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EXHIBIT 13
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Along the road to success 1996
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Peoples Heritage
Financial Group, Inc. Annual Report
Maine
New Hampshire
Massachusetts
[ GRAPHIC OF MAP AND THREE INSTANT PHOTOS ]
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AT PEOPLES HERITAGE,
we know how to get where we're going. With our community banking approach and
successful expansion strategy, Peoples Heritage continues to grow and prosper.
In 1996 we not only virtually doubled our asset size, but expanded our market
share and earnings potential. All while generating record-breaking earnings for
the third consecutive year.
Table of Contents
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FINANCIAL HIGHLIGHTS 1
LETTER TO SHAREHOLDERS 2
MARKETS 4
PERFORMANCE 4
STRATEGY 6
COMMUNITY BANKING SERVICES 9
SELECTED 5-YEAR CONSOLIDATED
FINANCIAL AND OTHER DATA 11
MANAGEMENT'S DISCUSSION
AND ANALYSIS 12
FINANCIAL STATEMENTS 30
CORPORATE DIRECTORY 55
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PEOPLES HERITAGE FINANCIAL GROUP, INC.
Peoples Heritage Financial Group, Inc. is the banking and financial
services holding company for Peoples Heritage Bank,
Bank of New Hampshire, and Family Bank.
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FINANCIAL HIGHLIGHTS
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1996 was our third consecutive record earnings year at Peoples Heritage. Our
annual net earnings were up 18% over 1995's record net earnings.
Just as importantly, we achieved these results while meeting the
challenges of two major bank acquisitions, Bank of New Hampshire and Family
Bank. As with all of our previous acquisitions, our successful expansion was
both prudent and profitable. We delivered a strong financial performance across
the board, while expanding our market area, increasing our earnings potential,
and positioning Peoples Heritage for continued growth.
Earnings Per Share Strong Margins
[BAR CHART 1 OF EARNINGS PER SHARE] [BAR CHART 2 OF STRONG MARGINS]
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Dear Shareholders:
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"In achieving both growth and profitability, we set earnings records for a third
consecutive year and realized impressive performance across a wide range of
financial measurements."
[ PHOTO ]
Net Income
[BAR CHART FOR NET INCOME]
1996 was yet another record-breaking year at Peoples Heritage. In
addition to achieving record earnings, we virtually doubled our asset size
through growth and acquisitions to become the fifth largest bank in New England.
While expanding in Maine, we grew to become a three-state holding
company with over half our assets outside the state. Building on our successful
record of acquisitions, we significantly expanded our presence in New Hampshire
to become the Granite state's number three bank to complement our number two
market position in Maine. We also entered a vital new market in northern
Massachusetts.
In achieving both growth and profitability, we set earnings records for
a third consecutive year and realized impressive performance across a wide range
of financial measurements. Our performance is moving us into the top tier of
American banks. At the same time, we have significantly expanded our earnings
potential through our broadened presence in the more vibrant economies of New
Hampshire and Massachusetts.
Our 1996 acquisitions of Bank of New Hampshire and Family Bank,
represented a natural extension of our market, and a natural fit for our growth
strategy. Peoples Heritage is committed to our customers and our community
banking approach. We understand and appreciate the value of community
involvement, local decision making, and a deep awareness of local banking needs.
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In addition to being strong-performing banks, both Bank of New
Hampshire and Family Bank share long histories of personal service and community
involvement. As part of our community banking approach, both banks are keeping
their management teams, keeping their bank names, and subsequently, keeping
their loyal customers who want to continue banking at their local bank with the
people they know and trust. It's a proven business approach that sets Peoples
Heritage apart from other banks in our markets -- and has helped make us one of
New England's fastest growing banks.
To ensure that we rapidly achieve profitability and efficiencies
through our acquisitions, we are consolidating operations activities at our
state-of-the-art operations facility in Maine. With the larger resources of
Peoples Heritage behind them, our New Hampshire and Massachusetts banks are
revitalizing their consumer and commercial lending. Additionally, we are sharing
successful banking products and services throughout the holding company to
realize efficiencies and leverage the best each bank has to offer.
As part of our strategy to enhance shareholder value during our
acquisitions, we completed a "Dutch Auction" self tender offer and repurchased
2.5 million shares of our Common Stock in 1996, in addition to the 751,600
shares repurchased in 1995.
Looking ahead, we will stay open to new business opportunities as they
arise. We will seek to attract and retain new customers as the potential for
disruptions from branch closings and cutbacks at other financial institutions in
our market areas continues. Above all, we will maintain our commitment to our
community banking focus and enhancing shareholder value.
Management can seek to expand our company, develop new lines of
business, and define the strategies critical to our success. However, it is the
daily efforts of our dedicated employees that give life to those decisions and
make them a reality. I wish to thank all of our valued employees, as well as our
loyal customers and shareholders, as we look to the future and new opportunities
for success.
Sincerely yours,
/s/ William J. Ryan
William J. Ryan
Chairman, President and
Chief Executive Officer
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ALONG THE ROAD IN MAINE
As Maine's own in-state bank, we
understand the needs of our customers
and deliver the kinds of products and
services that fit our customers' lives.
From our mortgage leadership to our new
supermarket branches to our Sunday
hours, we're constantly striving to
serve our customers better. Peoples
Heritage Bank holds the number two
market position in Maine with 66
branches throughout the state and $2.64
billion in assets.
66 BRANCHES THROUGHOUT MAINE
NO. 2 MARKET POSITION
$2.64 BILLION IN ASSETS
[ 2 PHOTOS ]
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MARKETS
Peoples' market share continues to expand through acquisitions and growth. When
1995 ended, Peoples Heritage had total assets of just over $3 billion. At the
end of 1996, we had expanded to $5.4 billion in assets with a banking system
that stretches from northern Maine to northeastern Massachusetts, encompassing
132 banking offices operating as Peoples Heritage Bank, Bank of New Hampshire
and Family Bank.
[GRAPHIC OF MAINE]
PERFORMANCE
With record earnings for a third consecutive year, Peoples Heritage Financial
Group is moving into the top tier of the region's and nation's banks. Our
performance numbers also reflect our ability to make profitable, sound
acquisitions.
RECORD EARNINGS - In 1996, Peoples Heritage achieved record annual
net earnings of $52.5 million, or $2.10 per share, even after merger-related
costs were expensed in the period. Net earnings were up 18% over 1995's record
net earnings of $44.5 million, or $1.80 per share.
RECORD DEPOSITS - In 1996, we increased our deposits to $4.2 billion from $3.2
billion at the end of 1995 -- an increase of 31%. Our strong increase was a
result of our
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[ 5 PHOTOS ]
profitable acquisition strategy as well as our continued market share growth in
Maine.
STRONG MARGINS - Our diversified portfolio of consumer and commercial loans and
foundation of core deposits enabled us to maintain a strong 4.7+% net interest
margin for 1996, stable with 1995.
MORE LOANS - Net loans and leases increased 32% in 1996, from $2.7 billion to
$3.6 billion. Our results reflect the impact of our successful marketing
efforts, core growth, and growth from acquisitions.
INCREASED FEE INCOME - Fee income increased 20% in 1996. We attribute this
growth to a variety of factors including our rapidly growing Trust Services,
customer fees, strength in mortgage originations, and our mortgage servicing
income which includes $3.2 billion of mortgages we service for others.
INCREASED DIVIDEND - More than 30 cents of every net dollar earned in 1996 was
returned to shareholders as dividend. Following the fourth quarter of 1996, we
increased the quarterly dividend to 18 cents per share, up from 17 cents per
share the previous quarter, and from 16 cents per share for the same quarter a
year ago.
RETURN ON ASSETS - Our Return on Average Assets (ROA) reached an annual historic
high of 1.21%, up from 1.16% in 1995. Our ROA performance puts us on par with
some of America's best banks.
RETURN ON EQUITY - Our Return on Average Equity reached 14.41% in 1996, as
compared to 13.53% in 1995 -- another historic high.
STRONG ASSET QUALITY - Asset quality improved markedly in 1996. We reduced
nonperforming
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ALONG THE ROAD IN NEW HAMPSHIRE
In 1996, Bank of New Hampshire became a
part of Peoples Heritage Financial Group
and was combined with our previous New
Hampshire bank, The First National Bank
of Portsmouth. We also acquired five
Shawmut Bank of New Hampshire branches
in the past year with $160 million in
deposits. As a result, we now enjoy the
number three market position in New
Hampshire with 44 branches and $1.77
billion in assets
44 BRANCHES THROUGHOUT
NEW HAMPSHIRE
NO. 3 MARKET POSITION
$1.77 BILLION IN ASSETS
[ 2 PHOTOS ]
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assets to 1.01% of total assets, down from 1.40% in 1995, and down from 2.1% in
1994 -cutting nonperforming asset ratio in half in just two years.
RESERVE COVERAGE -- Peoples Heritage achieved nearly a 160% ratio of reserves to
nonperforming loans. Our more than adequate coverage reflects our prudent
management style.
STRATEGY
Our growth in New Hampshire and expansion into Massachusetts provides us with a
larger and more vigorous economy than Maine alone. Of course, we also
strengthened our ability to earn and reward shareholders. By continuing a
community banking approach in new market areas, we can continue building on our
success.
COMMUNITY BANKING - At the heart of everything we do, community banking is the
fundamental strategy behind our expansion.
NONPERFORMING ASSETS COVERAGE RATIO
[BAR CHART FOR NONPERFORMING ASSETS] [BAR CHART FOR COVERAGE RATIO]
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[ 5 PHOTOS ]
With our newly acquired banks, we're expanding our community banking approach by
retaining the acquired banks' names, local management and customer contact staff
to continue to provide personal customer service. Local decision making will
also be maintained supported by our strategic business units and strong
performance expectations.
UNIQUE MARKET POSITION - With our lending expertise and systems, Peoples
Heritage is smartly positioned with the ability to serve the large segment of
commercial borrowers that big banks tend to ignore, and smaller banks can't
handle.
GROWTH AND PROFITABILITY - Peoples has demonstrated a history of intelligent,
profitable acquisitions. Our latest acquisitions are no exception -- in the
higher growth region of northern Massachusetts and in New Hampshire which boasts
New England's fastest growing economy.
OPERATIONAL EFFICIENCIES - Peoples' strong operations continued to improve in
1996. With our recent acquisitions, we achieved efficiencies by consolidating
"back room" functions including operations, accounting and finance, legal and
human resources.
BUILDING ON OUR STRENGTHS - With our expanded resources, we are able to share
successful products and ideas throughout our system. For example, we recently
took a successful checking product from Family Bank to Peoples, and took a
popular CD product from Peoples to Bank of New Hampshire.
EXPANDED ATM NETWORK - To make banking as convenient as possible for our
customers, we are
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ALONG THE ROAD IN MASSACHUSETTS
Family Bank joined the Peoples family at
the end of 1996 with the acquisition of
its parent company, Family Bancorp.
Family Bank enjoys the top market
position in most of the local
communities it serves. This valuable
acquisition extends Peoples' presence
and community banking approach into
northeastern Massachusetts. Family Bank
adds 17 branches in northeastern
Massachusetts, five in southern New
Hampshire, and $1.01 billion in assets.
17 BRANCHES IN NORTHEASTERN
MASSACHUSETTS
5 BRANCHES IN SOUTHERN
NEW HAMPSHIRE
$1.01 BILLION IN ASSETS
[ 2 PHOTOS ]
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continuing to expand our ATM network with new machines in supermarkets, banking
centers and at freestanding locations throughout our market area.
GROWING PHONE BANK - Driven by strong demand, our telephone banking service grew
significantly in 1996. We now have 70 professionals and an automated response
unit responding to over 300,000 calls each month. So customers from all three
banks can check balances, originate a consumer loan, or determine recent account
activity. They can take advantage of our automated services or talk to a person
- -- we're always there to help.
EXPANDED SUPERMARKET BANKING - Our customers really appreciate the ability to
bank where they shop. In 1996, we opened four new supermarket banking centers in
Maine. And with our experience and success, we're now laying the groundwork for
new supermarket
DIVIDEND BY YEAR RETURN ON ASSETS
[BAR CHART FOR DIVIDEND BY YEAR] [BAR CHART FOR RETURN ON ASSETS]
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[ 5 PHOTOS ]
banking centers in New Hampshire and Massachusetts. It's all part of our
strategy to continue our customer-driven approach in new markets.
SUNDAY HOURS - Being a community bank means being there for our customers --
even on Sundays. We offer Sunday hours and expanded Saturday and weekday hours
at numerous branches throughout our market areas and at all supermarket banking
centers.
INCENTIVE COMPENSATION - Delivering superior customer service requires the
commitment and support of employees at every level. That's why all employees,
from tellers to top management, operate under incentive-based compensation.
COMMUNITY BANKING
SERVICES
At Peoples Heritage, community banking means more than personal service. Being a
true community bank means providing a range of banking services which encompass
all the business and consumer needs of the markets we serve.
MORTGAGE LENDING - Peoples is the 70th largest mortgage originator in the nation
- -- up doubled digits from a year ago. We're the number one mortgage originator
in Maine, the second largest mortgage originator in New Hampshire, and we're
re-introducing mortgage lending at Family Bank. In addition, we service over
$3.2 billion of mortgages for others.
CONSUMER LENDING - Our successful consumer lending program includes home equity
loans, indirect auto loans, and manufactured housing loans.
COMMERCIAL LENDING - With the acquisitions of Bank of
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New Hampshire and Family Bank, our commercial lending program is benefiting from
the more vigorous economies of New Hampshire and Massachusetts. In 1996, we also
assembled a team of experienced asset-based lending specialists to bring
asset-based lending services to all our markets.
CASH MANAGEMENT SERVICES - In 1996, the Cash Management Department at Peoples
Heritage Bank introduced a new on-line banking product to improve service and
attract and retain commercial customers.
PUBLIC FINANCE - Revitalized two years ago, our growing Public Finance
Department provides investment and loan products to northern New England's
cities, towns and other public bodies. The Department contributed $2.2 million
to our bottom line in 1996, while adding resources to service our new market
areas.
LEASING SERVICES - Our equipment leasing services expand our Public Finance
offerings and broaden the services we provide to our commercial customers. We're
now providing leasing throughout our three-state region.
INVESTMENT SERVICES - With the acquisition of Bank of New Hampshire, we added
the resources of their 100-year-old Trust department with $1.4 billion under
management and another $1 billion in corporate trust assets. This strengthens
our capabilities in Maine with a Trust department with $600 million under
management with a like amount of corporate trust assets. We also plan to bring
Trust services to Family Bank this year. In addition, we added Private Banking
to our range of services in Maine in 1996.
AT PEOPLES HERITAGE, OUR ROAD TO SUCCESS RUNS RIGHT THROUGH THE
COMMUNITIES OF NORTHERN NEW ENGLAND. AFTER ALL, COMMUNITY BANKING IS AT THE
HEART OF WHAT MAKES US UNIQUE IN OUR MARKETS. BY STAYING CLOSE TO OUR CUSTOMERS
AND CLOSE TO OUR COMMUNITIES, WE ONCE AGAIN ACHIEVED RECORD ANNUAL EARNINGS AND
BUILT ON OUR SUCCESS.
TO US, COMMUNITY BANKING MEANS UNDERSTANDING THE NEEDS OF OUR CUSTOMERS
IN ALL THE MARKETS WE SERVE -- AND OFFERING THE KINDS OF INNOVATIVE PRODUCTS AND
SERVICES THAT FIT THEIR LIVES AND MAKE BANKING EASIER AND MORE CONVENIENT. IT IS
OUR COMMUNITY BANKING PHILOSOPHY WHICH HAS GUIDED US THROUGH OUR HISTORY OF
SUCCESSFUL ACQUISITIONS. IT HAS ENABLED US TO GROW BOTH PRUDENTLY AND
PROFITABLY. IT HAS ALLOWED US TO DELIVER FOR OUR CUSTOMERS, AND IN TURN, OUR
SHAREHOLDERS.
AS WE LOOK TO THE ROAD AHEAD, WE WILL CONTINUE TO SEEK BETTER WAYS TO
SERVE OUR CUSTOMERS, WE WILL EXPLORE ACQUISITIONS WHEN ADVANTAGEOUS, AND WE WILL
MAINTAIN OUR COMMITMENT TO ENHANCING SHAREHOLDER VALUE.
WE LOOK FORWARD THE JOURNEY.
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TOTAL DEPOSITS TOTAL ASSETS SHAREHOLDER'S EQUITY
[ BAR CHART FOR [ BAR CHART FOR [ BAR CHART FOR
TOTAL DEPOSITS] TOTAL ASSETS] SHAREHOLDER'S EQUITY]
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands, Except Per Share Data) December 31,
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Financial Condition Data 1996 1995 1994 1993 1992
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Total assets $5,398,398 $4,058,126 $3,737,906 $3,624,641 $3,523,094
Debt and equity securities, net (1) 1,045,069 766,648 719,194 717,467 557,787
Total loans and leases, net 3,587,112 2,717,608 2,575,902 2,638,348 2,425,020
Goodwill and other intangibles 71,649 22,792 20,713 22,758 22,310
Deposits 4,185,289 3,197,138 2,885,845 2,939,826 2,948,549
Borrowings 690,969 456,932 505,347 359,935 288,024
Shareholders' equity 437,010 354,925 304,439 287,438 249,862
Nonperforming assets 54,267 56,752 78,339 120,076 185,733
Allowance for loan and lease losses 67,488 60,975 63,675 67,385 71,223
Book value per share at end of period 15.48 14.16 12.26 11.61 10.73
Tangible book value per share at
end of period 12.95 13.25 11.42 10.69 9.77
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Operations Data Year Ended December 31,
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1996 1995 1994 1993 1992
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Interest and dividend income $ 341,172 $ 305,849 $ 256,597 $ 243,452 $ 272,596
Interest expense 150,599 134,895 108,002 112,305 150,458
--------- --------- --------- --------- ---------
Net interest income 190,573 170,954 148,595 131,147 122,138
Provision for loan losses 900 4,230 3,374 14,047 32,025
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 189,673 166,724 145,221 117,100 90,113
--------- --------- --------- --------- ---------
Net securities gains (losses) 507 116 (254) 1,183 2,859
Net gains on sales of consumer loans -- -- 33 2,576 --
Other noninterest income 37,941 31,301 27,847 24,842 26,747
Noninterest expenses 148,073 130,280 125,137 122,391 125,091
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes 80,048 67,861 47,710 23,310 (5,372)
Income tax expense 27,568 23,375 13,662 799 1,510
Cumulative effect on years prior to 1992
of a change in accounting principle -- -- -- -- 1,100
--------- --------- --------- --------- ---------
Net income (loss) $ 52,480 $ 44,486 $ 34,048 $ 22,511 $ (5,782)
========= ========= ========= ========= =========
Earnings (loss) per share $ 2.10 $ 1.80 $ 1.37 $ 0.95 $ (0.36)
Cash earnings per share (5) $ 2.29 $ 1.89 $ 1.45 $ 1.08 $ (0.20)
Dividends per share $ .65 $ 0.46 $ 0.23 $ 0.01 $--
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Other Data (2) At or For the Year Ended December 31,
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1996 1995 1994 1993 1992
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Net interest margin (3),(4) 4.71% 4.79% 4.44% 4.11% 3.71%
Net interest rate spread (3),(4) 4.12 4.20 4.01 3.76 3.41
Return on average assets 1.21 1.16 0.94 0.64 (0.16)
Return on average equity (4) 14.41 13.53 11.42 8.57 (2.69)
Tier I leverage capital ratio at end
of period 7.96 8.33 7.96 7.63 7.00
Dividend payout ratio 30.36 25.42 16.45 1.44 --
Price to book value at end of period 180.88 160.66 97.88 103.36 90.87
Nonperforming assets as a % of total
assets at end of period 1.01 1.40 2.10 3.31 5.29
Allowance for loan losses as a % of
nonperforming loans at end of period 158.99 143.40 113.17 86.95 65.39
Allowance for loan losses as a % of
total loans at end of period 1.85 2.19 2.41 2.77 2.85
Full service banking offices at end of period 132 106 96 98 100
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(1) All securities were classified as available for sale at December 31, 1996,
and 1995. (2) Ratios are based on average daily balances during the respective
periods. (3) Fully-taxable equivalent basis. (4) Excludes effect of unrealized
gains or losses on securities available for sale. (5) Earnings before the
amortization of goodwill and core deposit premiums.
