74,209
--------- --------- ---------
Operating expenses:
Interest on borrowings 9,544 9,375 9,070
Amortization of intangibles 1,842 1,838 1,864
Merger expenses 13,778 19,006 354
Other operating expenses 1,286 6,947 7,432
--------- --------- ---------
Total operating expenses 26,450 37,166 18,720
--------- --------- ---------
Income before income taxes and equity in
undistributed net income of subsidiaries 158,086 34,690 55,489
Income tax benefit (8,688) (9,894) (3,097)
--------- --------- ---------
Income before equity in undistributed
net income of subsidiaries 166,774 44,584 58,586
Equity in undistributed net income of subsidiaries (1) (24,352) 68,240 45,086
--------- --------- ---------
Net income $ 142,422 $ 112,824 $ 103,672
========= ========= =========
</TABLE>
(1) Amounts in parenthesis represent the excess of dividends over net income
from subsidiaries.
52
<PAGE> 55
Peoples Heritage Financial Group, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
Statements of Cash Flows 1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 142,422 $ 112,824 $ 103,672
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Undistributed net income from subsidiaries 24,352 (68,240) (45,086)
Amortization of goodwill and other intangibles 1,842 1,839 1,864
Securities losses (gains) -- (23) (113)
Decrease in unearned compensation 1,678 -- --
(Increase) decrease in amounts receivable from subsidiaries (47,718) (6,773) 7,330
Decrease (increase) in other assets (14,824) 297 (3,822)
Increase (decrease) in amounts payable to subsidiaries 19,767 8,928 (163)
Increase (decrease) in other liabilities 24,041 (9,252) 6,617
Other, net -- 37 (3,309)
--------- --------- ---------
Net cash provided by operating activities $ 151,560 $ 39,637 $ 66,990
--------- --------- ---------
Cash flows from investing activities:
Net decrease (increase) in interest bearing deposits with subsidiaries ($ 33,812) $ 9,370 ($ 9,818)
Sales of available for sale securities -- 16 185
Purchase of available for sale securities (34,119) -- (7)
Sales of held to maturity securities -- -- 4,337
Purchase of held to maturity securities -- -- (4,017)
Capital contribution from (to) subsidiary 5,785 (12,000) (55,000)
--------- --------- ---------
Net cash (used) provided by investing activities ($ 62,146) ($ 2,614) ($ 64,320)
--------- --------- ---------
Cash flows from financing activities:
Issuance of notes payable (net) $ 0 $ 0 $ 103,093
Payment of notes payable (2,612) (1,741) (2,177)
Other shareholders' equity, net -- -- 1,687
Dividends paid to shareholders (48,600) (42,159) (43,669)
Treasury stock acquired (53,745) (38,003) (40,110)
Common stock issued 13,393 14,181 12,609
--------- --------- ---------
Net cash provided (used) by financing activities ($ 91,564) ($ 67,722) $ 31,433
--------- --------- ---------
Net increase (decrease) in cash due from banks ($ 2,150) ($ 30,699) $ 34,103
Cash and due from banks at beginning of year 7,605 38,304 4,201
--------- --------- ---------
Cash and due from banks at end of year $ 5,455 $ 7,605 $ 38,304
========= ========= =========
Supplemental disclosure information:
Interest paid on borrowings $ 9,544 $ 9,060 $ 5,156
</TABLE>
53
<PAGE> 56
Peoples Heritage Financial Group, Inc. and Subsidiaries
19. SUBSEQUENT EVENT (UNAUDITED)
As discussed in Note 2, the Company has entered into an agreement to acquire
Banknorth Group, Inc., which will be accounted for as a pooling-of-interests.
The transaction is expected to be completed in the second quarter of 2000. The
following proforma condensed consolidated balance sheet was prepared as if the
pending acquisition noted above had been completed at December 31, 1999 and the
proforma condensed consolidated statement of income was prepared as if the
pending acquisition had been completed as of January 1, 1999.
The unaudited proforma information may not be indicative of the results that
would actually have occurred if the merger had been in effect on the date
indicated or which may be obtained in the future. The proforma information does
not give effect to anticipated cost savings or revenue enhancements in
connection with the merger.