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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
GENERAL
Peoples Heritage Financial Group, Inc. (the "Company") is a Maine-chartered,
multi-bank holding company which conducts business from its headquarters in
Portland, Maine and 131 offices located throughout Maine, New Hampshire and
northern Massachusetts. Based on $5.4 billion of total assets at December 31,
1996, the Company is the largest independent bank holding company headquartered
in northern New England and the fifth largest independent bank holding company
headquartered in New England.
The Company offers a broad range of commercial and consumer banking services
and products and trust and investment advisory services through three
wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New
Hampshire ("BNH") and Family Bank, FSB ("Family"). PHB is a Maine-chartered
savings bank which operates 66 offices throughout Maine and, through
subsidiaries, engages in mortgage banking, financial planning and equipment
leasing activities. At December 31, 1996, PHB had consolidated assets of $2.6
billion and consolidated shareholder's equity of $175.3 million. BNH is a New
Hampshire-chartered commercial bank which operates 44 offices throughout New
Hampshire. At December 31, 1996, BNH had consolidated assets of $1.8 billion and
consolidated shareholder's equity of $135.6 million. Family is a
federally-chartered savings bank which operates 22 offices in northern
Massachusetts and southern New Hampshire. At December 31, 1996, Family had
consolidated assets of $1.0 billion and consolidated shareholder's equity of
$107.1 million. Each of PHB, BNH and Family is a member of the Bank Insurance
Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC").
Business Strategy.
The principal business of the Company consists of attracting deposits from the
general public through its offices and using such deposits and other sources of
funds to originate residential mortgage loans, commercial business loans and
leases, commercial real estate loans and a variety of consumer loans. The
Company also invests in mortgage-backed securities and securities issued by the
United States Government and agencies thereof. In addition, the Company engages
in the sale of other financial products (annuities and mutual funds), provides
trust services, and services residential mortgage loans for investors.
The Company's goal is to sustain profitable, controlled growth by focusing on
increased loan and deposit market share in Maine, New Hampshire and northern
Massachusetts, developing new financial products, services and delivery
channels, closely managing yields on earning assets and rates on
interest-bearing liabilities, increasing non-interest income through, among
other things, expanded trust and investment advisory services and mortgage
servicing operations and controlling growth of noninterest expenses. It is also
part of the business strategy of the Company to supplement internal growth with
targeted acquisitions of other banking or thrift institutions in New England.
During the period covered by this discussion, the Company engaged in numerous
merger and acquisition related activities. For further information, see Note 2
to the Consolidated Financial Statements and "Overview" below.
OVERVIEW
The year 1996 was highlighted by several acquisitions by the Company. On
December 6, 1996 the Company completed the acquisition of Family Bancorp, the
holding company for Family, through the exchange of 1.26 shares of the Company's
Common Stock for each share of Family Bancorp Common Stock. There were 5,480,335
shares of the Company's Common Stock issued in connection with the acquisition
of Family Bancorp, including 2,500,000 shares of treasury stock. This
transaction was accounted for as a purchase. Accordingly, the impact of the
absorption of Family's operations is reflected in the Company's consolidated
financial statements from the date of acquisition.
On April 2, 1996, the Company completed the merger with Bank of New
Hampshire Corporation ("BNHC"), the holding company for BNH, whereby each share
of BNHC was converted into two shares of Common Stock of the Company. Because
the acquisition was accounted for under the pooling-of-interests method of
accounting, the consolidated financial statements of the Company for periods
prior to the acquisition have been restated to include BNHC. At December 31,
1995, BNHC had total consolidated assets of $977.8 million and total
consolidated shareholders' equity of $84.5 million.
On February 16, 1996, the Company acquired five branch offices and
approximately $160 million of related deposits from Fleet Bank NH (the "Branch
Acquisition"). The Company also acquired approximately $216.4 million of loans
in connection with this transaction, which consisted primarily of $178.6 million
of single-family residential loans.
On July 1, 1995, the Company acquired Bankcore, Inc. ("Bankcore"), the New
Hampshire-based holding company for North Conway Bank. At the time of
acquisition, Bankcore had $132.8 million in total assets and shareholders'
equity of $17.8 million. The Bankcore acquisition was treated as a purchase for
accounting purposes and, accordingly, the Company's financial statements reflect
the acquisition from the date of acquisition.
On June 15, 1995, the Company purchased all the branches and $46.1 million
in deposits, as well as $17.1 million in loans, of Fleet Bank of Maine located
in Aroostook County, Maine. Five of the seven branches purchased were merged
with and into existing branches of PHB.
During 1994, the Company acquired Mid-Maine Savings Bank, F.S.B., which was
accounted for under the pooling-of-interests method. Accordingly, the
consolidated financial statements of the Company have been restated to reflect
the acquisition for all periods presented.
Economic Conditions in Northern New England.
The Company believes that Maine, New Hampshire, northeastern Massachusetts and
New England in general have witnessed slow but steady economic growth since
1992. Although economic activity is just beginning to reach levels experienced
in the mid-to-late 1980s, the northern New England economy appears stable at
this time. The economies and real estate markets in the Company's primary market
areas will continue to be significant determinants of the quality of the
Company's assets in future periods and, thus, its results of operations.
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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REVIEW OF FINANCIAL STATEMENTS
The discussion and analysis which follows focuses on the factors affecting the
Company's financial condition at December 31, 1996 and 1995 and financial
results of operations during 1996, 1995 and 1994. The consolidated financial
statements and related notes beginning on page 30 of this report should be read
in conjunction with this review. Certain amounts in years prior to 1996 have
been reclassified to conform to the 1996 presentation.
RESULTS OF OPERATIONS
Overview.
The Company reported net income of $52.5 million or $2.10 per share in 1996, as
compared to net income of $44.5 million or $1.80 per share in 1995 and $34.0
million or $1.37 per share in 1994. Return on average assets amounted to 1.21%
in 1996, as compared to 1.16% and .94% during 1995 and 1994, respectively, and
return on average equity amounted to 14.41% in 1996, as compared to 13.53% and
11.42% during 1995 and 1994, respectively. The improved results were
attributable to substantial increases in net interest income, which on a
fully-taxable equivalent basis amounted to $191.4 million, $172.0 million and
$149.3 million for the years ended 1996, 1995 and 1994, respectively. The
increase in net interest income in 1996 was offset in part by non-recurring
expenses of $1.9 million incurred in connection with the recapitalization of the
Savings Association Insurance Fund ("SAIF") and $5.1 million in merger-related
expenses. The Company also experienced increases in noninterest income,
particularly in customer services income and mortgage banking services income
during 1996, 1995 and 1994.
The Company's results of operations are affected not only by its net
interest income, but also by the level of its other noninterest income including
gains and losses on the sales of loans and securities, noninterest expenses,
provision for loan losses resulting from the Company's assessment of the
adequacy of the allowance for loan losses, and income tax expense. Each of these
components of the Company's operating results is discussed below.
Net Interest Income.
The following table sets forth the information related to changes in net
interest income. For purposes of the table and the following discussion, (i)
income from interest-earning assets and net interest income is presented on a
fully-taxable equivalent basis primarily by adjusting income and yields earned
on tax-exempt interest received on loans to qualifying borrowers and on certain
of the Company's equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) nonaccrual loans have been included in the appropriate average balance
loan category, but unpaid interest on nonaccrual loans has not been included for
purposes of determining interest income.
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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Year Ended December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------------
Loans and leases: (1)
Residential real estate
mortgages $ 1,110,741 $ 87,357 7.86% $ 848,773 $ 69,957 8.24%
Commercial real estate
mortgages 829,011 80,825 9.75 762,275 75,657 9.93
Commercial business loans
and leases 425,873 40,880 9.60 371,863 37,174 10.00
Consumer loans and leases 858,684 80,524 9.38 749,407 71,696 9.57
------------- ------------- ------------- -------------
Total loans and leases 3,224,309 289,586 8.98 2,732,318 254,484 9.31
------------- ------------- ------------- -------------
Securities available for
sale (2) 793,847 50,102 6.31 771,462 47,392 6.14
Federal funds sold 43,716 2,350 5.38 85,191 5,066 5.95
------------- ------------- ------------- -------------
Total earning assets 4,061,872 342,038 8.42 3,588,971 306,942 8.55
------------- ------------- ------------- -------------
Nonearning assets (2) 289,781 256,797
------------- -------------
Total assets $ 4,351,653 $ 3,845,768
============= =============
Interest-bearing deposits
Regular savings $ 603,329 16,433 2.72 $ 588,581 16,753 2.85
NOW accounts 364,670 4,593 1.26 328,238 4,697 1.43
Money market access accounts 505,426 18,190 3.60 414,025 15,507 3.75
Certificates of deposit 1,462,097 81,227 5.56 1,299,735 71,252 5.48
------------- ------------- ------------- -------------
Total interest-bearing
deposits 2,935,522 120,443 4.10 2,630,579 108,209 4.11
Borrowed funds 568,406 30,156 5.31 471,456 26,686 5.66
------------- ------------- ------------- -------------
Total interest-bearing
liabilities 3,503,928 150,599 4.30 3,102,035 134,895 4.35
------------- ------------- ------------- -------------
Demand accounts 448,154 368,832
Other liabilities 35,318 46,197
Shareholders' equity (2) 364,253 328,704
------------- -------------
Total liabilities and
shareholders' equity $ 4,351,653 $ 3,845,768
============= =============
Net earning assets $ 557,944 $ 486,936
============= =============
Net interest income (fully-
taxable equivalent) 191,439 172,047
Less: fully-taxable equivalent
adjustments (866) (1,093)
------------- -------------
Net interest income $ 190,573 $ 170,954
============= =============
Net interest rate spread
(fully-taxable equivalent) 4.12 4.20%
Net interest margin
(fully-taxable equivalent) 4.71 4.79%
- --------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Year Ended December 31,
1994
- ----------------------------------------------------------------------------
AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST RATE
- ----------------------------------------------------------------------------
Loans and leases: (1)
Residential real estate
mortgages $ 808,715 $ 62,147 7.68%
Commercial real estate
mortgages 727,671 63,402 8.71
Commercial business loans
and leases 315,826 28,774 9.11
Consumer loans and leases 677,511 61,264 9.04
------------- -------------
Total loans and leases 2,529,723 215,587 8.52
------------- -------------
Securities available for
sale (2) 749,507 38,434 5.13
Federal funds sold 81,376 3,295 4.05
------------- -------------
Total earning assets 3,360,606 257,316 7.66
------------- -------------
Nonearning assets (2) 269,352
-------------
Total assets $ 3,629,958
=============
Interest-bearing deposits
Regular savings $ 596,254 16,313 2.74
NOW accounts 307,021 5,014 1.63
Money market access accounts 367,820 9,770 2.66
Certificates of deposit 1,275,805 56,823 4.45
------------- -------------
Total interest-bearing
deposits 2,546,900 87,920 3.45
Borrowed funds 414,956 20,082 4.84
------------- -------------
Total interest-bearing
liabilities 2,961,856 108,002 3.65
------------- -------------
Demand accounts 325,615
Other liabilities 44,357
Shareholders' equity (2) 298,130
-------------
Total liabilities and
shareholders' equity $ 3,629,958
=============
Net earning assets $ 398,750
=============
Net interest income (fully-
taxable equivalent) 149,314
Less: fully-taxable equivalent
adjustments (719)
-------------
Net interest income $ 148,595
=============
Net interest rate spread
(fully-taxable equivalent) 4.01
Net interest margin
(fully-taxable equivalent) 4.44
- ----------------------------------------------------------------------------
(1) Loans and leases include portfolio loans and leases, loans held for sale and
nonperforming loans.
(2) Excludes effect of unrealized gains or losses on securities available for
sale.
14
18
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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).
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 vs 1995 Year Ended December 31, 1995 vs 1994
(Dollars in Thousands) Increase (Decrease) Due to Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans and leases: (1)
Residential real estate mortgages $ (3,225) $ 21,586 $ (961) $ 17,400 $ 4,529 $ 3,076 $ 205 $ 7,810
Commercial real estate mortgages (1,372) 6,627 (87) 5,168 8,878 3,014 363 12,255
Commercial business loans and leases (1,487) 5,401 (208) 3,706 2,811 5,105 484 8,400
Consumer loans and leases (1,424) 10,458 (206) 8,828 3,591 6,499 342 10,432
-------- -------- -------- -------- -------- -------- -------- --------
Total loans and leases (7,508) 44,072 (1,462) 35,102 19,809 17,694 1,394 38,897
-------- -------- -------- -------- -------- -------- -------- --------
Securities available for sale 1,311 1,374 25 2,710 7,570 1,126 262 8,958
Federal funds sold (486) (2,468) 238 (2,716) 1,546 155 70 1,771
-------- -------- -------- -------- -------- -------- -------- --------
Total (6,683) 42,978 (1,199) 35,096 28,925 18,975 1,726 49,626
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Regular savings (765) 420 25 (320) 656 (210) (6) 440
NOW accounts (558) 521 (67) (104) (614) 346 (49) (317)
Money market access accounts (621) 3,428 (124) 2,683 4,009 1,229 499 5,737
Certificates of deposit 1,040 8,897 38 9,975 13,141 1,065 223 14,429
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits (904) 13,266 (128) 12,234 17,192 2,430 667 20,289
Borrowed funds (1,650) 5,487 (367) 3,470 3,403 2,735 466 6,604
-------- -------- -------- -------- -------- -------- -------- --------
Total (2,554) 18,753 (495) 15,704 20,595 5,165 1,133 26,893
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income
(fully taxable equivalent) $ (4,129) $ 24,225 $ (704) $ 19,392 $ 8,330 $ 13,810 $ 593 $ 22,733
======== ======== ======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
(1) Loans and leases include portfolio loans and loans held for sale and
nonperforming loans.
Net interest income increased by $19.4 million or 11.3% during 1996. This
increase was primarily attributable to significant increases in the volume of
interest-earning assets, primarily loans and leases, which contributed to a
$71.0 million or 14.6% increase in net earning assets during 1996. The increase
in volume of interest-earning assets was offset in part by a decrease in the
weighted average yield on all categories of interest-earning assets. The
Company's net interest margin decreased slightly from 4.79% in 1995 to 4.71% for
1996, and the net interest rate spread decreased to 4.12% in 1996 from 4.20% in
1995.
Interest and dividend income increased $35.1 million or 11.4% during 1996,
primarily due to increased interest on loans and leases. The average outstanding
balance of loans and leases increased $492.0 million or 18.0% from 1995 to 1996,
primarily as a result of the acquisition of $216.4 million of loans in
connection with the Branch acquisition.
The increase in volume of loans and leases was offset in part by a decrease
in the weighted average yield on loans and leases from 9.31% in 1995 to 8.98% in
1996. This decrease was due to growth in the percentage of lower-yielding
residential mortgage loans relative to other loans, as well as increased
competition for both consumer and commercial loans. At December 31, 1996, the
percentage of the Company's loans and leases which had adjustable or floating
interest rates amounted to 54.5%.
Interest expense increased $15.7 million or 11.6% during 1996. Interest
expense on interest-bearing deposits increased $12.2 million or 11.3% while
interest expense on borrowed funds, primarily from the Federal Home Loan Bank of
Boston, increased $3.5 million or 13.0%. The increase in interest expense was
primarily attributable to a $401.9 million or 13.0% increase in the volume of
interest-bearing liabilities as rates paid on deposits remained relatively
stable. The majority of the increase in volume was in certificates of deposit.
The $160.9 million of deposits acquired in connection with the Branch
Acquisition in February 1996 significantly contributed to the increase in the
volume of deposits, whereas the $774.6 million of deposits acquired in
connection with the acquisition of Family Bank in December 1996 contributed only
slightly to the increase in volume because such deposits were outstanding only
since the date of acquisition.
15
19
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Net interest income increased by $22.7 million or 15.2% during 1995. This
increase was primarily attributable to changes in the volume of interest-earning
assets and interest-bearing liabilities, which resulted from an $88.2 million or
22.1% increase in net earning assets from 1994 to 1995 and an increase in the
Company's net interest margin from 4.44% to 4.79% during the same respective
periods, and to a lesser extent to changes in the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities,
which resulted in an increase in the Company's interest rate spread from 4.01%
to 4.20% during 1994 and 1995, respectively.
Interest and dividend income increased by $49.6 million or 19.3% during 1995
primarily as a result of a $38.9 million or 18.0% increase in interest on loans
and leases available for sale and held for investment (collectively "loans and
leases"). The increase in interest on loans and leases was attributable to both
an increase in the weighted average yield on loans and leases from 8.52% during
1994 to 9.31% during 1995, which reflected increases in all loan categories, and
a $202.6 million or 8.0% increase in the average balance of loans and leases
from 1994 to 1995, which also reflected increases in all loan categories. At
December 31, 1995, the percentage of the Company's loans and leases which had
adjustable or floating rates amounted to 45.3%.
Interest and dividend income also increased in 1995 as a result of a $9.0
million or 23.3% increase in interest income on securities available for sale
which was primarily attributable to an increase in the weighted average yield
earned on securities from 5.13% to 6.14% during 1994 and 1995, respectively.
Interest expense increased by $26.9 million or 24.9% during 1995 as a result
of a $20.3 million or 23.1% increase in interest expense on interest-bearing
deposits and a $6.6 million or 32.9% increase in interest expense on borrowed
funds, which consist primarily of advances from the Federal Home Loan Bank of
Boston and, to a lesser extent, securities sold under agreements to repurchase
and federal funds purchased. These increases were primarily attributable to an
increase in the weighted average rate paid on interest-bearing liabilities,
which increased from 3.65% to 4.35% during 1994 to 1995, respectively. Interest
expense also increased during 1995 as a result of a $140.2 million or 4.7%
increase in the average balance of interest-bearing liabilities, which was
attributable to increases in both interest-bearing deposits, particularly money
market access accounts and borrowings.
Provision for Loan Losses.
The Company incurred a $900 thousand provision for loan losses in 1996
reflecting a decrease of $3.3 million from 1995. In 1995, the provision for
loans losses increased $856 thousand from $3.4 million in 1994 to $4.2 million
in 1995. The allowance for loan losses as a percentage of nonperforming loans
increased to 158.99% at December 31, 1996 compared to 143.40% at December 31,
1995. Provisions for loan losses are attributable to management's ongoing
evaluation of the adequacy of the allowance for loan and lease losses, which
incudes, among other procedures, consideration of the character and size of the
loan portfolio, monitoring trends in nonperforming loans, delinquent loans and
net charge-offs, as well as new loan originations and other asset quality
factors.
Although management utilizes its best judgment in providing for possible
losses, there can be no assurance that the Company will not have to change its
provisions for loan losses in subsequent periods to a higher level from that
recorded during 1996. Changing economic and business conditions in northern New
England, fluctuations in local markets for real estate, future changes in
nonperforming asset trends, large upward movements in market-based interest
rates or other reasons could affect the Company's future provisions for loan
losses.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the adequacy of the Company's allowance
for loan and lease losses. Such agencies may require the Company to recognize
changes to the allowance for loan and lease losses based on their judgment about
information available to them at the time of examination.
Noninterest Income.
Noninterest income was $38.5 million, $31.4 million and $27.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively. The $7.1 million or
22.6% increase in noninterest income during 1996 was primarily attributable to a
$3.4 million or 28.9% increase in customer services income, a $2.1 million or
19.3% increase in mortgage banking services income, and a $1.4 million or 23.6%
increase in trust and investment advisory services income. The $3.8 million or
13.7% increase in noninterest income during 1995 was primarily attributable to a
$2.4 million or 28.5% increase in mortgage banking services income and a $1.4
million or 13.6% increase in customer services income.
The following sets forth information relating to the Company's noninterest
income.
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Customer services $ 15,353 $ 11,908 $ 10,481
Mortgage banking services 12,940 10,849 8,446
Trust and investment
advisory services 7,233 5,850 5,471
Net securities gains (losses) 507 116 (254)
Other noninterest income 2,415 2,694 3,482
-------- -------- --------
$ 38,448 $ 31,417 $ 27,626
======== ======== ========
- --------------------------------------------------------------------------------
Mortgage banking services income is comprised of residential mortgage sales
income and residential mortgage servicing income. The increase in mortgage
banking services income in both 1996 and 1995 was primarily attributable to an
increase in residential mortgage sales income.
16
20
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to the Company's
mortgage banking activities.
- -----------------------------------------------------------------------------------
At or for the Year Ended December 31,
- -----------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------
Residential mortgages
serviced for investors $3,227,659 $2,595,049 $2,089,972
========== ========== ==========
Residential mortgage
sales income $ 7,108 $ 4,224 $ 1,915
Residential mortgage
servicing income 5,832 6,625 6,531
Mortgage banking
services income $ 12,940 $ 10,849 $ 8,446
========== ========== ==========
- -----------------------------------------------------------------------------------
The Company's portfolio of residential mortgages serviced for investors
increased by $632.6 million or 24.4% from December 31, 1995 to December 31,
1996. In conjunction with the acquisition of Family Bank on December 6, 1996,
the Company added $322.6 million to its portfolio of residential mortgages
serviced for investors. In addition, the Company's portfolio of mortgages
serviced for others continued to increase due to origination and sale of
residential mortgages to the secondary market while retaining the rights to
service these loans for the investors purchasing them. In addition, the
outstanding amount of residential mortgages serviced for investors is impacted,
from time to time, by the purchase and sale of mortgage servicing rights for
portfolios of residential mortgage loans.
Residential mortgage sales income increased by $2.9 million and $2.3
million, or 68.3% and 120.6%, in 1996 and 1995, respectively. Included in
residential mortgage sales income in 1996 and 1995 are $1.1 million and $642
thousand of gains on the sale of residential mortgage servicing rights,
respectively. The mortgage sales income in 1996 was attributable to a
significant increase in the volume of loans originated from correspondent
lenders, the vast majority of which were sold in the secondary mortgage market.
Residential mortgage originations from correspondent lenders increased to $844.5
million in 1996 from $378.5 million in 1995, a 123.1% increase.
Residential mortgage servicing income decreased by $793 thousand in 1996 and
increased by $94 thousand in 1995. During 1996, the Company reclassified the
amortization expense of constant maturity treasury floors ("CMT") to residential
mortgage servicing income from other noninterest expenses, which resulted in a
$684 thousand decrease in residential mortgage servicing income in 1996 as
compared with 1995. Excluding the CMT floor amortization expense in 1996 as an
offset to mortgage servicing income, mortgage servicing income would have been
$6.5 million, or $109 thousand less than 1995. Residential mortgage servicing
income has lagged increases in the portfolio of mortgages serviced for others as
a result of the impact of the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 122 in 1995, which effectively accelerates
mortgage servicing income into the current period as a component of capitalized
mortgage servicing rights. The mortgage servicing rights that have been created
as a result of the adoption of SFAS No. 122 are amortized and recorded as an
offset to mortgage servicing income. For additional discussion of CMT floors,
see "Interest Rate Risk and Asset Liability Management" below.
The generation of mortgage sales income and the recognition of net gains on
the sales of securities are dependent on market and economic conditions and,
accordingly, there can be no assurance that the income and net gains reported in
prior periods can be achieved in the future or that there will not be
significant inter-period variations in the results of such activities.
Customer services income increased by $3.4 million or 28.9% during 1996 and
by $1.4 million or 13.6% during 1995. The increase in customer services income
reflects the Company's focus on increasing the number and volume of transaction
accounts, the increased use of and fees generated by ATM machines, and the
impact of purchase acquisitions.
Trust and investment advisory services income increased $1.4 million or
23.6% in 1996 to $7.2 million. The increase primarily reflects the growth of the
trust department at PHB, which was started during the first quarter of 1995, as
well as increased fee based income from the sale of mutual fund and annuity
products.
Other noninterest income is primarily attributable to loan related services
income, which amounted to $2.1 million, $1.9 million and $1.8 million during
1996, 1995 and 1994, respectively.
Noninterest Expenses.
Total noninterest expenses increased $17.8 million or 13.7% during 1996 and $5.1
million or 4.1% in 1995. Excluding merger expenses in all periods and the
one-time assessment of all SAIF-insured deposits to recapitalize the SAIF in
1996, total noninterest expenses increased $15.8 million or 12.6% during 1996
and $744 thousand or 0.6% in 1995. The increase in noninterest expenses in 1996
was attributable to the expansion of the core banking franchise internally and
through acquisitions, asset growth, new product development, enhancements to
alternative delivery systems, increased market share in existing markets and
growth in noninterest income revenue. As the Company made investments in new
systems, products and employees during the past few years to support the current
business strategy, it has been able to significantly reduce collection and
carrying costs associated with nonperforming assets and has benefited from
substantially lower deposit insurance assessment related expenses.
17
21
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth information relating to the Company's noninterest
expenses during the periods indicated.
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Salaries and employee benefits $ 73,303 $ 67,472 $ 61,799
Data processing 12,528 8,924 7,306
Occupancy 12,320 10,574 10,454
Equipment 8,479 6,844 6,233
Advertising and marketing 4,327 4,642 4,642
Deposit and other assessments 3,050 4,497 7,899
Collection and carrying costs of
nonperforming assets 1,573 2,595 6,033
Merger expenses 5,105 4,958 559
Other noninterest expenses:
Amortization of goodwill 2,215 1,925 1,801
Amortization of deposit premium 2,659 -- --
Other 22,514 17,849 18,411
-------- -------- --------
Total other noninterest expenses 27,388 19,774 20,212
-------- -------- --------
Total noninterest expenses $148,073 $130,280 $125,137
======== ======== ========
- --------------------------------------------------------------------------------
Salaries and employee benefits increased by $5.8 million or 8.6% from 1995 to
1996 and by $5.7 million or 9.2% from 1994 to 1995. These increases reflect
staff additions in connection with the expansion of the retail franchise,
expanded telephone banking services, increased mortgage banking activities and
trust services, and additional staff related to the purchase acquisitions, as
well as normal salary and wage increases.
Data processing expenses increased by $3.6 million or 40.4% during 1996 and
by $1.6 million or 22.1% during 1995. Investment in expanded operational
capacities to support new product offerings and improve customer services,
increased transaction volumes related to mortgage banking operations, increased
automated deposit and check processing volumes, and the increase in
transactional processing associated with the purchase acquisitions were among
the primary factors behind the increase in data processing expenses in 1996.
Data processing expenses were also higher in 1996 as a result of BNH which, in
1995, processed checks in-house as opposed to outsourcing check processing in
1996. Consequently, the cost to outsource check processing is included in data
processing in 1996, with no equivalent charge in 1995. Effective July 1, 1996,
the computer systems and other back office functions of BNH were merged with
those of the Bank. Family Bank computer systems and other back office functions
were merged effective as of the acquisition date on December 6, 1996.
Occupancy expenses increased by $1.7 million or 16.5% in 1996 and by $120
thousand or 1.1% in 1995. The increase in occupancy expense in 1996 was
primarily attributable to the expansion of the Company's retail delivery system,
which resulted in higher rent, depreciation, utilities and maintenance expenses.
Deposit and other assessment expenses decreased by $1.5 million or 32.2%
during 1996 and by $3.4 million or 43.1% in 1995. These expenses consist
primarily of deposit insurance premiums paid by the Company's subsidiary banks
to either the Bank Insurance Fund ("BIF") or the SAIF administered by the FDIC.
The BIF premium, which had been set at $.23 per $100 deposits since 1991, was
lowered to $.04 per $100 of deposits in August 1995, and as a result of the BIF
becoming fully capitalized, the FDIC voted in November 1995 to reduce the
premium to zero as of January 1, 1996 with only an administrative fee being
assessed. Consequently, the Company incurred only a minimal expense for 1996
thereby accounting for approximately a $3.3 million decrease in premiums in
1996. This was offset by a one-time charge of $1.85 million to recapitalize the
SAIF, which was assessed as a result of legislation enacted by Congress in
September 1996. At December 31, 1996, the Company had approximately 91.1% of its
deposits insured by the BIF and 8.9% by the SAIF. Due to an overall reduction in
assessment rates, the Company expects a net decrease in deposit insurance
premium expenses for 1997.
The Company continued to benefit in 1996 from lower collection and carrying
costs associated with the reduction of nonperforming assets. Collection and
carrying costs of nonperforming assets decreased $1.0 million or 39.4% during
1996 and by $3.4 million or 57.0% during 1995. See "Financial Condition -
Nonperforming Assets" below.
Other categories of noninterest expense include equipment, which increased
$1.6 million in 1996, and advertising and marketing, which decreased $315
thousand in 1996.
Merger expenses of $5.1 million in 1996 and $5.0 million in 1995 are
primarily related to the acquisition of BNH by the Company. Of the $5.0 million
of merger expenses in 1995, $1.3 million was related to the acquisition of
Bankcore and the remainder related to the acquisition of BNH. Merger expenses
included employee severance costs, professional fees, branch consolidation costs
and operational consolidation costs.
Other noninterest expenses include amortization of goodwill and deposit
premiums as well as other administrative expenses. The increases in other
noninterest expenses in 1996 were primarily attributable to recent acquisitions
by the Company. Prior to 1996, deposit premium expense was included in interest
on deposits.
18
22
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Income Tax Expense.
The Company recognized $27.6 million, $23.4 million and $13.7 million in income
tax expense for the years ended December 31, 1996, 1995 and 1994, respectively.
The effective tax rate was 34.4% for 1996, 34.5% for 1995 and 28.6% for 1994. As
a result of the acquisition of MMSB by the Company in mid 1994, the Company
recorded a one-time $1.7 million tax benefit from the reversal of the valuation
allowance for net deferred tax assets. This one-time benefit is reflected in the
Company's income tax expense for 1994. For additional information relating to
income taxes, see Note 10 to the Consolidated Financial Statements.
FINANCIAL CONDITION
General.
The Company's total consolidated assets increased by $1.3 billion or 33.0% from
$4.1 billion at December 31, 1995 to $5.4 billion at December 31, 1996. This
increase reflected internal growth, as well as the Company's acquisitions as
discussed above. Of the $1.3 billion increase, approximately $1.0 billion was
due to the acquisition of Family Bank and $216 million was due to the Branch
Acquisition.
Set forth below is a discussion of the material changes in the Company's
financial condition from December 31, 1995 to December 31, 1996.
BALANCE SHEET REVIEW
Securities Available for Sale.
Securities available for sale, which include U.S. Government securities,
asset-backed and mortgage-backed securities, collateralized mortgage
obligations, and other debt and equity securities, increased by $278.4 million
or 36.3%. Of the increase, Family Bank contributed $391.8 million, which was
offset by sales activity to fund loan growth. The overall increase in securities
available for sale was primarily in mortgage-backed securities, which is
consistent with the Company's investment strategy.
The changes in the securities portfolio reflect the Company's efforts to
meet asset and liability objectives and otherwise manage its liquidity and
funding needs within the parameters of current accounting policies. For
additional information see "Risk Management" below and Notes 1 and 3 to the
Consolidated Financial Statements.
The following table sets forth the carrying value of the Company's securities
available for sale and securities held to maturity at the dates indicated.
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Securities available for sale:
Bonds and other debt securities:
U.S. Government and federal agencies $ 432,230 $ 526,576 $ 219,220
Tax-exempt bonds and notes 17,828 10,837 11,085
Other bonds and notes 7,819 5,694 2,706
Mortgage-backed securities 443,995 195,823 172,466
Collateralized mortgage obligations 102,817 -- --
---------- ---------- ----------
Total debt securities 1,004,689 738,930 405,477
---------- ---------- ----------
Equities:
FHLB stock 37,948 23,793 23,236
Other equity securities 2,432 3,925 3,904
---------- ---------- ----------
Total equity securities 40,380 27,718 27,140
---------- ---------- ----------
Total securities available for sale $1,045,069 $ 766,648 $ 432,617
========== ========== ==========
Securities held to maturity:
Bonds and other debt securities:
U.S. Government and federal agencies $ -- $ -- $ 285,392
Tax-exempt bonds and notes -- -- 908
Other bonds and notes -- -- 277
---------- ---------- ----------
Total debt securities -- -- 286,577
---------- ---------- ----------
Equities:
Other equity securities -- -- --
---------- ---------- ----------
Total equity securities -- -- --
---------- ---------- ----------
Total investment securities held
to maturity $ -- $ -- $ 286,577
========== ========== ==========
- --------------------------------------------------------------------------------
19
23
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth the scheduled maturities and weighted average
yields of the Company's debt securities available for sale at December 31, 1996,
based on amortized cost.
- ---------------------------------------------------------------------------------------------------------------------------------
Amortized Cost Maturing in
- ---------------------------------------------------------------------------------------------------------------------------------
More Than One to More Than Five to
(Dollars in Thousands) One Year or Less Five Years Ten Years More Than Ten Years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. government and
federal agencies $213,287 5.78% $204,089 5.91% $ 8,383 7.18% $ 6,608 7.12% $ 432,367 5.89%
Tax-exempt bonds and
notes 13,624 3.78 3,825 4.65 -- -- 340 6.33 17,789 4.02
Other bonds and notes 3,290 5.62 4,481 6.11 87 7.14 -- -- 7,858 5.92
Mortgage-backed
securities 129 7.50 13,011 6.11 31,754 7.01 399,719 7.04 444,613 7.01
Collateralized mortgage
obligations 225 8.16 3,154 7.33 9,081 7.05 90,777 7.05 103,237 7.06
-------- -------- -------- -------- ----------
Total $230,555 5.66 $228,560 5.92 $ 49,305 7.05 $497,444 7.04 $1,005,864 6.47
======== ======== ======== ======== ==========
- ---------------------------------------------------------------------------------------------------------------------------------
Loans Held for Sale.
Loans held for sale increased by $32.3 million or 45.5%. This increase was due
to an increased volume of residential mortgages originated for sale in the
secondary market at the end of 1996 as compared with the end of 1995, and an
increase in the volume of loans originated through the correspondent lenders.
For additional information, see Note 1 to the Consolidated Financial Statements
and "Financial Condition-Loans and Leases" below.
Loans and Leases.
Total loans and leases increased by $876.0 million or 31.5%. Family Bank and the
Branch Acquisitions accounted for $692.0 million of this increase. In addition,
significant internal growth was realized in the consumer loan portfolio.
20
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth information concerning the Company's loan
portfolio by type of loan at the dates indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
% OF % of % of % of % of
AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Residential real
estate loans:
Adjustable rate $ 617,323 16.89% $ 402,695 14.49% $ 418,653 15.86% $ 382,485 15.70% $ 303,437 12.16%
Fixed rate 559,551 15.31 395.381 14.23 384,845 14.58 336,391 13.81 391,160 15.67
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total 1,176,874 32.20 798,076 28.72 803,498 30.44 718,876 29.51 694,597 27.83
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial real
estate loans:
Permanent first
mortgage loans 901,105 24.66 753,857 27.13 745,356 28.24 731,074 30.01 793,019 31.77
Construction and
development 61,270 1.68 43,829 1.58 25,216 0.96 21,260 0.87 27,235 1.09
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total 962,375 26.34 797,686 28.71 770,572 29.20 752,334 30.88 820,254 32.86
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial loans
and leases:
Business Loans 463,011 12.67 397,652 14.31 315,200 11.94 292,645 12.01 314,550 12.60
Leases 14,391 0.39 10,940 0.39 9,208 0.35 10,949 0.45 18,467 0.74
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total 477,402 13.06 408,592 14.70 324,408 12.29 303,594 12.46 333,017 13.34
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Consumer loans
and leases:
Home equity 362,105 9.91 283,008 10.19 247,751 9.39 222,262 9.13 220,674 8.84
Mobile home 206,061 5.64 214,761 7.73 222,600 8.43 210,682 8.65 189,732 7.60
Automobile 192,295 5.26 127,969 4.61 125,887 4.77 95,449 3.92 77,942 3.12
Education Loans 106,900 2.93 38,685 1.39 43,599 1.65 17,133 0.71 9,322 0.37
Boat and recreational
vehicle 31,969 0.87 22,716 0.82 20,680 0.78 24,992 1.03 28,767 1.15
Other 138,619 3.79 87,090 3.13 80,582 3.05 90,411 3.71 121,938 4.89
---------- ------ ---------- ------- ---------- ------ ---------- ------
Total 1,037,949 28.40 774,229 27.87 741,099 28.07 660,929 27.15 648,375 25.97
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans
receivable 3,654,600 100.00% 2,778,583 100.00% 2,639,577 100.00% 2,435,733 100.00% 2,496,243 100.00%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Allowance for loan and
lease losses 67,488 60,975 63,675 67,385 71,223
Net loans
receivable $3,587,112 $2,717,608 $2,575,902 $2,368,348 $2,425,020
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
21
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth loans held for sale and total loans and leases
originated, purchased, sold and repaid during 1996 and 1995.
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
Originations and purchases:
Residential real estate mortgages $1,297,723 $ 721,400
Commercial real estate mortgages 174,021 146,300
Commercial business loans and
leases 522,047 453,900
Consumer loans and leases 491,261 290,600
---------- ----------
Total originations and purchases 2,485,052 1,612,200
---------- ----------
Loans acquired through purchases
and acquisitions 691,966 94,452
---------- ----------
Total loan originations, purchases
and acquisitions 3,177,018 1,706,652
---------- ----------
Sales and principal reductions:
Sales 1,057,261 552,774
Principal reductions 1,211,449 954,985
---------- ----------
Total sales and principal reductions 2,268,710 1,507,759
---------- ----------
Net increase in loans held for sale
and loans and leases $ 908,308 $ 198,893
========== ==========
- --------------------------------------------------------------------------------
Residential real estate mortgage loan originations increased to $1.3 billion in
1996, a 79.9% increase over 1995 originations. Residential real estate loans
consist of loans secured by single-family (one-to-four units) residences and
consist primarily of conventional loans. The Company's strategy generally is to
originate fixed-rate residential loans for sale to investors in the secondary
market. The Company generally retains adjustable-rate loans in its portfolio but
will, from time to time, also retain 15 year fixed-rate mortgages. Residential
real estate mortgage originations from correspondent lenders increased to $844.5
million from $378.5 million in 1995, a 123.1% increase.
Commercial real estate loans consist of loans secured by income-producing
commercial real estate (including office buildings and industrial buildings),
service industry real estate (including hotels and health care facilities),
multi-family (over four units) residential real estate and retail trade real
estate (including restaurants, automotive-related properties and food stores),
as well as loans for the acquisition, development and construction of such
commercial real estate.
Commercial real estate mortgage originations increased by $27.7 million or
19.0% in 1996 as compared with 1995. The Company's business plan is to continue
to lend within its geographic markets to sound commercial businesses which
collateralize their borrowings with commercial real estate properties as well as
ongoing refinances of existing commercial real estate mortgages in the Company's
loan portfolio. The Company continues to de-emphasize commercial real estate
loans and to reduce its relative exposure to such loans in favor of other types
of loans.
Commercial business loans consist primarily of loans secured by various
equipment, machinery and other corporate assets, as well as loans to provide
working capital to businesses in the form of lines of credit, which may be
secured by inventory, accounts receivable or other assets or unsecured. The
Company also originates commercial business leases. Commercial business loans
and leases increased by $68.1 million or 15.0% in 1996 as compared with 1995.
The Company continues to focus on lending to sound, small and medium sized
business customers within its geographical markets.
Consumer loans consist of a wide variety of loans which have been emphasized
by the Company in recent years in order to provide a full range of financial
services to its customers and because such loans generally have shorter terms
and higher interest rates than mortgage loans. Consumer loans are originated
directly by the Company, or in the case of mobile home loans, automobile loans,
boat loans and certain other loans, indirectly through various dealers in
products financed by the Company. Consumer loan originations increased by 69.1%
to $491.3 million during 1996. The increase was primarily a result of growth in
home equity loans, indirect automobile loans and educational loans, which are
included in other consumer loans. Increased consumer loan originations is
consistent with the Company's strategy to increase the percentage of consumer
loans in its loan portfolio.
22
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth scheduled contractual amortization of loans
in the Company's portfolio at December 31, 1996, as well as the dollar amount of
loans which are scheduled to mature after one year which have fixed or
adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdraft loans are reported as due in
one year or less.