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Proforma
PHFG Banknorth Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Investments $ 5,702,341 $ 1,170,841 $ -- $ 6,873,182
Total loans and leases, net 6,736,788 2,962,820 -- 9,699,608
Other assets 1,480,399 455,075 -- 1,935,474
----------- ----------- ----------- -----------
Total assets $13,919,528 $ 4,588,736 $ -- $18,508,264
=========== =========== =========== ===========
Liabilities and equity:
Deposits $ 8,114,757 $ 3,595,744 $ -- $11,710,501
Borrowings 4,788,564 578,914 -- 5,367,478
Other liabilities 96,455 42,781 30,972(1) 170,208
----------- ----------- ----------- -----------
Total liabilities 12,999,776 4,217,439 30,972(1) 17,248,187
----------- --------- ----------- -----------
Securities of subsidiary trust 68,775 30,000 -- 98,775
Shareholders' equity 850,977 341,297 (30,972)(1) 1,161,302
----------- --------- ----------- -----------
Total liabilities and shareholders' equity $13,919,528 4,588,736 $ -- $18,508,264
=========== ========= =========== ===========
</TABLE>
(1) The adjustment reflects estimated one-time reorganization and restructuring
costs related to the merger, net of taxes.
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------
Proforma
PHFG Banknorth Adjustments Combined
---- --------- ----------- --------
<S> <C> <C> <C> <C>
Interest income $ 907,935 $ 319,584 $ -- $ 1,227,519
Interest expense 461,688 141,602 -- 603,290
------------ ------------ --------------- ------------
Net interest income 446,247 177,982 -- 624,229
Provision for loan and lease losses 14,100 9,475 -- 23,575
------------ ------------ --------------- ------------
Net interest income after provision
for loan and lease losses 432,147 168,507 -- 600,654
Non-interest income 129,188 55,105 -- 184,293
Non-interest expense 346,874 145,517 -- 492,391
------------ ------------ --------------- ------------
Income before income taxes 214,461 78,095 -- 292,556
Income tax expense 72,039 23,559 -- 95,598
------------ ------------ --------------- ------------
Net income $ 142,422 $ 54,536 -- $ 196,958
============ ============ =============== ============
Earnings per share:
Basic $ 1.38 $ 2.33 $ 1.35
Fully diluted $ 1.37 $ 2.30 $ 1.34
Weighted average shares outstanding:
Basic 102,988,690 23,435,122 145,757,788
Fully diluted 104,112,038 23,734,591 147,427,667
</TABLE>
54
<PAGE> 57
Peoples Heritage Financial Group, Inc. and Subsidiaries
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
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 $240,596 $236,741 $220,350 $210,248 $208,955 $210,211 $208,614 $209,679
Interest expense 126,216 121,938 111,224 102,310 102,722 102,742 102,395 103,127
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 114,380 114,803 109,126 107,938 106,233 107,469 106,219 106,552
Provision for loan
and lease losses 3,405 3,565 3,565 3,565 3,973 3,973 3,235 3,249
Net interest income
after provision for
loan and lease losses 110,975 111,238 105,561 104,373 102,260 103,496 102,984 103,303
Noninterest income 33,854 32,120 33,780 29,434 30,745 28,956 30,274 28,716
Special charges (3,889) -- -- 33,235 3,798 -- 34,474 900
Noninterest expenses 80,945 79,502 79,312 77,769 79,574 78,296 79,873 84,088
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 67,773 63,856 60,029 22,803 49,633 54,156 18,911 47,031
Income tax expense 22,192 21,275 19,263 9,309 17,703 16,914 6,375 15,915
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 45,581 $ 42,581 $ 40,766 $ 13,494 $ 31,930 $ 37,242 $ 12,536 $ 31,116
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share
Basic $ 0.45 $ 0.41 $ 0.39 $ 0.13 $ 0.31 $ 0.36 $ 0.12 $ 0.30
Diluted 0.44 0.41 0.39 0.13 0.30 0.35 0.12 0.29
Operating earnings per share (1):
Basic $ 0.42 $ 0.41 $ 0.39 $ 0.36 $ 0.35 $ 0.36 $ 0.35 $ 0.31
Diluted 0.42 0.41 0.39 0.36 0.34 0.35 0.35 0.30
</TABLE>
(1) Earnings before special charges.
55
<PAGE> 58
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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
[KPMG LLP]
Boston, Massachusetts
January 18, 2000
56
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
FINANCIAL GROUP, INC.
BOARD OF DIRECTORS
WILLIAM J. RYAN
Chairman of the Board
President & CEO
Peoples Heritage Financial Group, Inc.