- --------------------------------------------------------------------------------------------------------------------
Commercial
Residential Commercial Business Consumer
Real Estate Real Estate Loans and Loans and
(In Thousands) Loans Loans Leases Leases Total (1)
- --------------------------------------------------------------------------------------------------------------------
Amounts due:
Within one year $ 52,226 $ 152,261 $ 191,234 $ 548,335 $ 944,056
After one year through five years 151,441 394,581 185,414 296,597 1,028,033
Beyond five years 973,207 415,533 100,754 193,017 1,682,511
---------- ---------- ---------- ---------- ----------
Total $1,176,874 $ 962,375 $ 477,402 $1,037,949 $3,654,600
========== ========== ========== ========== ==========
Interest rate terms on
amounts due after one year:
Fixed $ 547,773 $ 313,909 $ 115,629 $ 417,944 $1,395,255
Adjustable 576,875 496,205 170,539 71,670 1,315,289
- --------------------------------------------------------------------------------------------------------------------
(1) Scheduled contractual amortization does not reflect the actual maturities of
loans and leases because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses, which give the lender the right to
require repayment of a mortgage loan in connection with a transfer of the
related property.
Substantially all of the mortgage loans in the Company's loan portfolio are
secured by properties located in Maine, New Hampshire and northern
Massachusetts. Moreover, substantially all of the Company's non-mortgage loan
portfolio consists of loans made to residents of and businesses located in these
areas.
Nonperforming assets.
Nonperforming assets decreased $2.5 million or 4.4% from $56.8 million at
December 31, 1995 to $54.3 million at December 31, 1996. The decrease reflects a
decline in nonperforming loans and other nonperforming assets in recent years.
Nonperforming assets as a percentage of total assets decreased from 2.10% at
December 31, 1994 to 1.01% at December 31, 1996.
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 continue to focus on the further reduction of nonperforming
asset levels. 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.
23
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth information regarding nonperforming loans and
leases and other nonperforming assets held by the Company at the dates
indicated.
- -------------------------------------------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
Residential real estate loans
Nonaccrual loans $ 3,867 $ 5,713 $ 3,317 $ 4,806 $ 8,555
Accruing loans 90 days overdue 5,560 3,728 4,473 4,479 4,316
Troubled debt restructurings -- -- -- 111 1,097
-------- -------- -------- -------- --------
Total 9,427 9,441 7,790 9,396 13,968
-------- -------- -------- -------- --------
Commercial real estate loans:
Nonaccrual loans 15,270 17,029 26,978 30,780 43,731
Accruing loans 90 days overdue -- -- 1,020 454 1,704
Troubled debt restructurings 1,581 3,186 6,284 15,275 18,155
-------- -------- -------- -------- --------
Total 16,851 20,215 34,282 46,509 63,590
-------- -------- -------- -------- --------
Commercial business loans and leases:
Nonaccrual loans 8,016 6,735 6,871 14,399 24,252
Accruing loans 90 days overdue -- 25 30 336 1,163
Troubled debt restructurings 579 1,859 2,684 2,547 1,649
-------- -------- -------- -------- --------
Total 8,595 8,619 9,585 17,282 27,064
-------- -------- -------- -------- --------
Consumer loans:
Nonaccrual loans 5,097 3,586 3,775 3,386 3,038
Accruing loans 90 days overdue 2,478 659 831 897 1,268
Troubled debt restructurings -- -- -- 26 --
-------- -------- -------- -------- --------
Total 7,575 4,245 4,606 4,309 4,306
-------- -------- -------- -------- --------
Total nonperforming loans:
Nonaccrual loans 32,250 33,063 40,941 53,371 79,576
Accruing loans 90 days overdue 8,038 4,412 6,354 6,166 8,451
Troubled debt restructurings 2,160 5,045 8,968 17,959 20,901
-------- -------- -------- -------- --------
Total 42,448 42,520 56,263 77,496 108,928
-------- -------- -------- -------- --------
Other nonperforming assets:
Other real estate owned, net of
related reserves 10,000 12,679 16,682 28,867 37,657
In-substance foreclosures, net of
related reserves -- -- 3,391 11,752 36,582
Repossessions, net of related
reserves 1,818 1,553 2,003 1,961 2,566
-------- -------- -------- -------- --------
Total 11,818 14,232 22,076 42,580 76,805
-------- -------- -------- -------- --------
Total nonperforming assets $ 54,267 $ 56,752 $ 78,339 $120,076 $185,733
======== ======== ======== ======== ========
Total nonperforming loans as a
percentage of total loans 1.16% 1.53% 2.13% 3.18% 4.36%
Total nonperforming assets as a
percentage of total assets 1.01 1.40 2.10 3.31 5.29
Total nonperforming assets as a
percentage of total loans and
total other nonperforming assets 1.48 2.03 2.94 4.85 7.22
- -------------------------------------------------------------------------------------------------------------------------
It is the policy of the Company to generally place all commercial real estate
loans and commercial business loans and leases which are 90 days or more past
due, unless secured by sufficient cash or other assets immediately convertible
to cash, on nonaccrual status. All such loans 90 days or more past due, whether
on nonaccrual status or not, are considered as nonperforming loans. Residential
real estate loans and consumer loans and leases are placed on nonaccrual status
generally at 90 days or more past due or when in management's judgment the
collectibility of interest and/or principal is doubtful.
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. At December 31, 1996, $10.8
million of commercial real estate and commercial business loans and leases, or
42.5% of total nonperforming loans, were on nonaccrual status and thus disclosed
as nonperforming loans even though they were less than 90 days past due.
24
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure generally is classified as other real estate owned
until it is sold. When property is acquired as other real estate owned, it is
recorded at the lower of carrying or fair value at the date of acquisition or
classification and any writedown resulting therefrom is charged to the allowance
for loan and lease losses. All costs incurred from that date in maintaining the
property and subsequent reductions in value are expensed and are included in
collection and carrying costs of nonperforming assets (a component of
noninterest expenses). For further information, see Note 9 to the Consolidated
Financial Statements.
Potential Nonperforming Assets.
The total of commercial real estate and commercial business loans and leases
which are internally graded substandard or lower, according to the Company's
internal loan grading system, but which are still in a performing status (the
population from which future nonperforming loans would most likely arise), has
continued to decrease since the middle of 1992. At December 31, 1996 and 1995,
the Company had classified a total of $79.6 million and $89.7 million,
respectively, of commercial real estate and commercial business loans and leases
as substandard or lower on its risk rating system. Included in this amount at
December 31, 1996 was the Company's $25.4 million of nonperforming commercial
real estate loans and commercial business loans and leases. In the opinion of
management, the remaining $54.2 million of commercial real estate loans and
commercial business loans and leases classified as substandard at December 31,
1996 evidence one or more weaknesses or potential weaknesses and, depending on
the regional economy and other factors, may become nonperforming assets in
future periods. These loans are net of charge-offs, but not general reserves
which have been established based on the Company's internal rating of such loans
and evaluation of the adequacy of its allowance for loan and lease losses.
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 chargeoffs of loans and leases deemed
noncollectible. This allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off. Arriving at an
appropriate level of allowance for loan and lease losses necessarily involves a
high degree of judgment, as discussed above under the "Results of Operations
Provision for Loan Losses."
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 sets forth information
concerning the activity in the Company's allowance for loan and lease losses
during the periods indicated.
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $3,224,309 $2,732,316 $2,529,723 $2,473,666 $2,647,479
========== ========== ========== ========== ==========
Allowance at the beginning of period $ 60,975 $ 63,675 $ 67,385 $ 71,223 $ 88,067
Additions due to acquisitions 11,365 2,314 -- -- --
Charge-offs:
Residential real estate mortgages 2,812 4,139 4,646 6,607 13,565
Commercial real estate mortgages 8,769 8,964 6,207 8,482 19,053
Commercial business loans and leases 2,994 2,234 4,124 9,622 18,825
Consumer loans and leases 3,598 2,631 2,225 3,861 5,771
---------- ---------- ---------- ---------- ----------
Total loans charged off 18,173 17,968 17,202 28,572 57,214
---------- ---------- ---------- ---------- ----------
Recoveries:
Residential real estate mortgages 507 620 904 642 627
Commercial real estate mortgages 9,541 5,185 4,917 6,293 2,582
Commercial business loans and leases 1,536 2,181 3,440 2,035 2,997
Consumer loans and leases 837 738 857 1,717 2,139
---------- ---------- ---------- ---------- ----------
Total loans recovered 12,421 8,724 10,118 10,687 8,345
---------- ---------- ---------- ---------- ----------
Net charge-offs 5,752 9,244 7,084 17,885 48,869
Additions charged to operating expenses 900 4,230 3,374 14,047 32,025
---------- ---------- ---------- ---------- ----------
Allowance at the end of the period $ 67,488 $ 60,975 $ 63,675 $ 67,385 $ 71,223
========== ========== ========== ========== ==========
Ratio of net charge-offs to average
loans and leases outstanding 0.18% 0.34% 0.28% 0.72% 1.85%
Ratio of allowance to total loans
and leases at end of period 1.85% 2.19% 2.41% 2.77% 2.85%
Ratio of allowance to nonperforming
loans at end of period 158.99% 143.40% 113.17% 86.95% 65.39%
- ---------------------------------------------------------------------------------------------------------------------------
25
29
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table sets forth information concerning the allocation of the
Company's allowance for loan and lease losses by loan categories at the dates
indicated.
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE TO Allowance to Allowance to Allowance to Allowance to
PERCENT OF Percent of Percent of Percent of Percent of
TOTAL LOANS Total Loans Total Loans Total Loans Total Loans
(Dollars in Thousands) AMOUNT BY CATEGORY Amount by Category Amount by Category Amount by Category Amount by Category
- ----------------------------------------------------------------------------------------------------------------------------------
Residential real
estate loans $ 7,723 0.66% $10,118 1.27% $ 8,567 1.07% $ 9,864 1.37% $13,647 1.96%
Commercial real
estate loans 35,478 3.69 31,673 3.97 35,505 4.61 38,177 5.07 40,899 4.99
Commercial business
loans and leases 13,449 2.82 9,491 2.32 9,274 2.86 8,734 2.88 12,162 3.65
Consumer loans and
leases 10,838 1.04 9,693 1.25 10,329 1.39 10,610 1.61 4,515 0.70
------- ------- ------- ------- -------
$67,488 1.85 $60,975 2.19 $63,675 2.41 $67,385 2.77 $71,223 2.85
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits.
The following table presents the changes in the balances of deposits outstanding
at December 31, 1996, 1995 and 1994:
- ---------------------------------------------------------------------------------------------------------------------------
1996-1995 1995-1994
Change Change
(Dollars in Thousands) 1996 1995 1994 Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits $ 604,980 $ 434,091 $ 362,790 $ 170,889 39.4% $ 71,301 19.7%
NOW accounts 497,930 351,481 333,192 146,449 41.7 18,289 5.5
Money market access accounts 525,518 490,575 327,424 34,943 7.1 163,151 49.8
Regular savings 760,340 557,896 650,302 202,444 36.3 (92,406) (14.2)
Certificates of deposit 1,796,521 1,363,095 1,212,137 433,426 31.8 150,958 12.5
---------- ---------- ---------- ---------- ----------
Total deposits $4,185,289 $3,197,138 $2,885,845 $ 988,151 30.9% $ 311,293 10.8%
========== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
The increase of $988.2 million in deposits in 1996 was principally due to $774.6
million of deposits acquired in connection with the acquisition of Family Bank
in December 1996 and $160.9 million of deposits acquired in connection with the
Branch Acquisition in February 1996.
Certificates of deposit of $100,000 or more are scheduled to mature as follows
at December 31, 1996:
- --------------------------------------------------------------------------------
(In Thousands)
3 months or less $ 77,403 33.3%
Over 3 to 6 months 50,566 21.7
Over 6 to 12 months 36,839 15.8
More than 12 months 68,072 29.2
-------- --------
$232,880 100.0%
======== ========
- --------------------------------------------------------------------------------
Other Interest-Bearing Liabilities.
Other interest-bearing liabilities consist of borrowings from the Federal Home
Loan Bank ("FHLB"), securities sold under repurchase agreements, Federal Funds
purchased, debentures and treasury tax and loan borrowings from the Federal
Reserve Bank. Total interest-bearing liabilities increased 51.2% to $691.0
million at December 31, 1996. The majority of the increase was in borrowings
from the Federal Home Loan Bank of Boston. The acquisition of Family Bank added
$69.6 million in borrowings in December 1996.
The following table sets forth certain information concerning the Company
borrowings at the dates indicated.
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
FHLB advances $470,080 $252,446 $362,450
Repurchase agreements 197,005 180,957 127,519
Federal funds purchased -- 1,500 4,404
Other 23,884 22,029 10,974
-------- -------- --------
Total $690,969 $456,932 $505,347
======== ======== ========
- --------------------------------------------------------------------------------
FHLB advances remain the largest nondeposit related interest-bearing funding
source for the Company in 1996. These borrowings are secured by qualified
residential loans, certain investment securities and certain other assets
available to be pledged. The increase in FHLB borrowings was used to partially
fund the Branch Acquisition and to support loan growth. For additional
information regarding FHLB advances, see Note 12 to the Consolidated Financial
Statements. At December 31, 1996, the Company estimates its addi-
26
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
tional available borrowing capacity from the FHLB to be approximately $641.9
million.
The increase in securities sold under repurchase agreements of $16.0 million
was primarily attributable to the acquisition of Family Bank in December 1996,
which had securities sold under repurchase agreements of $11.2 million at
December 31, 1996. For additional information regarding securities sold under
repurchase agreements, see Note 11 to the Consolidated Financial Statements.
Capital Resources.
Consistent with its long-term goal of operating a safe, sound and profitable
organization, the Company strives to maintain a strong capital base. The
Company's shareholders' equity totaled $437.0 million or 8.1% of total assets at
December 31, 1996, as compared to $354.9 million or 8.7% of total assets at
December 31, 1995. The $82.1 million or 23.1% increase in shareholders' equity
from December 31, 1995 to December 31, 1996 was the result of $52.5 million in
net income, $47.9 million in new stock issuance related to the purchase of
Family Bank and $2.3 million of treasury stock sales related to various employee
benefit plans of the Company, the effects of which were offset in part by cash
dividends of $15.9 million and a $4.7 million reduction in net unrealized gain
(net of tax effect) in the market value of securities available for sale.
During 1996 the Company completed an issuer tender offer in anticipation of
the Family Bank purchase and acquired 2,500,000 shares of its common stock.
These shares were reissued in connection with the acquisition of Family Bank in
December 1996.
In anticipation of the Bankcore acquisition, the Company repurchased 751,600
shares of its common stock for a total cost of $9.6 million during 1994 and
1995. All shares repurchased were reissued in connection with the Bankcore
acquisition in July 1995.
On January 24, 1997, the Company established a statutory business trust
which issued $100 million in capital securities on January 31, 1997. The
proceeds were invested in Company issued junior subordinated debentures due
2027. See Note 19 to the Consolidated Financial Statements for more information.
For additional discussion on capital resources, see Note 13 to the
Consolidated Financial Statements and "Regulatory Capital Requirements" under
"Regulatory Environment" below.
RISK MANAGEMENT
The Company's success is largely dependent upon its ability to strategically
manage financial and nonfinancial risks. Prominent nonfinancial challenges
facing the Company and addressed through the Company's strategic planning
process include competition from bank and nonbank financial service companies,
changing regulatory and political environments, rapid advances in
technology-based information systems and demographic and economic changes. The
significant financial risks actively managed by the Company include:a) credit
risk; b) interest rate risk, including asset and liability management; c)
liquidity risk; and d) off-balance sheet risks and commitments.
Credit Risk Management.
The Company's net loan portfolio accounted for 66.4% of the assets of the
Company at December 31, 1996 and represents its primary source of credit risk.
The Company has dedicated and will continue to dedicate a substantial amount of
time and resources to the management of credit risk within its loan portfolio.
The Company has established systems of checks and balances to manage the
origination, control and collection of loan assets.
For additional information relating to credit risk, see "Results of
Operations - Provision for Loan Losses," "Financial Condition - Nonperforming
Assets" and Notes 4 and 5 to the Consolidated Financial Statements.
Interest Rate Risk and Asset/Liability Management.
The Company's interest rate risk and asset and liability management are the
responsibility of a Liquidity and Funds Management Committee which reports to
the Board of Directors and is comprised of members of the Company's senior
management. The Committee is actively involved in formulating the economic
projections used by the Company in its planning and budgeting process and
establishes policies which monitor and coordinate the Company's sources, uses
and pricing of funds.
Interest rate risk can be defined as the exposure of the Company's net
income or financial position to adverse movements in interest rates. In addition
to directly impacting net interest income, changes in the level of interest
rates also can affect (i) the amount of loans originated and sold by an
institution, (ii) the ability of borrowers to repay adjustable rate loans, (iii)
the average maturity of mortgage loans, which tends to increase when current
mortgage loan rates are substantially higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgage loans are
substantially lower than current mortgage loan rates (due to refinancings of
loans at lower rates), (iv) the value of an institution's interest-earning
assets and the resultant ability to realize gains on the sale of such assets and
(v) the carrying value of investment securities classified as available for sale
and resultant adjustments to shareholders' equity.
The Company seeks to reduce the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. To accomplish this, the Company has undertaken various
steps to increase the percentage of floating rate assets and to reduce the
average maturity of such assets. A principal focus in recent years has been on
the origination of adjustable-rate residential real estate loans and consumer
loans, which generally have shorter maturities than fixed-rate residential real
estate loans. The Company also originates adjustable-rate and fixed-rate
commercial real estate loans and commercial business loans and leases, which
collectively also generally mature or reprice more quickly than fixed-rate
residential real estate loans.
Net interest income sensitivity to movements in interest rates is measured
through use of a simulation model which analyzes resulting net income under
various interest rate scenarios. Projected net interest income is modeled based
on both an immediate rise or fall in interest rates ("rate shock") as well as
gradual movements in interest rates over a twelve month period. The model is
based on the actual maturity and repricing characteristics of interest-rate
sensitive assets and liabilities and factors in projections for anticipated
activity levels by major product lines of the Company. The simulation model
incorporates assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also takes into
account the Company's ability to exert greater control over the setting of
interest rates on certain deposit products than it has over variable and
adjustable-rate loans which are tied to published indices, such as designated
prime lending rates and the rate on U.S. Treasury Bills.
27
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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Based on the information and assumptions in effect at December 31, 1996,
management of the Company believes that a 200 basis point gradual change in
interest rates over a twelve month period, up or down, would not significantly
affect the Company's annualized net interest income.
As a result of the Company's business strategy to increase noninterest
income related to mortgage banking services, the Company has increased its
portfolio of residential mortgages serviced for investors. As a result of that
strategy, as well as the adoption of SFAS No. 122, the level of mortgage
servicing rights has increased significantly in recent periods.
In order to mitigate the prepayment risk associated with mortgage servicing
rights and protect economic value, in 1995 the Company began purchasing constant
maturity treasury floors ("CMTs"). The value of the CMTs is related to movements
in market interest rates to which they are indexed and the remaining term of the
CMT. A CMT's value is inversely related to movements in market interest rates.
As interest rates decline, the value of a CMT increases. Market interest rate
movements also influence the behavior of borrowers, which impacts the value of
mortgage servicing rights as a result of an increase or decrease in mortgage
loan prepayment speeds. The value of mortgage servicing rights generally
increases as market interest rates increase and declines as market interest
rates decrease. Although not accorded hedge accounting treatment due to the
uncertainty of strict correlation, in the event that interest rates fall any
resulting increase in the value of the CMT is intended to offset, in part, the
prospective impairment to the value of the Company's mortgage servicing rights.
At December 31, 1996, the Company's CMTs had an amortized cost of $279 thousand,
which approximates market value, and were included in other assets on the
Company's balance sheet.
Liquidity Risk Management.
The Company seeks to maintain various sources of funds and prudent levels of
liquid assets in order to satisfy its varied liquidity demands. Many factors
affect the Company's ability to meet its liquidity needs, including its mix of
assets and liabilities, reputation and credit standing in the marketplace,
interest rates and general economic conditions. The Company's actual inflow and
outflow of funds is detailed in the Consolidated Statements of Cash Flows.
Each of the Company's banking subsidiaries monitors its liquidity in
accordance with guidelines established by the Company and applicable regulatory
requirements. The primary sources of funds of the Company's banking subsidiaries
are deposits, borrowings from the FHLB of Boston and other sources, cash flows
from operations, prepayments and maturities of outstanding loans, leases,
investments and mortgage-backed securities and the sale of mortgage loans.
During 1996 and 1995, the Company's banking subsidiaries used their sources of
funds primarily to meet ongoing commitments to pay maturing savings certificates
and savings withdrawals, fund loan and lease commitments and maintain a
substantial securities portfolio.
Management believes that the Company's banking subsidiaries currently have
adequate liquidity available to respond to both expected and unexpected
liquidity demands, according to the measurement system established during 1991
and set forth in the Company's contingency liquidity plan. This system measures
the net amount of marketable assets, after deducting pledged assets, plus lines
of credit, primarily with the FHLB, which are available to fund liquidity
requirements. It then measures the adequacy of that amount against the amount of
sensitive or volatile liabilities, which include core deposit balances in excess
of $100,000, term deposits with short maturities and credit commitments
outstanding. This evaluation is conducted at each banking subsidiary and
consolidated for the Company on a monthly basis. It allows the Company to manage
its liquidity position and funding sources in order to ensure that is has
continuing ability to meet its ongoing commitments to pay maturing savings
certificates and savings withdrawals, fund loan and lease commitments, meet
contractual maturities on borrowings and maintain a significant portfolio of
investment securities.
The Company's liquidity management policies currently include requirements
that the Company maintain a minimum liquidity ratio of no less than 15% with a
target of 20%. The Company's consolidated liquidity position generally has
exceeded these amounts, as net cash, short-term and marketable assets amounted
to 26.8% of net deposits and short-term liabilities at December 31, 1996, as
compared to 26.5% at December 31, 1995.
A secondary source of liquidity, not included in the liquidity ratio
calculation, is represented by asset-based liquidity. Asset-based liquidity
consists primarily of single-family residential real estate loans which qualify
for sale in the secondary market.
The liquidity needs of the Company on a parent-only basis consist primarily
of dividends to shareholders and expenses for general corporate purposes. The
primary source of parent-only company cash flow is dividends received from
subsidiary banks. For additional information, see Notes 13 and 18 to the
Consolidated Financial Statements.
Off-Balance Sheet Risks and Commitments.
Set forth below is a discussion of various off-balance sheet risks and
commitments of the Company.
Commitments to extend credit.
At December 31, 1996 and 1995, the total approved loan commitments outstanding,
commitments under unused lines of credit and the unadvanced portion of
construction loans amounted to $828.8 million and $716.2 million, respectively.
Derivatives.
The Company has only limited involvement with off-balance sheet derivative
financial instruments and does not use them for trading purposes.
The Company has explored and utilized in the past certain financial
techniques, such as interest rate exchange agreements, to assist in the
management of interest rate risk. The Company believes that such techniques have
benefits under certain market and economic conditions. At December 31, 1996, the
Company did not have any interest rate exchange agreements in place.
The Company makes use of forward commitments to sell loans as part of its
mortgage banking business. Forward commitments are used in the normal course of
business to reduce the Company's exposure to fluctuations in interest rates.
For additional information, see Note 14 to the Consolidated Financial
Statements.
28
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Counterparty risk.
The Company does business with a variety of financial institutions and other
companies in the normal course of business. The Company is subject to potential
financial loss if the counterparty is unable to complete an agreed upon
transaction. The Company controls counterparty risk through financial analysis,
dollar limits and other monitoring procedures.
REGULATORY ENVIRONMENT
Regulatory Capital Requirements.
Banks and bank holding companies are subject to a broad scope of laws and
regulations. The Company believes that it is in material compliance with all
applicable federal and state laws and regulations.
Under Federal Reserve Board ("FRB") guidelines, bank holding companies such
as the Company are required to maintain capital based on "risk-adjusted" assets.
Under risk-based capital guidelines, categories of assets with potentially
higher credit risk require more capital than assets with lower risk. In addition
to balance sheet assets, bank holding companies are required to maintain
capital, on a risk-adjusted basis, to support certain off-balance sheet
activities such as loan commitments. The FRB guidelines classify capital into
two tiers, Tier I and Total. Tier I risk-based capital consists of common
shareholders' equity, noncumulative perpetual preferred stock, cumulative
perpetual preferred stock and capital securities of trust subsidiaries, subject
in each case to specified limitations, and minority interests, less goodwill and
certain other intangible assets. Total risk-based capital consists of Tier I
capital plus a portion of the general allowance for loan losses, hybrid capital
instruments, term subordinated debt and intermediate preferred stock.
In addition to risk-based capital requirements, the FRB requires bank
holding companies to maintain a minimum leverage capital ratio of Tier I capital
to total assets. Total assets for this purpose do not include goodwill and any
other intangible assets and investments that the FRB determines should be
deducted from Tier I capital. For more information, see Note 13 to the
Consolidated Financial Statements.
Impact of Inflation and Changing Prices.
The Consolidated Financial Statements and related Notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as inflation.
Impending Accounting Changes.
Effective January 1, 1997, the Company will adopt SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125," requires the deferral of implementation as
it relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions until years beginning after December 31, 1997. Earlier or
retroactive applications of this Statement is not permitted. SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on an approach that focuses on control, whereby after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
Forward-Looking Statements.
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based on
various assumptions (some of which are beyond the Company's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the Company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
29
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CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Number of Shares and Per Share Data) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 276,995 $ 190,436
Federal funds sold 83,000 100,255
Securities available for sale, at market value (Notes 3, 11 and 12) 1,045,069 766,648
Loans held for sale, market value $103,790 in 1996
and $71,872 in 1995, respectively 103,270 70,979
Loans and leases (Notes 4 and 12) 3,654,600 2,778,583
Less: Allowance for loan and lease losses (Note 5) 67,488 60,975
----------- -----------
Net loans and leases 3,587,112 2,717,608
----------- -----------
Premises and equipment (Note 6) 73,956 56,021
Goodwill and other intangibles (Note 7) 71,649 22,792
Mortgage servicing rights (Note 8) 33,314 20,309
Other assets (Notes 9 and 10) 124,033 113,078
----------- -----------
$ 5,398,398 $ 4,058,126
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 760,340 $ 557,896
Money market access accounts 525,518 490,575
Certificates of deposit (including certificates of $100 or more
of $232,880 and $116,472 in 1996 and 1995, respectively) 1,796,521 1,363,095
NOW accounts 497,930 351,481
Demand deposits 604,980 434,091
----------- -----------
4,185,289 3,197,138
----------- -----------
Federal funds purchased -- 1,500
Securities sold under repurchase agreements (Note 11) 197,005 180,957
Borrowings from the Federal Home Loan Bank of Boston (Note 12) 470,080 252,446
Other borrowings 23,884 22,029
Other liabilities (Notes 10 and 16) 85,130 49,131
----------- -----------
Total liabilities 4,961,388 3,703,201
----------- -----------
Commitments and contingent liabilities (Notes 13, 14, 15 and 16)
Shareholders' equity (Notes 2, 3, 13, 15, 18 and 19):
Preferred stock, par value $0.01; 5,000,000 shares
authorized, none issued -- --
Common stock, par value $0.01; 100,000,000 and 30,000,000 shares authorized,
28,576,885 and 25,596,550 shares issued in 1996 and 1995, respectively 286 256
Paid-in capital 271,790 224,268
Retained earnings 170,855 134,443
Net unrealized gain (loss) on securities available for sale, net of applicable income taxes (582) 3,763
Treasury stock at cost (355,385 shares and
524,062 shares, respectively) (5,339) (7,805)
----------- -----------
Total shareholders' equity 437,010 354,925
----------- -----------
$ 5,398,398 $ 4,058,126
=========== ===========
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
30
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CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
(In Thousands, Except Number of Shares and Per Share Data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Interest and dividend income:
Interest on loans and leases (Note 4) $ 288,999 $ 253,787 $ 215,177
Interest on mortgage-backed investments 18,629 12,627 12,409
Interest on other investments 31,620 37,521 27,241
Dividends on equity securities 1,924 1,914 1,770
------------ ------------ ------------
Total interest and dividend income 341,172 305,849 256,597
------------ ------------ ------------
Interest expense:
Interest on deposits 120,443 108,209 87,920
Interest on borrowed funds 30,156 26,686 20,082
------------ ------------ ------------
Total interest expense 150,599 134,895 108,002
------------ ------------ ------------
Net interest income 190,573 170,954 148,595
Provision for loan and lease losses (Note 5) 900 4,230 3,374
------------ ------------ ------------
Net interest income after provision
for loan and lease losses 189,673 166,724 145,221
------------ ------------ ------------
Noninterest income:
Customer services 15,353 11,908 10,481
Mortgage banking services (Note 8) 12,940 10,849 8,446
Trust and investment advisory services 7,233 5,850 5,471
Net securities gains (losses) (Note 3) 507 116 (254)
Other noninterest income 2,415 2,694 3,482
------------ ------------ ------------
38,448 31,417 27,626
------------ ------------ ------------
Noninterest expenses:
Salaries and employee benefits (Notes 15 and 16) 73,303 67,472 61,799
Data processing 12,528 8,924 7,306
Occupancy 12,320 10,574 10,454
Equipment 8,479 6,844 6,233
Advertising and marketing 4,327 4,642 4,642
Deposit and other assessments 3,050 4,497 7,899
Collection and carrying costs of nonperforming assets 1,573 2,595 6,033
Merger expenses 5,105 4,958 559
Other noninterest expenses (Note 7) 27,388 19,774 20,212
------------ ------------ ------------
148,073 130,280 125,137
------------ ------------ ------------
Income before income tax expense 80,048 67,861 47,710
Applicable income tax expense (Note 10) 27,568 23,375 13,662
------------ ------------ ------------
Net income $ 52,480 $ 44,486 $ 34,048
============ ============ ============
Weighted average shares outstanding 25,035,041 24,696,393 24,849,800
Earnings per share $ 2.10 $ 1.80 $ 1.37
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
31
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Number Net
Number of Shares of Shares Par Paid-in Retained Unrealized Treasury
and Per Share Data) Issued Value Capital Earnings Gain (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1993 25,602,106 $ 256 $ 224,306 $ 72,535 $ 2,964 $ (12,353) $ 287,438
Treasury stock purchased
(105,000 shares at an
average price of $12.02) -0- -0- -0- -0- -0- (1,262) (1,262)
Treasury stock issued for employee
benefit plans (179,426 shares at
an average price of $7.42) -0- -0- -0- (1,027) -0- 2,655 1,628
Purchase and retirement of
common stock (5,680) -0- (60) -0- -0- -0- (60)
Change in unrealized gains (losses)
on securities available for sale,
net of tax of $6,900 -0- -0- -0- -0- (11,773) -0- (11,773)
Compensation cost of employee
stock plan -0- -0- 21 -0- -0- -0- 21
Net income -0- -0- -0- 34,048 -0- -0- 34,048
Cash dividends $0.23 per share -0- -0- -0- (5,601) -0- -0- (5,601)
---------- ---------- ---------- --------- ---------- ---------- ---------
Balances at December 31, 1994 25,596,426 $ 256 $ 224,267 $ 99,955 $ (9,079) $ (10,960) $ 304,439
Treasury stock purchased
(647,357 shares at an
average price of $12.85) -0- -0- -0- -0- -0- (8,317) (8,317)
Treasury stock issued for employee
benefit plans (132,022 shares at
an average price of $9.76) -0- -0- -0- (401) -0- 1,908 1,507
Reissuance of treasury stock
pursuant to acquisition
(751,600 shares at $15.00) -0- -0- -0- 1,710 -0- 9,564 11,274
Changes in unrealized gains (losses)
on securities available for sale,
net of tax effect of $7,293 -0- -0- -0- -0- 12,842 -0- 12,842
Compensation cost of employee
stock plan 124 -0- 1 -0- -0- -0- 1
Net income -0- -0- -0- 44,486 -0- -0- 44,486
Cash dividends $0.46 per share -0- -0- -0- (11,307) -0- -0- (11,307)
---------- ---------- ---------- --------- ---------- ---------- ---------
Balances at December 31, 1995 25,596,550 $ 256 $ 224,268 $ 134,443 $ 3,763 $ (7,805) $ 354,925
========== ========== ========== ========= ========== ========== =========
- --------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
32
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT'D)
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Number Net
Number of Shares of Shares Par Paid-in Retained Unrealized Treasury
and Per Share Data) Issued Value Capital Earnings Gain (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 25,596,550 $ 256 $ 224,268 $ 134,443 $ 3,763 $ (7,805) $ 354,925
Treasury stock issued for employee
benefit plans (168,677 shares at
an average price of $14.62) -0- -0- -0- (134) -0- 2,466 2,332
Purchase of 2,500,000 of treasury
stock pursuant to acquisition of
Family Bank -0- -0- -0- -0- -0- (60,342) (60,342)
Issuance of common stock and
2,500,000 shares from treasury
stock pursuant to acquisition of
Family Bank 2,980,335 30 47,522 -0- 344 60,342 108,238
Change in unrealized gains (losses)
on securities available for sale,
net of taxes of $2,194 -0- -0- -0- -0- (4,689) -0- (4,689)
Net income -0- -0- -0- 52,480 -0- -0- 52,480
Cash dividends $0.65 per share -0- -0- -0- (15,934) -0- -0- (15,934)
---------- ---------- ---------- --------- --------- --------- ---------
Balances at December 31, 1996 28,576,885 $ 286 $ 271,790 $ 170,855 $ (582) $ (5,339) $ 437,010
========== ========== ========== ========= ========= ========= =========
- --------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
33
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 52,480 $ 44,486 $ 34,048
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 900 4,230 3,374
Provision for depreciation 7,409 6,286 5,399
Provision for losses and writedowns of
other real estate owned 100 (958) 143
Amortization of goodwill and other intangibles 4,874 2,211 2,045
Net (increase) decrease in net deferred tax assets (394) 3,919 (2,486)
Net losses realized from sales
of other real estate owned 335 528 64
Net (gains) losses realized from sales
of securities and consumer loans (507) (116) 254
Net (gains) losses realized from sales
of loans held for sale (a component
or mortgage banking services) (7,108) 664 491
Net decrease (increase) in mortgage servicing rights (9,305) (3,034) (10,792)
Proceeds from sales of loans held for sale 1,057,261 552,774 273,287
Residential loans originated and purchased for sale (1,082,444) (613,171) (218,034)
Net decrease (increase) in interest and
dividends receivable and other assets (9,101) (2,925) 10,459
Net increase (decrease) in other liabilities 29,743 366 8,227
----------- ----------- -----------
Net cash provided by operating activities $ 44,243 $ (4,740) $ 106,479
----------- ----------- -----------
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal
repayments of investment securities $ -- $ 125,540 $ 158,211
Purchase of investment securities -- (114,491) (186,396)
Proceeds from sales of securities available for sale 42,620 9,814 65,380
Proceeds from maturities and principal repayments of
securities available for sale 516,395 135,972 110,446
Purchases of securities available for sale (487,789) (184,040) (168,173)
Net (increase) decrease in loans and leases (398,152) (184,323) (215,590)
Proceeds from sales of loans -- 31,425 7,550
Premiums paid on deposits purchased (18,230) (4,290) (75)
Net additions to premises and equipment (12,155) (15,800) (5,323)
Proceeds from sales of other real estate owned 3,992 12,722 13,420
Net decrease in repossessed assets owned 1,396 2,360 4,020
Net cash provided by acquisitions 72,835 -- --
----------- ----------- -----------
Net cash provided (used) by investing activities $ (279,088) $ (185,111) $ (216,530)
----------- ----------- -----------
- --------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
34
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
- ------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits $ 213,572 $ 311,293 $ (53,981)
Net increase (decrease) in securities sold under
repurchase agreements 10,675 53,438 26,831
Proceeds from Federal Home Loan Bank
of Boston borrowings 481,998 415,998 390,284
Payments on Federal Home Loan Bank
of Boston borrowings (328,507) (526,002) (279,594)
Net increase (decrease) in other borrowings 1,855 11,055 5,087
Sale of treasury stock 2,332 1,507 1,628
Purchase of treasury stock (60,342) (8,317) (1,262)
Reissuance of treasury stock pursuant
to acquisition -- 11,274 --
Cash dividends paid to shareholders (15,934) (11,307) (5,601)
Other shareholders' equity, net -- -- 39
----------- ----------- -----------
Net cash provided by financing activities $ 305,649 $ 258,939 $ 83,431
----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 70,804 69,088 (26,620)
Cash and cash equivalents at beginning of period 289,191 220,103 246,723
----------- ----------- -----------
Cash and cash equivalents at end of period $ 359,995 $ 289,191 $ 220,103
=========== =========== ===========
Supplemental disclosures of information:
Interest paid on deposits and borrowings $ 147,785 $ 132,301 $ 107,927
Income taxes paid 22,905 18,272 2,429
Noncash investing transactions:
Common stock and treasury stock issued
for acquisition (1) 108,238 -- --
Investment securities transferred to
securities available for sale -- 275,528 --
Loans transferred to other real estate owned 5,188 12,828 9,304
Loans originated to finance the sales of
other real estate owned 3,602 6,020 12,161
Increases (decreases) related to SFAS No. 115:
Securities available for sale 6,883 20,133 (18,547)
Deferred income taxes - liabilities 2,194 7,291 (6,859)
Net unrealized gain (loss) on
securities available for sale, net of tax 4,689 12,842 (11,688)
- --------------------------------------------------------------------------------
(1) The Company purchased Family Bank whereby each share of Family Bank was
exchanged for 1.26 shares of the Company's stock. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $959,089
Less liabilities assumed 850,851
--------
Net effect on capital $108,238
========
See accompanying notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(All Dollar Amounts Expressed in Thousands, Except Per 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 and investment advisory services, and are conducted through the
Company's direct wholly-owned subsidiaries located in Maine, New Hampshire and
northern Massachusetts. The Company and its subsidiaries are subject to
competition from other financial institutions and are also subject to regulation
of, and periodic examination by, the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision, the Maine Bureau of Banking, the New Hampshire
Bank Commissioner and the Federal Reserve Board. The following is a description
of the more significant accounting policies.
Financial Statement Presentation.
The consolidated financial statements include the accounts of Peoples Heritage
Financial Group, Inc., the Company's direct wholly-owned subsidiaries Peoples
Heritage Savings Bank (the "Bank"), Bank of New Hampshire Corporation ("BNHC"),
which wholly owns the Bank of New Hampshire ("BNH") and Peoples Heritage Merger
Corporation, which wholly owns Family Bank, FSB ("Family"), and other
subsidiaries which are wholly-owned by the Company's direct wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain amounts in prior periods have been
reclassified to conform to the current presentation.
Assets held in a fiduciary capacity by subsidiary trust departments are not
assets of the Company and, accordingly, are not included in the Consolidated
Balance Sheets.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that effect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for possible loan and lease
losses and the net deferred tax asset.
Cash and Cash Equivalents.
The Company is required to comply with various laws and regulations of the
Federal Reserve Bank which require that the Company maintain certain amounts of
cash on deposit and is restricted from investing those amounts.
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits in banks, and federal funds sold
minus federal funds purchased.
Securities Available for Sale.
Securities available for sale consist of debt and equity securities that are
available for sale in response to changes in market interest rates, liquidity
needs, changes in funding sources and other similar factors.
These assets are specifically identified and are carried at market value.
Changes in market value, net of applicable income taxes, are reported as a
separate component of shareholders' equity. When a decline in market value of a
security is considered other than temporary, the loss is charged to net
securities gains (losses) in the consolidated statements of income as a
writedown. Premiums and discounts are amortized and accreted over the term of
the securities on the level yield method adjusted for prepayments. Gains and
losses on the sale of securities are recognized at the time of the sale using
the specific identification method.
Loans.
Loans are carried at the principal amounts outstanding reduced by partial
charge-offs and net deferred loan fees. Loans are generally placed on nonaccrual
status when they are past due 90 days as to either principal or interest, or
when in management's judgment the collectibility of interest or principal of the
loan has been significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against interest
on loans. A loan can be returned to accrual status when collectibility of
principal is reasonably assured and the loan has performed for a period of time,
generally six months. Loans are classified as impaired when it is probable that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status and collateral value.
Allowance for Loan and Lease Losses.
The allowance for loan and lease losses is maintained at a level determined to
be adequate by management to absorb future charge-offs of loans and leases
deemed uncollectible. This allowance is increased by provisions charged to
operating expense and by recoveries on loans previously charged off, and
reduced by charge-offs on loans and leases.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and management's estimation of
future potential losses. Although management uses available information to
establish the appropriate level of the allowance for loan and lease losses,
future additions to the allowance may be necessary based on estimates that are
susceptible to change as a result of changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize adjustments to
the allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment.
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of related assets.
36
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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Long-lived assets are evaluated periodically for other-than-temporary
impairment. An assessment of recoverability is performed prior to any writedown
of the asset. If circumstances suggest that their value may be permanently
impaired, then an expense would be charged in the current period.