PAMELA P. PLUMB
Vice Chairman of the Board
Pamela Plumb & Associates
GARY G. BAHRE
President & CEO
New Hampshire International Speedway
P. KEVIN CONDRON
President & CEO
The Granite Group LLC
KATHERINE M. GREENLEAF
Senior Vice President
Wright Express
DOUGLAS S. HATFIELD, JR.
Attorney, President & Treasurer
Hatfield, Moran & Barry, PA
DAVID D. HINDLE
Retired President &
Chief Executive Officer
Family Bank
DANA S. LEVENSON
Principal
Levenson Business Group
President
Quatro Realty Group
PHILIP A. MASON
Attorney
Mason & Martin, L.L.P.
JOHN M. NAUGHTON
Retired Executive
Massachusetts Mutual Life Insurance Company
MALCOLM W. PHILBROOK, JR.
Attorney & President
Crockett, Philbrook & Crouch, P.A.
SETH A. RESNICOFF, MD
Surgeon & President
Concord Surgical Associates, P.A.
CURTIS M. SCRIBNER
Principal
C. M. Scribner & Co.
PAUL R. SHEA
Retired President & CEO
Bank of New Hampshire Corp.
JOHN E. VEASEY
President
Cedardale Athletic Club
- --------------------------------------------------------------------------------
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
R. SCOTT BACON
Executive Vice President
President & CEO
Bank of New Hampshire
STEPHEN J. BOYLE
Executive Vice President
Controller
CHRISTOPHER W. BRAMLEY
Executive Vice President
President & CEO
Family/SISBank
JOHN W. FRIDLINGTON
Executive Vice President
Lending
ANDREW W. GREENE
Executive Vice President
Insurance and Investments
CYNTHIA HAMILTON
Executive Vice President
Human Resources
JOSEPH W. HANSON
Executive Vice President
Operations
EMERY F. HILL
Executive Vice President
Information Technology
THOMAS P. HOGAN
Executive Vice President
Consumer Lending
CAROL L. MITCHELL, ESQ.
Executive Vice President
General Counsel, Clerk
& Secretary
DAVID J. OTT
Executive Vice President
President & CEO
Peoples Heritage Bank
EDWARD P. SCHREIBER
Executive Vice President
Risk Management
WENDY P. SUEHRSTEDT
Executive Vice President
Retail Delivery
HALL THOMPSON
Executive Vice President
Investments
ELIZABETH K. WARN
Executive Vice President
Residential Mortgage Lending
BRIAN WOOD
Executive Vice President
Marketing
57
<PAGE> 60
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PEOPLES HERITAGE BANK
BOARD OF DIRECTORS
MALCOLM W. PHILBROOK, JR.
Chairman of the Board
Attorney & President
Crockett, Philbrook & Crouch P.A.
WILLIAM J. RYAN
Chairman, President
& Chief Executive Officer
Peoples Heritage Financial Group, Inc.
DAVID J. OTT
President
Peoples Heritage Bank
MEG BAXTER
President
United Way of Greater Portland
CHARLES BELLEGARDE, JR.
Consultant & President
Charles Bellegarde & Son, Inc.
CYNTHIA FOSS BOWMAN, M.D.
Medical Director, Clinical Lab
Pen Bay Medical Center
SCOTT B. BULLOCK
President & Chief Executive Officer
Maine General Medical Center
PETER B. CHAPMAN
President & Chief Executive Officer
Paris Farmers Union
GUY A. HARTNETT
President, Treasurer, Owner
One-Right Systems, Inc.
President
Lydimap Corp.
GALEN N. HOGAN
President, Treasurer &
Chief Executive Officer
Hogan Tire Co.
TIMOTHY B. HUSSEY
President & CEO
Hussey Seating Co.
DAVID M. MACMAHON
President
Gates Formed-Fibre Products, Inc.
CURTIS M. SCRIBNER
Principal
C.M. Scribner & Company
PETER G. VIGUE
President
Cianbro Corporation
SHELTON S. WHITE, JR.
Retired President
H.E. Callahan Construction Co.
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
BOARD OF DIRECTORS
PAUL R. SHEA
Chairman of the Board
ELIZABETH S. HAGER
Vice Chairman of the Board
Executive Director
United Way of Merrimack
R. SCOTT BACON
President & Chief Executive Officer
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.
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.
PETER PRUDDEN, JR.
Senior Account Executive
Moore Business Forms, Inc.