Goodwill and Other Intangibles.
Goodwill is amortized on a straight-line basis over various periods not
exceeding twenty years; core deposit premiums are amortized on a level-yield
basis over the estimated life of the associated deposits. Goodwill and other
intangible assets are reviewed for possible impairment when events or changed
circumstances may affect the underlying basis of the asset.
Mortgage Banking and Loans Held for Sale.
Loans originated for sale are classified as held for sale. These loans are
specifically identified and carried at the lower of aggregate cost or estimated
market value. Market value is estimated based on outstanding investor
commitments or, in the absence of such commitment, current investor yield
requirements.
Forward commitments to sell residential real estate mortgages are contracts
which the Company enters into for the purpose of reducing the market risk
associated with originating loans for sale. In the event the Company is unable
to originate loans to fulfill the contracts, it would normally purchase loans
from correspondents or in the open market to deliver against the contract. Such
loans are also classified as held for sale.
Gains and losses on sales of mortgage loans are determined using the specific
identification method and recorded as mortgage sales income, a component of
mortgage banking services income. The gains and losses resulting from the sales
of loans with servicing retained are adjusted to recognize the present value of
future servicing fee income over the estimated lives of the related loans.
Purchased mortgage servicing rights are recorded at cost upon acquisition.
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB
Statement No. 65." SFAS No. 122 changed the Company's method of accounting for
certain mortgage banking activities. The Company elected early adoption of SFAS
No. 122 effective for all mortgage banking activities in 1995.
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 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.
Other Real Estate and Repossessed Assets Owned.
Other real estate and repossessed assets owned are initially carried at the
lower of cost or fair value of the collateral less estimated cost to sell.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Operating expenses and any subsequent provisions to
reduce the carrying value are charged to current period earnings. Gains upon
disposition are reflected in earnings as realized; losses are charged to the
valuation allowance.
Pension Accounting.
The Company provides pension benefits to its employees under a noncontributory
defined benefit plan which is funded on a current basis in compliance with the
requirements of the Employee Retirement Income Security Act of 1974 and
recognizes costs over the estimated employee service period.
Income Taxes.
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share.
Earnings per share have been computed on the basis of the weighted average
number of shares of common stock outstanding. Common stock equivalents were not
considered in the calculation of weighted average shares outstanding since their
effect was not material.
2. MERGERS AND ACQUISITIONS
On December 6, 1996, the Company completed its purchase of Family Bank located
in northern Massachusetts. The purchase included 22 branch offices and $473.8
million in loans and $774.6 million in deposits. The transaction was treated as
a purchase for accounting purposes, and, accordingly, the Company's financial
statements reflect the acquisition from the time of purchase. The Company issued
5,480,335 shares of common stock.
On April 2, 1996, the Company completed its merger with the Bank of New
Hampshire Corporation which was accounted for under the pooling-of-interests
method. Accordingly, the consolidated financial statements of the Company have
been restated to reflect the acquisition at the beginning of each period
presented. At December 31, 1995, BNHC had total assets of $977.8 million and
total shareholders' equity of $84.5 million.
On February 16, 1996, the Company acquired five branch offices and
approximately $160 million of related deposits from Fleet Bank NH. In addition
to various assets related to the acquired branches, the Company also acquired
approximately $216.4 million of loans in connection with this transaction and
assumed $160.8 million in deposits.
In 1995 the Company had two acquisitions. On July 1, the Company acquired
Bankcore, Inc. ("Bankcore"), the New Hampshire-based holding company for North
Conway Bank. At the time of acquisition, Bankcore had $132.8 million in total
assets and shareholders' equity of $17.8 million. The Bankcore acquisition was
treated as a purchase for accounting purposes and, accordingly, the Company's
financial statements reflect the acquisition from the time of purchase only.
37
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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On July 15, 1995, the Company purchased all the branches and associated
deposits, as well as certain loans, of Fleet Bank of Maine located in Aroostook
County, Maine. The purchase resulted in the transfer of $46.1 million in
deposits and $17.1 million in loans.
During 1994, the Company acquired Mid-Maine Savings, F.S.B. and was accounted
for under the pooling of interest method. Accordingly, the consolidated
financial statements of the Company have been restated to reflect the
acquisition at the beginning of the period presented.
3. SECURITIES AVAILABLE FOR SALE
A summary of the amortized cost and market values of securities available for
sale follows:
- ----------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
December 31, 1996:
U. S. Government obligations
and obligations of U.S.
Government agencies and
corporations $ 432,367 $ 934 $ (1,071) $ 432,230
Tax-exempt bonds and notes 17,789 39 -- 17,828
Other bonds and notes 7,858 11 (50) 7,819
Mortgage-backed securities 444,613 2,217 (2,835) 443,995
Collateralized mortgage
obligations 103,237 286 (706) 102,817
---------- ---------- ---------- ----------
Total debt securities 1,005,864 3,487 (4,662) 1,004,689
---------- ---------- ---------- ----------
Federal Home Loan Bank of
Boston stock 37,948 -- -- 37,948
Other equity securities 2,330 102 -- 2,432
---------- ---------- ---------- ----------
Total equity securities 40,278 102 -- 40,380
---------- ---------- ---------- ----------
Total securities available
for sale $1,046,142 $ 3,589 $ (4,662) $1,045,069
========== ========== ========== ==========
- --------------------------------------------------------------------------------
The excess of amortized cost over market value of $1.1 million, net of tax
effect of $491 thousand, is recorded as a separate component of shareholders'
equity.
- ----------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
December 31, 1995:
U. S. Government obligations
and obligations of U.S.
Government agencies and
corporations $522,822 $ 3,981 $ (227) $526,576
Tax-exempt bonds and notes 10,796 43 (2) 10,837
Other bonds and notes 5,645 55 (6) 5,694
Mortgage-backed securities 194,018 2,224 (419) 195,823
-------- -------- -------- --------
Total debt securities 733,281 6,303 (654) 738,930
-------- -------- -------- --------
Federal Home Loan Bank of
Boston stock 23,793 -- -- 23,793
Other equity securities 3,764 170 (9) 3,925
-------- -------- -------- --------
Total equity securities 27,557 170 (9) 27,718
-------- -------- -------- --------
Total securities available
for sale $760,838 $ 6,473 $ (663) $766,648
======== ======== ======== ========
- --------------------------------------------------------------------------------
The excess of market value over amortized cost of $5.8 million, net of tax
effect of $2.0 million, is recorded as a separate component of shareholders'
equity.
38
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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The amortized cost and market values of debt securities available for sale at
December 31, 1996 by contractual maturity are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. At
December 31, 1996, the Company had $24.9 million of securities available for
sale with call provisions.
- --------------------------------------------------------------------------------
Amortized Cost Market Value
- --------------------------------------------------------------------------------
December 31, 1996:
Due in one year or less $ 230,555 $ 230,786
Due after one year through five years 228,560 228,105
Due after five years through ten years 49,305 49,293
Due after ten years 497,444 496,605
---------- ----------
Total debt securities $1,005,864 $1,004,689
========== ==========
- --------------------------------------------------------------------------------
A summary of realized gains and losses on securities available for sale for
1996, 1995 and 1994 follows:
Gross Gross
Realized Realized
Gains Losses
- --------------------------------------------------------
1996 $533 $ 26
1995 305 189
1994 549 803
- --------------------------------------------------------------------------------
39
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
4. LOANS AND LEASES
The Company's lending activities are conducted principally in Maine, New
Hampshire and northern Massachusetts. The principal categories of loans in the
Company's portfolio are residential real estate loans, which are secured by
single-family (one to four units) residences; commercial real estate loans,
which are secured by multi-family (five or more units) residential and
commercial real estate; commercial business loans and leases; and consumer loans
and leases.
A summary of loans and leases follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995
Residential real estate mortgages:
Adjustable-rate $ 617,323 $ 402,695
Fixed-rate 559,551 395,381
---------- ----------
1,176,874 798,076
---------- ----------
Commercial real estate mortgages:
Commercial real estate 901,105 753,857
Construction and development 61,270 43,829
---------- ----------
962,375 797,686
---------- ----------
Commercial business loans and leases:
Business loans 463,011 397,652
Leases 14,391 10,940
---------- ----------
477,402 408,592
---------- ----------
Consumer loans and leases:
Home equity 362,105 283,008
Mobile home 206,061 214,761
Automobile 192,295 127,969
Education loans 106,900 38,685
Boat and recreational vehicle 31,969 22,716
Other 138,619 87,090
---------- ----------
1,037,949 774,229
---------- ----------
Total loans and leases $3,654,600 $2,778,583
========== ==========
- --------------------------------------------------------------------------------
Loan and lease balances are stated net of deferred loan fees totaling $3,324 and
$5,022 at December 31, 1996 and 1995, respectively.
Related Party Transactions
Loans to officers, directors and related parties are made in the ordinary course
of business and on the same terms and conditions prevailing at the time for
comparable transactions. A summary of loans to related parties during 1996 and
1995 follows:
Balance at December 31, 1994 $ 20,760
Loans made/advanced and additions 4,224
Repayments and reductions (4,191)
Other changes (1,380)
--------
Balance at December 31, 1995 $ 19,413
Loans made/advanced and additions 557
Repayments and reductions (2,415)
Other changes (5,571)
--------
Balance at December 31, 1996 $ 11,984
========
- --------------------------------------------------------------------------------
40
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NONPERFORMING LOANS
The following table sets forth information regarding nonperforming loans at the
dates indicated:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Residential real estate mortgages:
Nonaccrual loans $ 3,867 $ 5,713
Accruing loans which are 90 days overdue 5,560 3,728
------- -------
Total 9,427 9,441
------- -------
Commercial real estate loans:
Nonaccrual loans 15,270 17,029
Accruing loans which are 90 days overdue -- --
Troubled debt restructurings 1,581 3,186
------- -------
Total 16,851 20,215
------- -------
Commercial business loans and leases:
Nonaccrual loans 8,016 6,735
Accruing loans which are 90 days overdue -- 25
Troubled debt restructurings 579 1,859
------- -------
Total 8,595 8,619
------- -------
Consumer loans:
Nonaccrual loans 5,097 3,586
Accruing loans which are 90 days overdue 2,478 659
------- -------
Total 7,575 4,245
------- -------
Total nonperforming loans:
Nonaccrual loans 32,250 33,063
Accruing loans which are 90 days overdue 8,038 4,412
Troubled debt restructurings 2,160 5,045
------- -------
Total $42,448 $42,520
======= =======
- --------------------------------------------------------------------------------
The ability and willingness of the residential real estate, commercial real
estate, commercial business and consumer borrowers to repay loans is generally
dependent on current economic conditions and real estate values within the
borrowers' geographic areas.
During 1996 and 1995, the Company's policy was generally to limit new loans
to one borrower to $10.0 million. These limitations are substantially below the
limitations set forth in applicable laws and regulations.
Interest income that would have been recognized for 1996, 1995 and 1994, if
nonperforming loans at December 31, 1996, 1995 and 1994 had been performing in
accordance with their original terms, approximated $4.7 million, $5.3 million
and $8.2 million, respectively. The actual amount that was collected on these
loans during the periods and included in interest income approximated $1.9
million, $1.6 million and $1.8 million, respectively. As a result, the reduction
in interest income for 1996, 1995, and 1994 associated with nonperforming loans
held at the end of such periods approximated $2.8 million, $3.7 million and $6.4
million, respectively.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and loans on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or on which payments of principal or interest have become
contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is probable that the Company
will collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is not a commercial, commercial real estate or an
individually significant mortgage or consumer loan. Factors considered by
management in determining impairment include payment status and collateral
value. 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 surround-
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
ing 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, 1996 and 1995, total impaired loans were $28.3 million and
$27.8 million, of which $22.7 million and $24.7 million had related allowances
of $4.2 million and $5.7 million, respectively. During the years ended December
31, 1996 and 1995, the income recognized related to impaired loans was $1.6
million and $1.5 million and the average balance of outstanding impaired loans
was $25.2 million and $29.1 million, respectively. The Company recognizes
interest on impaired loans on a cash basis when the ability to collect the
principal balance is not in doubt; otherwise, cash received is applied to
principal balance of loan.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses follow:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of period $ 60,975 $ 63,675 $ 67,385
Allowance on acquired loans 11,365 2,314 --
Provisions charged to operations 900 4,230 3,374
Loans and leases charged off (18,173) (17,968) (17,202)
Recoveries 12,421 8,724 10,118
-------- -------- --------
Balance at end of period $ 67,488 $ 60,975 $ 63,675
======== ======== ========
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Land $ 10,227 $ 11,754
Buildings and improvements 61,398 45,302
Leasehold improvements 12,273 10,090
Furniture, fixtures and equipment 65,326 47,372
-------- --------
149,224 114,518
-------- --------
Less accumulated depreciation
and amortization 75,268 58,497
-------- --------
$ 73,956 $ 56,021
======== ========
- --------------------------------------------------------------------------------
7. GOODWILL AND OTHER INTANGIBLES
A summary of goodwill and other intangibles follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Goodwill $53,554 $20,761
Core deposit premiums 18,095 2,031
------- -------
$71,649 $22,792
======= =======
- --------------------------------------------------------------------------------
Amortization of goodwill is included in other noninterest expenses and amounted
to $2,215, $1,925 and $1,801 for the years ended December 31, 1996, 1995 and
1994, respectively.
Amortization of core deposit premiums is included in interest on deposits and
amounted to $2,659, $286 and $244 for the years ended December 31, 1996, 1995
and 1994, respectively.
8. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31, 1996,
1995 and 1994 follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of period $ 20,309 $ 17,275 $ 6,483
Mortgage servicing rights capitalized 17,299 9,101 12,535
Mortgage servicing rights acquired
through acquisition 3,700 -- --
Amortization charged against
mortgage service fee income (4,375) (3,483) (1,743)
Mortgage servicing rights sold (3,619) (2,584) --
-------- -------- --------
Balance at end of period $ 33,314 $ 20,309 $ 17,275
======== ======== ========
- --------------------------------------------------------------------------------
The Company generally continues to service the residential real estate mortgages
sold in the secondary market. The Company pays the investor an agreed-upon rate
on the loan, which is less than the interest rate the Company receives from the
borrower. The difference is retained by the Company as a fee for servicing the
residential real estate mortgages. As required by SFAS No. 122, the Company
capitalizes mortgage servicing rights at their allocated cost based on relative
fair values upon sale of the related loans.
The Company periodically purchases and sells residential mortgage servicing
rights through a closed bid process from brokers representing financial
institutions with mortgage servicing portfolios. Residential real estate
mortgages serviced for investors at December 31, 1996, 1995 and 1994 amounted to
$3.2 billion, $2.6 billion and $2.1 billion, respectively.
9. OTHER REAL ESTATE AND REPOSSESSED ASSETS OWNED
The following table summarizes the composition of other real estate and
repossessed assets owned, net of related reserves, which is included in other
assets.
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Real estate properties acquired
in settlement of loans $ 9,941 $12,679 $20,073
Other assets repossessed in
settlement of non-real
estate loans 1,877 1,553 2,003
------- ------- -------
$11,818 $14,232 $22,076
======= ======= =======
- --------------------------------------------------------------------------------
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
10. INCOME TAXES
The current and deferred components of income tax expense (benefit) follow:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Current (including $1,381, $805,
and $302 respectively, of state
income tax) $27,134 $19,480 $ 16,129
Deferred 434 3,895 (2,467)
------- ------- --------
$27,568 $23,375 $ 13,662
======= ======= ========
- --------------------------------------------------------------------------------
The following table reconciles the expected income tax expense (computed by
applying the federal statutory tax rate to income before taxes) to recorded
income tax expense:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Computed tax expense $ 28,017 $ 23,585 $ 16,572
State income tax, net of
federal benefits 898 523 196
Benefit of tax-exempt income (740) (585) (495)
Merger Expenses 623 380 --
Amortization of goodwill and
other intangibles 916 839 842
Low income/rehabilitation credits (1,231) (1,265) (1,265)
Tax bad debt reserve recapture on
Mid Maine acquisition -- -- 1,022
Change in valuation allowance -- -- (3,322)
Other, net (915) (102) 112
-------- -------- --------
$ 27,568 $ 23,375 $ 13,662
======== ======== ========
- --------------------------------------------------------------------------------
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, 1996 and 1995 follow:
- ---------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan and lease losses $25,003 $23,007
Reserve for mobile home dealers 2,000 2,119
Accrued pension expense 2,085 848
Difference of tax and book basis of other real estate owned 666 391
Deferred loan fees 272 527
Interest accrued and payments received on nonperforming loans for tax purposes 1,032 1,096
Unrealized depreciation on securities 491 --
Other 3,835 4,984
------- -------
Total gross deferred tax assets 35,384 32,972
------- -------
Deferred tax liabilities
Difference of tax and book basis of leases 313 420
Difference of tax and book basis of premises and equipment 1,819 1,747
Difference of tax and book basis of securities 256 522
Difference of tax and book basis of partnership investments 2,606 397
Tax bad debt reserve 6,143 5,518
Unrealized appreciation of securities -- 2,025
Other 942 1,948
Total gross deferred tax liabilities 12,079 12,577
------- -------
Net deferred tax asset $23,305 $20,395
======= =======
- --------------------------------------------------------------------------------
43
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Peoples Heritage Financial Group, Inc. and Subsidiaries
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The Company's net deferred tax asset was increased by $828 thousand during 1996
to reflect the purchase of Family Bank. In assessing the realizability of
deferred tax assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. The Company considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this assessment. The
Company estimates that substantially all of its gross deferred tax assets and
liabilities will reverse within the next five years. In order to fully realize
the net deferred tax asset, the Company will need to generate future taxable
income of approximately $66.6 million. Pre-tax book income for the year ended
December 31, 1996 was $80.0 million. Based upon the level of 1996 taxable income
and projections for future taxable income over the periods which the deferred
tax assets are deductible, the Company believes it is more likely than not that
it will realize the benefits of these deductible temporary differences at
December 31, 1996. Accordingly, no valuation allowance has been recorded at
December 31, 1996.
In August, 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
The unrecaptured base year reserves will not be subject to recapture as long
as the institution continues to carry on the business of banking. In addition,
the balance of the pre-1988 bad debt reserves continue to be subject to
provisions of present law that require recapture in the case of certain excess
distributions to shareholders. The tax effect of pre-1988 bad debt reserves
subject to recapture in the case of certain excess distributions is
approximately $610 thousand.
11. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
A summary of securities sold under repurchase agreements follows:
- --------------------------------------------------------------------------------
At of for the Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance outstanding at
end of period $197,005 $180,957 $127,519
Market value of collateral at
end of period 205,084 195,861 137,304
Amortized cost of
collateral at end of period 204,470 194,560 141,104
Average balance outstanding 140,365 152,411 109,216
Maximum outstanding at any
month end during the period 197,005 213,104 153,710
Average interest rate
during the period 4.47% 4.90% 3.36%
Average interest rate at end of period 4.06% 4.64% 4.62%
- --------------------------------------------------------------------------------
Securities sold under repurchase agreements generally have maturities of 180
days or less and are collateralized by mortgage backed securities and U.S.
Government obligations with the aggregate market value and aggregate amortized
costs for the respective periods noted above.
- --------------------------------------------------------------------------------
12. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
A summary of the borrowings from the Federal Home Loan Bank of Boston is as
follows:
- --------------------------------------------------------------
December 31, 1996
- --------------------------------------------------------------
Principal Amounts Interest Rates Maturity Dates
- --------------------------------------------------------------
$ 90,983 4.81% - 6.87% 1997
62,500 5.19% - 5.87% 1998
225,000 5.30% - 5.65% 1999
75,025 4.70% - 6.05% 2000
4,728 5.20% - 5.82% 2003
5,793 5.68% - 5.72% 2004
6,051 6.14% - 6.90% 2005
--------
$470,080
========
- --------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------
Principal Amounts Interest Rates Maturity Dates
- --------------------------------------------------------------
$ 31,500 4.26% - 6.57% 1996
72,950 5.82% - 6.87% 1997
82,500 5.30% - 6.02% 1998
64,000 5.71% - 5.78% 2000
1,496 6.70% - 6.90% 2005
--------
$252,446
========
- --------------------------------------------------------------
Short and long-term borrowings from the Federal Home Loan Bank of Boston, which
consist of both fixed and adjustable rate borrowings, are secured by a blanket
lien on qualified collateral consisting primarily of loans with first mortgages
secured by 1 to 4 family properties, certain unencumbered investment securities
and other qualified assets.