L. WILLIAM SLANETZ
President (Retired)
Perkins Lumber Co., Inc.
GERRY S. WEIDEMA
Partner
Weidema & Lavin, CPAs
58
<PAGE> 61
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAMILY BANK / SIS BANK
BOARD OF DIRECTORS
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
NELSON D. BLINN, CPA
Principal
Blinn & Farrell, CPAs
MARY E. BOLAND, ESQ.
Senior Partner
Egan, Flanagan & Cohen, P.C.
P. KEVIN CONDRON
President and CEO
The Granite Group
WILLIAM B. HART, JR.
Chairman
National Trust for
Historic Preservation
THOMAS O'BRIEN
Dean, Eugene M. Isenberg School
of Management, University of
Massachusetts
KENNETH L. PAUL
Vice President
Chart Industries, 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.
- --------------------------------------------------------------------------------
GLASTONBURY BANK & TRUST COMPANY
BOARD OF DIRECTORS
JOHN J. CARSON
Chairman of the Board
University of Hartford
J. GILBERT SOUCIE
President
Glastonbury Bank & Trust
LOREN J. ANDREO
Andy's Foodtown
RONALD E. BOURBEAU
REB Realty
CHRISTOPHER BRAMLEY
President and CEO
Family Bank
CAMILLE S. BUSHNELL
The Prudential CT Realty
GRACE C. NOME
Connecticut Foods
JOHN G. PINONE
150 Trumbull Street Associates
MARK A. SHEPTOFF
Sheptoff & Reuber Co., P.C.
JAMES UCCELLO
First Realty of Glastonbury
59
<PAGE> 62
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The 2000 Annual Meeting of the Shareholders of Peoples Heritage Financial Group,
Inc. will be held at 10:30 a.m. on Tuesday, April 25, 2000 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. It is anticipated that
immediately following the merger of Banknorth with and into Peoples Heritage
that the combined Company's symbol will change to BKNG.
FORM 10-K AND OTHER REPORTS
Peoples Heritage will send a copy of its 1999 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 LLP
99 High Street
Boston, MA 02110
RESEARCH COVERAGE
Recent research coverage on Peoples Heritage Financial Group, Inc. is available
from: A.G. Edwards & Sons, Inc., CIBC Oppenheimer, Inc., First Albany Corp.,
Fox-Pitt, Kelton, Inc., Friedman Billings Ramsey & Co., Johnston, Lemon & Co.,
Keefe, Bruyette & Woods, Inc., Lehman Brothers, Inc., Maine Securities Corp.,
Merrill Lynch, Pierce, Fenner & Smith, Parker/Hunter Incorporated, Salomon Smith
Barney Inc., Sandler O'Neill & Partners, L.P., Tucker Anthony Cleary Gull
MARKET MAKERS
The following companies have generally been market makers for Peoples Heritage
Financial Group, Inc. Common Stock as of December 31, 1999:
Advest, Inc. Bear,
Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Carl P. Sherr & Co.
CIBC Oppenheimer & Co., Inc.
Deutsche Bank Securities, Inc.
First Albany Corporation
Fox-Pitt Kelton, Inc.
Friedman Billings Ramsey & Co.
Gruntal & Co., Inc.
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.
Merrill Lynch, Pierce, Fenner
Midwest Stock Exchange
Moors & Cabot, Inc.
PaineWebber, Inc.
Ryan Beck & Co., Inc.
Salomon Securities Corp.
Sandler O'Neill & Partners, L.P.
Sherwood Securities Corp.
Spear, Leeds & Kellogg
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 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DIVIDENDS DECLARED MARKET PRICES
1999 QUARTERS PER SHARE HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FIRST $ .115 $20.25 $16.50
SECOND .115 20.13 15.75
THIRD .12 19.81 16.06
FOURTH .12 19.56 14.31
1998 Quarters
- --------------------------------------------------------------------------------
First $ .11 $24.66 $18.69
Second .11 26.75 21.56
Third .11 26.25 15.69
Fourth .11 21.25 12.81
</TABLE>
- --------------------------------------------------------------------------------
As of December 31, 1999, the Company had approximately 11,600 shareholders of
record and 102,181,789 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.
60
<PAGE> 63
PEOPLES HERITAGE FINANCIAL GROUP, INC.
ONE PORTLAND SQUARE
P.O. BOX 9540
PORTLAND, MAINE 04112-9540