13. SHAREHOLDERS' EQUITY
Regulatory Capital Requirements
Bank regulatory agencies have established capital adequacy standards which are
used extensively in their monitoring and control of the industry. These
standards relate capital to level of risk by assigning different weighing to
assets and certain off-balance sheet activity. The Company must maintain a
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth
in the table below.
44
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
For Capital
Actual Adequacy Purposes Excess
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total capital (to risk weighted assets) $409,144 12.24% $267,428 8.00% $141,716 4.24%
Tier 1 capital (to risk weighted assets) 367,041 10.98 133,714 4.00 233,327 6.98
Tier 1 leverage capital ratio (to average assets) 367,041 7.96 184,445 4.00 182,596 3.96
as of December 31, 1995:
Total capital (to risk weighted assets) 361,991 12.88 204,728 8.00 157,353 4.88
Tier 1 capital (to risk weighted assets) 329,645 14.15 102,364 4.00 227,231 10.15
Tier 1 leverage capital ratio (to average assets) 329,645 8.33 158,369 4.00 171,276 4.33
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 and 1995, the Company and each of its banking subsidiaries
were in compliance with all applicable regulatory capital requirements and had
capital ratios in excess of federal 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 Company's subsidiary
banks are subject to certain requirements imposed by state and federal banking
laws and regulations. These requirements, among other things, establish minimum
levels of capital and restrict the amount of dividends that may be distributed
by the subsidiary banks to the Company.
Stockholder Rights Plan
In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan
declaring a dividend of one preferred Stock Purchase Right for each outstanding
share of Common Stock. The rights will remain attached to the Common Stock and
are not exercisable except under limited circumstances relating to acquisition
of, the right to acquire beneficial ownership of, or tender offer for 20% or
more of the outstanding shares of Common Stock. The Rights have no voting or
dividend privileges and, until they become exercisable, have no dilutive effect
on the earnings of the Company.
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, 1996 and 1995
follow:
- -----------------------------------------------------------------------
Contract or Notional Amount
- -----------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------
Financial instruments with contract
amounts which represent credit risk:
Commitments to originate loans,
unused lines, standby letters of credit
and unadvanced portions of
construction loans $828,845 $716,251
Loans serviced with recourse 38,286 48,213
Financial instruments with notional or
contract amounts which exceed the
amount of credit risk:
Forward commitments to
sell loans $149,330 $128,000
- -----------------------------------------------------------------------
45
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial instruments.
Forward commitments to sell residential mortgage loans are contracts which
the Company enters into for the purpose of reducing the market risk associated
with originating loans for sale. Risks may arise from the possible inability of
the Company to originate loans to fulfill the contracts, in which case the
Company would normally purchase loans from correspondent banks or in the open
market to deliver against the contract.
Legal Proceedings
The Company and certain of its subsidiaries have been named as defendants in
various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, based upon the opinions of
counsel, any such liability will not have a material effect on the consolidated
financial position or results of operations of the Company and its subsidiaries.
Lease Obligations
The Company leases certain properties used in operations under terms of
operating leases which include renewal options. Rental expense under these
leases approximated $4.5 million, $3.4 million and $3.6 million for the years
ended 1996, 1995 and 1994, respectively.
Approximate minimum lease payments over the remaining terms of the leases at
December 31, 1996 follow:
- ---------------------------------------------
1997 $ 4,216
1998 3,734
1999 3,394
2000 3,077
2001 2,169
2002 and after 5,940
-------
$22,530
=======
- ---------------------------------------------
15. STOCK BASED COMPENSATION PLANS
Profit Sharing Employee Stock Ownership Plan
In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan which
is designed to invest primarily in Common Stock of the Company. Substantially
all employees are eligible for the Plan following one year of service. Employees
may not make contributions to the Plan but may receive a discretionary
contribution from the Company based on their pro-rata share of eligible
compensation. For 1996, 1995 and 1994 the Directors voted to contribute 4%, 3%
and 5% of eligible compensation, respectively. The approximate expense of this
contribution for 1996, 1995 and 1994 was $1.5 million, $850 thousand and $1.4
million, respectively.
Stock Option Plans
The Company has adopted various stock option and stock appreciation rights plans
for key employees. In 1996, the Company adopted a stock option plan (the "1996
Option Plan") which replaced a plan that had existed since 1986 (the "1986
Option Plan"). The 1996 Option Plan authorizes grants of options to purchase up
to 1,250,000 shares of authorized but unissued 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, 1996, there were 903,050 additional shares available for grant under the
1996 Option Plan. The Company issued no stock appreciation rights in 1996 or
1995.
The Company has adopted a stock option plan for non-employee directors. The
maximum number of shares which may be granted under the plan is 75,000 shares,
of which 20,000 were granted in 1996 at $20.88 per share and 18,000 granted in
1995 at $13.63 per share. 1,627 shares had been issued upon exercise of the
stock options cumulatively through December 31, 1996.
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $7.91 and $7.04 on the date of the grants using the Black Scholes
option-pricing model with the following average assumptions:
- --------------------------------------------------------------
1996 1995
- --------------------------------------------------------------
Expected dividend yield 2.50% 2.50%
Risk-free interest rate 6.06% 5.84%
Expected life 5.56 YEARS 5.63 Years
Volatility 34.50% 36.60%
- --------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no cost has been recognized for its stock options in the financial
statements. Had the Company determined cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
- -------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------
Net Income
As reported $52,480 $44,486
Pro Forma $51,399 $44,263
Earnings Per Share
As Reported $ 2.10 $ 1.80
Pro Forma $ 2.05 $ 1.79
- -------------------------------------------------------------------
46
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Pro forma net income reflects only stock options granted in 1996 and 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 during the periods indicated was as follows:
- ----------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------
Balance at December 31, 1994 1,135,683 $10.31
Granted 417,139 20.68
Exercised 73,790 7.78
Forfeited 24,902 12.50
Expired -- --
Balance at December 31, 1995 1,454,130 13.36
Granted 366,950 23.73
Exercised 137,973 9.54
Forfeited 30,296 18.59
Expired -- --
Assumed in acquisitions 91,665 7.34
---------
Balance at December 31, 1996 1,744,476 $15.44
=========
- ----------------------------------------------------------------
The range of per share prices for outstanding exercisable stock options at
December 31, 1996 and 1995 were as follows:
- ---------------------------------------------------------------------
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------
Options Options Options Options
Outstanding Exercisable Outstanding Exercisable
- ---------------------------------------------------------------------
$ 2.65 to $ 5.00 135,608 135,608 109,392 109,392
$ 5.01 to $15.00 256,329 256,329 291,270 147,463
$10.01 to $15.00 607,181 494,540 654,558 379,174
$15.01 to $20.00 -- -- -- --
$20.01 to $25.38 745,358 158,429 398,910 --
---------- ---------- ---------- --------
Total Options 1,744,476 1,044,906 1,454,130 636,029
========== ========== ========== ========
Weighted
average price $ 15.44 $ 11.67 $ 13.36 $ 9.73
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan covering all full-time employees
with one year of service. The maximum number of shares which may be issued under
the Employee Stock Purchase Plan is 676,000 shares. Employees have the right to
authorize payroll deductions up to 10% of their salary. As of December 31, 1996,
327,250 shares had been purchased under this plan.
16. RETIREMENT AND OTHER BENEFIT PLANS
Defined Benefit Pension Plan
The Company and its subsidiaries have noncontributory defined benefit plans
covering substantially all permanent, full-time employees. Benefits are based on
career average earnings and length of service. The Company's funding policy is
to contribute annually the maximum amount that can be deducted for federal
income tax purposes.
The following tables set forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheets at December 31, 1996 and 1995.
- ------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of $34,285
and $30,020 $ 36,161 $ 30,890
======== ========
Projected benefit obligation for service
rendered to date $ 42,628 $ 34,087
Plan assets at fair value, primarily listed
stocks and corporate bonds (42,331) (31,602)
-------- --------
Plan assets (greater) less than projected
benefit obligation 297 2,485
Unrecognized net loss from past experi-
ence different from that assumed and
effects of changes in assumptions (114) (3,721)
Unrecognized prior service cost 72 550
Unrecognized net asset at adoption of
SFAS No. 87, net of amortization 1,814 1,921
-------- --------
Accrued pension cost included
in other liabilities $ 2,069 $ 1,235
======== ========
- ------------------------------------------------------------------------
Net pension cost for 1996, 1995 and 1994 included the following components:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost during the period $ 1,667 $ 1,650 $ 1,562
Interest cost on projected
benefit obligation 2,515 2,268 2,181
Actual return on plan assets (3,673) (5,518) 283
Net amortization and deferral 693 3,158 (2,560)
------- ------- -------
Net periodic pension cost $ 1,202 $ 1,558 $ 1,466
======= ======= =======
- --------------------------------------------------------------------------------
Assumptions used to determine actuarial present value of benefit obligations
were as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
Weighted average 1996 1995 1994
- --------------------------------------------------------------------------------
Discount rate 7.50% 7.25% 7.50%
Increase in compensation levels 4.50 4.50 4.50
Expected long term return on assets 8.25 8.25 8.50
- --------------------------------------------------------------------------------
47
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Thrift Incentive Plan
The Company has a Contributory Thrift Incentive Plan, covering substantially all
permanent employees after completion of one year of service. The Company matches
employee contributions based on a predetermined formula and may make additional
discretionary contributions. The total expense for 1996, 1995 and 1994 was $870
thousand, $659 thousand and $620 thousand, respectively.
Supplemental Retirement Plans
The Company has adopted supplemental retirement plans for several key officers.
These plans were designed to offset the impact of changes in the Pension Plan
which reduced benefits for highly paid employees. The cost of these plans was
$343 thousand, $823 thousand and $342 thousand for 1996, 1995 and 1994,
respectively.
Postretirement Benefits Other Than Pensions
The Company and its subsidiaries sponsor postretirement 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.
The following reconciles the program's funded status with amounts recognized
in the Company's Consolidated Balance Sheet at December 31, 1996 and 1995:
- ----------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $4,146 $4,170
Fully eligible active program participants 427 817
Other active program participants 1,476 1,704
------ ------
6,049 6,691
Plan assets -- --
------ ------
Accumulated postretirement benefit
obligation in excess of plan assets 6,049 6,691
Unrecognized net gain 1,067 269
Unrecognized prior service cost (4,764) (5,219)
------ ------
Accrued postretirement benefit cost
included in other liabilities $2,352 $1,741
====== ======
- ----------------------------------------------------------------------
Net postretirement benefit cost for the year ended December 31, 1996, 1995 and
1994 included the following components:
- ---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------
Service cost $127 $100 $ 145
Interest cost 417 469 514
Amortization of accumulated
postretirement obligation 263 313 342
---- ---- ------
Net periodic postretirement
benefit cost $807 $882 $1,001
==== ===== ======
- ---------------------------------------------------------------
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
many cases, could not be realized in an immediate sale of the instrument. Also,
because of differences in methodologies and assumptions used to estimate fair
values, the Company's fair values should not be compared to those of other
banks.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the Company. For certain assets and
liabilities, the information required under SFAS No. 107 is supplemented with
additional information relevant to an understanding of the fair value. Also,
fair values are presented for certain assets that are not financial instruments
under the definition in SFAS No. 107.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments and certain non-financial
instruments:
CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS,
INTEREST-BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD. For these cash and
cash equivalents, which have maturities of 90 days or less, the carrying amounts
reported in the balance sheet approximate fair values.
SECURITIES AVAILABLE FOR SALE AND LOANS HELD FOR SALE. Fair values, are based
on quoted bid market prices, where available. Where quoted market prices for an
instrument are not available, fair values are based on quoted market prices of
similar instruments, adjusted for differences between the quoted instruments and
the instrument being valued. Fair values are calculated based on the value of
one unit without regard to premiums or discounts that might result from selling
all of the Company's holdings of a particular security in one transaction.
LOANS AND LEASES. The fair values of commercial, commercial real estate,
residential real estate, and certain consumer loans and leases are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of
credit and credit card receivables, carrying value approximates fair value. This
method of estimating the fair value of the credit card portfolio excluded the
value of the ongoing customer relationships, a factor which can represent a
significant premium over book 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.
48
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage servicing
rights is based on the expected present value of future mortgage servicing
income, net of estimated servicing costs.
DEPOSITS. The fair value of deposits with no stated maturity is equal to the
carrying amount. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered
on the deposit products of similar maturities.
The fair value estimates for deposits do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of alternative forms of funding ("deposit base intangibles")
BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON,
SUBORDINATED CAPITAL NOTES AND OTHER BORROWINGS. The fair value of the Company's
long-term borrowings is estimated based on quoted market prices for the issues
for which there is a market, or by discounting cash flows based on current rates
available to the Company for similar types of borrowing arrangements. For
short-term borrowings that mature or reprice in 90 days or less, carrying value
approximates fair value.
OFF-BALANCE SHEET INSTRUMENTS:
COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY
LETTERS OF CREDIT. In the course of originating loans and extending credit and
standby letters of credit, the Company will charge fees in exchange for its
lending commitment. While these commitment fees have value, the Company has not
estimated their value due to the short-term nature of the underlying
commitments.
FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward
commitments to sell loans reflects the value of origination fees and excess
servicing recognizable upon sale of loans net of any cost to the Company if it
fails to meet its sale obligation. Of the $149.3 million of forward sales
commitments at December 31, 1996, the Company had $103.3 million of loans
available to sell at that date as well as sufficient loan originations
subsequent to December 31, 1996 to fulfill the commitments. Consequently, the
Company has no unmet sales obligation to value and due to the short-term nature
of the commitments has not estimated the value of the fees and servicing.
LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing
arrangements with investors, the Company has recourse obligation to those
serviced loan portfolios. In the event of foreclosure on a serviced loan, the
Company is obligated to repay the investor to the extent of the investor's
remaining balance after application of proceeds from the sale of the underlying
collateral. To date, losses related to these recourse arrangements have been
insignificant and while the Company cannot project future losses, the fair value
of this recourse obligation is deemed to be likewise insignificant.
A summary of the fair values of the Company's significant financial instruments
at December 31, 1996 and 1995 follows:
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
- --------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 359,995 $ 359,995 $ 290,691 $ 290,691
Securities 1,045,069 1,045,069 766,648 766,648
Loans held for sale 103,270 103,790 70,979 71,872
Loans and leases 3,587,112 3,767,093 2,717,608 2,776,912
Mortgage servicing rights 33,314 35,908 20,309 22,140
Liabilities:
Deposit (with no stated maturity) $2,388,768 $2,388,768 $1,834,043 $1,834,043
Time deposits 1,796,521 1,823,214 1,363,095 1,382,145
Borrowings 690,969 689,003 456,932 458,116
- --------------------------------------------------------------------------------------------------------
49
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
18. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
- ---------------------------------------------------------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
Balance sheets 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 2,401 $ 22,568
Securities -- 1,045
Investment in bank subsidiaries 418,074 311,907
Goodwill and other intangibles 13,206 14,392
Amounts receivable from subsidiaries 6,331 9,363
Other assets 4,088 5,315
-------- --------
Total assets $444,100 $364,590
======== ========
Liabilities and shareholders' equity
Amounts payable to subsidiaries $188 $132
Notes payable 6,530 7,836
Other liabilities 372 1,697
Shareholders' equity 437,010 354,925
-------- --------
Total liabilities and shareholders' equity $444,100 $364,590
======== ========
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Income 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Operating income:
Dividends from banking subsidiaries $ 67,710 $ 23,007 $ 10,590
Gain (loss) on intercompany loan sales -- -- (430)
Other operating income 625 474 452
-------- -------- --------
Total operating income 68,335 23,481 10,612
-------- -------- --------
Operating expenses:
Interest on borrowings 609 363 --
Amortization of goodwill 1,505 1,505 1,505
Amortization of acquisition premiums 359 359 359
Merger 37 4,958 --
Other operating expenses 907 731 1,242
-------- -------- --------
Total operating expenses 3,417 7,916 3,106
-------- -------- --------
Income before income taxes and equity
in undistributed net income of subsidiaries 64,918 15,565 7,506
Income tax benefit (25) (1,492) (432)
-------- -------- --------
Income before equity in undistributed
net income of subsidiaries 64,943 17,057 7,938
Equity in undistributed net income
of subsidiaries (1) (12,463) 27,429 26,110
-------- -------- --------
Net income $ 52,480 $ 44,486 $ 34,048
======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
(1) Amounts in parenthesis represent the excess of dividends over net income
from subsidiaries.
50
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 52,480 $ 44,486 $ 34,048
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Undistributed net income from subsidiaries 12,463 (27,429) (26,110)
Amortization of goodwill 1,505 1,505 1,505
Amortization of acquisition premiums 359 359 359
Securities losses (gains) -- 1 (165)
Loss (gain) on intercompany loan sales -- -- 430
(Increase) decrease in amounts receivable from subsidiaries 3,032 (7,973) (459)
Decrease (increase) in other assets 549 (119) (130)
Increase (decrease) in amounts payable to subsidiaries 56 47 79
Increase (decrease) in other liabilities (1,325) 488 (325)
Other, net (2,081) (1,021) (609)
-------- -------- --------
Net cash (used) provided by operating activities 67,038 10,344 8,623
-------- -------- --------
Cash flows from investing activities:
Reissuance of treasury stock pursuant to acquisition -- 11,274 --
Issuance of notes payable pursuant to acquisition (net) -- 7,836 --
Sales of available for sale securities 1,045 622 255
Purchase of available for sale securities -- (622) --
Payment of notes payable (1,306) -- --
Capital contribution to subsidiary (13,000) -- --
-------- -------- --------
Net cash used (provided) by investing activities (13,261) 19,110 255
-------- -------- --------
Cash flows from financing activities:
Dividends paid to shareholders (15,934) (11,307) (5,601)
Treasury stock acquired (60,342) (8,317) (1,322)
Treasury stock sold 2,332 1,507 1,628
-------- -------- --------
Net cash provided (used) by financing activities (73,944) (18,117) (5,295)
-------- -------- --------
Net increase (decrease) in cash and due from banks (20,167) 11,337 3,583
Cash and due from banks at beginning of year 22,568 11,231 7,648
-------- -------- --------
Cash and due from banks at end of year $ 2,401 $ 22,568 $ 11,231
======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosure information:
Interest paid on borrowings $ 609 $ 363 $--
- --------------------------------------------------------------------------------------------------------------------
51
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
19. SUBSEQUENT EVENT (UNAUDITED)
On January 24, 1997, the Company sponsored the creation of Peoples Heritage
Capital Trust I (the "Trust") a statutory business trust created under the laws
of Delaware. The Company is the owner of all of the common securities of the
Trust. On January 31, 1997, the Trust issued $100.0 million of 9.06% Capital
Securities (the "Capital Securities," and with the "Common Securities," the
"Trust Securities"), the proceeds from which were used by the Trust, along with
the Company's $3.1 million capital contribution for the Common Securities, to
acquire $103.1 million aggregate principal amount of the Company's 9.06% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company has,
through the Declaration of Trust establishing the Trust, Common Securities and
Capital Securities Guarantee Agreements, the Debentures and a related Indenture,
taken together, fully irrevocably and unconditionally guaranteed all of the
Trust's obligations under the Trust Securities. The Capital Securities will be
presented as a separate line item in future consolidated balance sheets of the
Company, entitled "Company-obligated mandatorily redeemable capital securities
of subsidiary trust holding solely junior subordinated debentures of the
Company." The Company has sought treatment that separate financial statements of
the Trust are not required pursuant to Staff Accounting Bulletin 53 of the
Securities and Exchange Commission.
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $90,827 $85,506 $84,085 $80,754 $80,162 $79,490 $74,364 $71,833
Interest expense 40,168 37,562 37,254 35,615 35,854 35,344 32,970 30,727
Provision for loan losses -- -- 450 450 1,080 1,080 1,040 1,030
Net interest income after
provision for loan losses 50,659 47,944 46,381 44,689 43,228 43,066 40,354 40,076
Noninterest income 9,979 9,804 9,196 9,469 8,379 8,325 7,616 7,097
Noninterest expenses 37,649 36,256 39,586 34,582 35,253 31,901 30,983 32,143
Income before income taxes 22,989 21,492 15,991 19,576 16,354 19,490 16,987 15,030
Income tax expense 7,450 7,300 5,848 6,970 5,930 6,701 5,776 4,968
Net income 15,539 14,192 10,143 12,606 10,424 12,789 11,211 10,062
Earnings per share 0.63 0.56 0.40 0.51 0.42 0.51 0.46 0.41
Cash earnings per share 0.69 0.61 0.45 0.54 0.44 0.53 0.49 0.43
- -------------------------------------------------------------------------------------------------------------------------------
52
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Peoples Heritage Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Peoples Heritage
Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, 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,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company changed its method of accounting for
mortgage servicing rights effective January 1, 1995.
KPMG PEAT MARWICK LLP
January 22, 1997
Boston, Massachusetts
53
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PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
54
58
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
FINANCIAL GROUP, INC.
BOARD OF DIRECTORS
[PHOTO]
WILLIAM J. RYAN (1,4)
Chairman of the Board
President & Chief Executive Officer
Chairman, Governance & Nominating Committee
Peoples Heritage Financial Group, Inc.
President & Chief Executive Officer
Peoples Heritage Bank
ROBERT A. MARDEN (1,4)
Vice Chairman of the Board
Chairman, Executive/ALCO Committee
Attorney-at-Law
Marden, Dubord, Bernier & Stevens
PAMELA P. PLUMB (1,3,4)
Vice Chairman of the Board
Pamela Plumb & Associates
Former President - National League of Cities
ROBERT P. BAHRE (1)
President & Chief Executive Officer
New Hampshire International Speedway
EVERETT W. GRAY (2,3,5)
Retired Attorney
Real Estate Investor
DAVIS P. THURBER
Chairman
Bank of New Hampshire
ANDREW W. GREENE (1,3,5)
President
Blue Cross/Blue Shield of Maine
KATHERINE M. GREENLEAF (1,3)
Chairman, Human Resources Committee
Principal
Katherine M. Greenleaf Consulting
MALCOLM W. PHILBROOK, JR. (1,2,5)
Chairman, Audit Committee Attorney & President
Crockett, Philbrook & Crouch, P.A.
CURTIS M. SCRIBNER (1,2,5)
Chairman, Asset Review
President
C. M. Scribner & Company
DANA S. LEVENSON (3,5)
President
Quatro Realty Corp.
PAUL R. SHEA
President & CEO
Bank of New Hampshire
JOHN E. VEASEY
President
Cedardale, Inc.
1. Executive/ALCO Committee
2. Audit Committee
3. Human Resources Committee
4. Governance & Nominating Committee
5. Asset Review Committee
- --------------------------------------------------------------------------------
PEOPLES HERITAGE BANK
BOARD OF DIRECTORS
[PHOTO]
[PEOPLES HERITAGE LOGO]
ROBERT A. MARDEN (1,3,6)
Chairman of the Board
Attorney-at-Law
Marden, Dubord, Bernier & Stevens
WILLARD B. ARNOLD III (1,3,4)
Chairman, Nominating Committee
Retired Sales Executive
EARL B. AUSTIN, JR. (1,2,4)
Accountant
Earl B. Austin, JL & Assoc., P.A.
CHARLES BELLEGARDE, JR. (2,4)
Consultant & President
Charles Bellegarde & Son, Inc.
PETER B. CHAPMAN (2,3,5)
President & Chief Executive Officer
Paris Farmers Union
MADELEINE R. FREEMAN (2)
Chairman
Audit Committee
Retired Executive Director
Eastern Area Agency on Aging
EVERETT W. GRAY (1,2,3,5)
Retired Attorney
Real Estate Investor
GUY A. HARTNETT (1,3,5)
President, Treasurer, Owner
One-Right Systems, Inc.
President
Lydimap Corp.
GALEN N. HOGAN (2,4)
President, Treasurer, Chief Executive Officer
Hogan Tire Co.
MALCOLM W. PHILBROOK, JR. (1,3,4,5,6)
Chairman, Executive Committee
Chairman, Liquidity & Funds Management Committee
Chairman, Trust Committee
Attorney & President
Crockett, Philbrook & Crouch P.A.
CURTIS M. SCRIBNER (1,4,5)
Chairman
Asset Review Committee
Principal
C.M. Scribner & Company
WILLIAM J. RYAN (1,3,4,5)
Chairman,
President & Chief Executive Officer
Peoples Heritage Financial Group, Inc.
President & Chief Executive Officer
Peoples Heritage Bank
DAVID M. MACMAHON (6)
President
Gates Formed-Fibre Products, Inc.
SHELTON S. WHITE, JR. (4)
President
H.E. Callahan Construction Co.
MEG BAXTER
President
United Way of Greater Portland
1. Executive Committee
2. Audit Committee
3. Nominating Committee
4. Liquidity & Funds Management Committee
5. Asset Review Committee
6. Trust Committee
55
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
FINANCIAL GROUP, INC.
SENIOR MANAGEMENT
WILLIAM J. RYAN
President & Chief Executive Officer
PETER J. VERRILL, CPA
Executive Vice President & Chief Operating Officer & Chief Financial Officer
JOHN W. FRIDLINGTON
Executive Vice President
Commercial Lending
GLENN H. MCALLISTER
Executive Vice President
Residential and Consumer Lending
WENDY P. SUEHRSTEDT
Executive Vice President
Retail Delivery
R. SCOTT BACON
Executive Vice President
Bank of New Hampshire
DAVID D. HINDLE
Executive Vice President
Family Bank
CAROL L. MITCHELL, ESQ.
Executive Vice President General Counsel, Clerk & Secretary
- --------------------------------------------------------------------------------
PEOPLES HERITAGE BANK
SENIOR MANAGEMENT
WILLIAM J. RYAN
President & Chief Executive Officer
PETER J. VERRILL, CPA
Executive Vice President, Chief Operating Officer & Chief Financial Officer
JOHN W. FRIDLINGTON
Executive Vice President
Commercial Lending
GLENN H. MCALLISTER
Executive Vice President
Residential and Consumer Lending
CAROL L. MITCHELL, ESQ.
Executive Vice President & General Counsel
Legal Affairs, Human Resources, Facilities
WENDY P. SUEHRSTEDT
Executive Vice President
Retail Banking
ANNE T. DUNNE
President
Heritage Investment Planning Services
NORMAND J. ALBERT
Senior Vice President
Commercial Lending
THOMAS P. HOGAN
Senior Vice President
Consumer Lending
JOSEPH W. HANSON, JR.
Senior Vice President
Operations
MAURICE C. GALLANT, JR.
Senior Vice President
Audit
THEODORE N. SCONTRAS
Senior Vice President
Public Finance
STEPHEN J. BOYLE
Senior Vice President
Controller
CYNTHIA H. HAMILTON
Senior Vice President
Human Resources
ELIZABETH K. WARN
Senior Vice President
Retail Mortgage
GARY L. ROBINSON
Senior Vice President
Trust and Investment Group
WENDY P. SUEHRSTEDT
Executive Vice President
Retail Banking
HALL THOMPSON
Senior Vice President
Investments
RICHARD J. VAIL
Senior Vice President
Commercial Lending
BRIAN E. WOOD
Senior Vice President
Marketing
- --------------------------------------------------------------------------------
OXFORD BANK & TRUST
a division of Peoples Heritage Bank
SENIOR MANAGEMENT
EDWARD L. DILWORTH, JR.
Division President
NEIL R. ELDER
Senior Vice President
56
60
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PEOPLES HERITAGE
BANKING CENTERS
ASHLAND
10 Main Street
AUBURN
223 Center Street
Great Falls Plaza
Auburndale Plaza
600 Center Street
AUGUSTA
101 Western Ave
BANGOR
1067 Union Street
74 Hammond Street
353 Main Street
54 Springer Drive
BIDDEFORD
299 Elm Street
BREWER
508 Wilson Street
BRUNSWICK
208 1/2 Maine Street
CAMDEN
89 Elm Street
CARIBOU
Sweden Street
Caribou Mall
EAGLE LAKE
Church Street
EASTON
Main Street
ELLSWORTH
204 Main Street
FAIRFIELD
112 Main Street
FALMOUTH
223 U.S. Route #1
FARMINGTON
60 Main Street
Mount Blue Shopping Center,
Rts. 2 & 4
FORT FAIRFIELD
206 Main Street
FORT KENT
Pleasent Street Plaza
GRAY
Gray Plaza, Rt. # 26
HOULTON
6 North Street
KENNEBUNK
56 Portland Road
KITTERY
30 State Road
LEWISTON
217 Main Street
664 Main Street
790 Lisbon Street
LIMESTONE
222 Main Street
LINCOLN
Lincoln Plaza
LISBON FALLS
38 Main Street
MARS HILL
37 Main Street
NEWPORT
Main Street
NORTH WINDHAM
Route #302 Roosevelt Trail
Shaw's Supermarket,
Route #302
OAKLAND
11 Main Street
PITTSFIELD
60 Main Street
PORTLAND
One Portland Square
481 Congress Street
605 Congress Street
Westgate Shopping Center,
1370 Congress Street
449 Forest Avenue
Northgate Shopping Center,
3 Auburn Street
PRESQUE ISLE
551 Main Street
ROCKLAND
34 School Street
SACO
Saco Valley Shopping Center,
11 Scammon Street
SANFORD
Shaw's Shopping Plaza
SCARBOROUGH
Oak Hill Plaza
SEARSPORT
Main Street
SOUTH PORTLAND
Millcreek Shopping Center
415 Philbrook Road
THOMASTON
115 Main Street
VAN BUREN
29 Main Street
WASHBURN
12 Main Street
WATERVILLE
182 Main Street
Shaw's Plaza,
251 Kennedy Memorial Drive
WESTBROOK
835 Main Street
YARMOUTH
Shop 'N Save Plaza,
U.S. Route #1
YORK
127 Long Sands Road
- ----------------------------
OXFORD BANK & TRUST
BANKING CENTERS
OXFORD
Route 26
MECHANIC FALLS
80 Lewiston Street
WEST PARIS
Main Street
CASCO
Leach Hill Road
SOUTH PARIS
45 Main Street
57
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
BOARD OF DIRECTORS
[PHOTO]
[BANK OF NEW HAMPSHIRE LOGO]
DAVIS P. THURBER
Chairman of the Board
PAUL R. SHEA
President & Chief Executive Officer
ARTHUR E. COMOLLI, DMD
General Dentistry
RAYMOND G. COTE
President (Retired)
Harvey Construction Co., Inc.
RAYMOND J. CRETEAU
President (Retired)
Riverside Millwork Co., Inc.
JOSEPH A. DESMOND
Chairman & Chief Executive Officer
The Concord Group Insurance Companies
RALPH GABARRO
Chief Operating Officer
Charter Brookside
PETER J. GRIFFIN
President
Great Bay Marine, Inc.
DONALD G. HAYES
President
Ricci Supply Company, Inc.
DIANA JURIS
Vice President and Chief Operating Officer
Nashua Motor Express
DANA S. LEVENSON
President
Quatro Realty Corp.
JOHN E. MENARIO
Special 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.
GERRY S. WEIDEMA
Partner
Weidema & Lavin, CPAs
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
SENIOR OFFICERS
PAUL R. SHEA
President & CEO
R. SCOTT BACON
Chief Operating Officer
Executive Vice President
HAROLD R. ACRES
Senior Executive Vice President
Chief Lending Officer
MARK A. COLLINS
Executive Vice President
Marketing & Strategic Planning
ROBERT B. ESAU
Executive Vice President
Trust Services
MARY A. SCHNOBRICH
Executive Vice President
Branch Administration
CAROLYN A. CLOUTIER
Senior Vice President
Commercial Lending
MAUREEN F. DONOVAN
Senior Vice President
Human Resources
THOMAS FURLONG
Senior Vice President
Trust Services
JOANNE T. HOWARD
Senior Vice President
Branch Administration
CORNEILUS J. JOYCE
Senior Vice President
Consumer & Mortgage Banking
DAVID H. MCARDLE
Senior Vice President
Commercial Lending
ROBERT J. MCDONALD
Senior Vice President
Loan Administration
STEVEN C. WEBB
Senior Vice President
Commercial Lending
DONNA F. CLARICO
Senior Vice President
Financial Services
PAUL E. DUFFY
Senior Vice President
Commercial Lending
MARY W. MCLAUGHLIN
Senior Vice President
Commercial Lending
58
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Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK OF
NEW HAMPSHIRE
LOCATIONS
BARRINGTON
Route 125 & Province Road
BEDFORD
184 Route 101
BRISTOL
Central Square
CONCORD
143 North Main Street
216 Loudon Road
CONTOOCOOK
884 Maine Street
CONWAY
51 White Mountain Highway
DOVER
353 Central Ave
Shaw's Plaza,
845 Central Ave
EPSOM
Epsom Circle
GLEN
Junction Routes 16 & 302
GOFFSTOWN
3 Elm Street
GREENLAND
650 Portsmouth Avenue
HAMPTON
853 Lafayette Road
40 High Street
HILLSBOROUGH
School Street
HOOKSETT
1288 Hooksett Road
HUDSON
80 Derry Road
LITTLETON
76 Main Street
MANCHESTER
300 Franklin Street
Two South Beech Street
293 South Main Street
1255 South Willow
70 Bay Street
MERRIMACK
300 Daniel Webster Highway
Harris Pond,
32 Daniel Webster Highway
NASHUA
191 Main Street
Nashua Mall
300 Main Street
4 Northwest Boulevard
Daniel Webster Plaza,
225 Daniel Webster Highway
NEWINGTON
2033 Woodbury Avenue
NEWMARKET
72 Exeter Street
NORTH CONWAY
Routes 16 & 302
Mountain Valley Mall
NORTHWOOD
Route 4
PORTSMOUTH
Two Harbour Place
325 State Street
Market Basket Plaza,
1500 Lafayette Road
ROCHESTER
1 Merchants Plaza,
Intersection Rts. 125 & 16B
RYE
500 Washington Road
STRATHAM
28 Portsmouth Avenue
SUNCOOK
50 Glass Street
WEST OSSIPEE
Junction Routes 16 & 25
59
63
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAMILY BANK
BOARD OF DIRECTORS
[PHOTO]
[FAMILY BANK LOGO]
DAVID D. HINDLE
President & Chief Executive Officer
CHARLES GEORGE, JR.
President
Donahue & George Associates, Inc.
ELKIN B. MCCALLUM
President & Chief Executive Officer
Joan Fabrics
KENNETH L. PAUL
Vice President
Process Engineering, Inc.
JOHN E. VEASEY
President
Cedardale, Inc.
RICHARD L. BAILLY
Executive Vice President
UFP Technologies, Inc.
FRANCIS J. BERUBE
President & Treasurer
Westville Enterprises, Inc.
NELSON D. BLINN
Principal
Blinn & Farrell, CPAs
LAWRENCE J. EWING, JR.
Retired
WILLIAM J. LETOILE, JR.
President & Treasurer
Letoile Roofing Co., Inc.
DONALD R. MAIN
President
Don Main Auto Center, Inc.
JOHN F. REILLY, JR.
President & Chief Executive Officer
Fred C. Church, Inc.
NICOLA S. TSONGAS
Former Partner
Tsongas & Murphy, P.C.
L. DAVID VINCOLA
Principal
Lyman Associates, Management Consultants
- --------------------------------------------------------------------------------
FAMILY BANK
SENIOR OFFICERS
DAVID D. HINDLE
Chairman
President & Chief Executive Officer
DAVID J. LAFLAMME
Senior Vice President
Commercial
RONALD G. TROMBLEY
Senior Vice President
Retail
- --------------------------------------------------------------------------------
FAMILY BANK
LOCATIONS
MASSACHUSETTS
BRANCH OFFICES
HAVERHILL
Main Office,
153 Merrimack Street
Plainstow Road,
Route 125
Whittier Regional Vo-Tech HS,
115 Amesbury Line Road
ANDOVER
77 Main Street
BOXFORD
7 Elm Street
BRADFORD
860 South Main Street
CHELMSFORD
41 Drum Hill Road
DRACUT
1255 Bridge Street
GEORGETOWN
63 Central Street
GROVELAND
280 Main Street
LOWELL
45 Central Street,
33 Mammouth Road,
350 Westford Street
MIDDLETON
230 South Main Street,
Route 114
TOPSFIELD
16 Main Street,
Masconomet Regional High School,
20 Endicott Road
TYNGSBORO
One Pondview Place,
Middlesex Road
NEW HAMPSHIRE
BRANCH OFFICES
EXETER
82 Portsmouth Avenue
HAMPSTEAD
Main Street,
Route 21
KINGSTON
Carriage Town Plaza
PLAINSTOW
47 Plainstow Road
SEABROOK
270 Lafayette Road
60
64
Peoples Heritage Financial Group, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The 1997 Annual Meeting of the Shareholders of Peoples Heritage Financial Group,
Inc. will be held at 10:30 a.m. on Tuesday, April 22, 1997 at the Portland
Marriott at Sable Oaks, 200 Sable Oaks Drive, South Portland, Maine.
CORPORATE HEADQUARTERS
One Portland Square
Portland, Maine 04101
Mail Address:
P.O. Box 9540
Portland, ME 04112-9540
Contact: Brian S. Arsenault, Vice President,
Corporate Communications
(207)761-8517
1-800-462-3666 Outside Maine
1-800-462-6606 Outside Greater Portland
or
Peter J. Verrill
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
(207)761-8507
STOCK LISTING
Peoples Heritage Financial Group, Inc. is traded over the counter on the NASDAQ
National Market System under the symbol: PHBK.
FORM 10-K AND OTHER REPORTS
Peoples Heritage will send a copy of its 1996 Annual Report on Form 10-K to
shareholders upon request. Requests should be addressed to Investor Relations at
the Corporate Headquarters.
TRANSFER AGENT
Shareholder inquiries regarding change of address or title should be directed
to:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Phone: 718-921-8206
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
One Boston Place
Boston, MA 02110
RESEARCH COVERAGE
Recent research coverage on Peoples Heritage Financial Group, Inc. is available
from Legg Mason Wood Walker, Inc., Keefe, Bruyette & Woods, Inc., Friedman
Billings Ramsey & Co., Merrill, Lynch, Pierce, Fenner & Smith, Inc., First
Albany Corp., Tucker Anthony Inc., Lehman Brothers, Inc., Southeast Research
Partners, Inc., Capital Resources, Inc. Research, and Maine Securities Corp.
MARKET MAKERS
The following companies have generally been market makers for Peoples Heritage
Financial Group, Inc. Common Stock as of December 31, 1996:
Advest, Inc.
Bear, Stearns & Co., Inc.
Dean Witter Reynolds, Inc.
First Albany Corporation
Fox-Pitt Kelton, Inc.
Friedman Billings Ramsey & Co.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
Legg Mason Wood Walker, Inc.
Lehman Brothers, Inc.
M.A. Schapiro & Co., Inc.
Macallister Pitfield Mackay
Mayer & Schweitzer, Inc.
Merrill Lynch, Pierce,
Fenner & Smith, Inc.
Morgan Stanley & Co., Inc.
Nash Weiss/Div. of Shatkin Inv.
PaineWebber, Inc.
Prudential Securities Inc.
Ryan Beck & Co., Inc.
Salomon Brothers Inc.
Sherwood Securities Corp.
Smith Barney, Inc.
Tucker Anthony Incorporated
- --------------------------------------------------------------------------------
COMMON STOCK PRICES
Market prices for Peoples Heritage Financial Group, Inc.'s common stock and
dividends declared per quarter during 1996 and 1995 are as follows:
- --------------------------------------------------------------------------------
DIVIDENDS DECLARED
1996 QUARTERS PER SHARE HIGH LOW
- --------------------------------------------------------------------------------
FIRST $ .17 $ 22 3/4 $ 19
SECOND .17 22 1/4 19 3/8
THIRD .17 23 5/8 19
FOURTH .18 28 5/8 22 1/2
1995 Quarters
- --------------------------------------------------------------------------------
First $ .11 $ 14 $ 11 3/4
Second .13 16 3/4 12 3/8
Third .13 20 1/2 15 1/4
Fourth .15 22 7/8 18 1/4
- --------------------------------------------------------------------------------
As of December 31, 1996, the Company had approximately 5,700
shareholders of record of the 28,407,603 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.
65
- --------------------------------------------------------------------------------
PEOPLES HERITAGE ONE PORTLAND SQUARE
FINANCIAL GROUP, INC. POST OFFICE BOX 9540
PORTLAND, MAINE 04112-9540
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