1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16947
PEOPLES HERITAGE FINANCIAL GROUP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Maine 01-0437984
- ------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
One Portland Square, Portland, Maine 04112
- --------------------------------------- ----------
(Address of principal executive offices (Zip Code)
(207) 761-8500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the Registrant's common stock as of
November 1, 1998 is:
Common stock, par value $.01 per share 87,785,748
- -------------------------------------- ------------
(Class) (Outstanding)
1
2
INDEX
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income - Three
and Nine Months ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders'
Equity - Nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal proceedings 30
Item 2. Changes in securities 30
Item 3. Defaults upon senior securities 30
Item 4. Submission of matters to a vote of security holders 30
Item 5 Other information 30
Item 6 Exhibits and reports on Form 8-K 30
2
3
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 399,387 $ 424,567
Federal funds sold 189,909 13,091
Securities available for sale, at market value 1,881,830 1,802,758
Securities held to maturity - 28,184
Loans and leases held for sale 485,125 398,369
Loans and leases:
Residential real estate mortgages 2,408,216 2,635,663
Commercial real estate mortgages 1,420,859 1,405,357
Commercial business loans and leases 844,297 786,578
Consumer loans and leases 1,752,859 1,696,623
----------- -----------
6,426,231 6,524,221
Less: Allowance for loan and lease losses 88,671 89,983
----------- -----------
Net loans and leases 6,337,560 6,434,238
----------- -----------
Premises and equipment 109,841 114,729
Goodwill and other intangibles 119,440 127,416
Mortgage servicing rights 56,797 59,702
Other assets 302,840 265,188
----------- -----------
$ 9,882,729 $ 9,668,242
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 1,023,404 $ 1,084,158
Money Market and NOW accounts 1,643,803 1,522,252
Certificates of deposit (including certificates
of $100 or more of $552,100 and $586,467DDD 2,870,173 2,921,452
Brokered Deposits 255,116 249,990
Demand deposits 1,089,676 969,567
----------- -----------
Total deposits 6,882,172 6,747,419
Federal funds purchased and securities sold under
repurchase agreements 440,273 568,535
Borrowings from the Federal Home Loan Bank of Boston 1,576,986 1,394,746
Other borrowings 28,876 18,909
Other liabilities 103,768 117,850
----------- -----------
Total liabilities 9,032,075 8,847,459
----------- -----------
Company obligated, mandatory redeemable securities
of subsidiary trust holding solely parent
junior subordinated debentures 100,000 100,000
Shareholders' Equity:
Preferred stock (par value $0.01 per share,
5,000,000 shares authorized, none issued) - -
Common stock (par value $0.01 per share,
200,000,000 shares authorized,
89,937,187 and 89,324,737 shares issued) 900 893
Paid in capital 441,818 436,367
Retained earnings 341,702 303,864
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale 6,242 5,805
Treasury stock, at cost (2,153,377 shares
and 1,739,347 shares) (40,008) (26,146)
----------- -----------
Total shareholders' equity 750,654 720,783
----------- -----------
$ 9,882,729 $ 9,668,242
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
4
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited)
Interest and dividend income:
Interest on loans and leases $ 150,616 $ 132,199 $ 453,583 $ 374,154
Interest and dividends on securities 27,041 31,203 81,723 90,093
----------- ----------- ----------- -----------
Total interest and dividend income 177,657 163,402 535,306 464,247
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 59,907 55,240 181,343 160,039
Interest on borrowed funds 26,429 20,827 79,985 51,343
----------- ----------- ----------- -----------
Total interest expense 86,336 76,067 261,328 211,382
----------- ----------- ----------- -----------
Net interest income 91,321 87,335 273,978 252,865
Provision for loan and lease losses 3,721 1,423 9,702 3,385
----------- ----------- ----------- -----------
Net interest income after provision for loan
and lease losses 87,600 85,912 264,276 249,480
----------- ----------- ----------- -----------
Noninterest income:
Customer services 8,413 7,402 24,435 21,683
Mortgage banking services 4,606 6,492 18,984 16,961
Insurance commissions 3,362 - 9,050 -
Trust and investment advisory services 4,113 2,928 11,469 8,416
Net securities gains 1,456 594 3,506 1,372
Other noninterest income 3,727 3,077 10,072 8,057
----------- ----------- ----------- -----------
25,677 20,493 77,516 56,489
----------- ----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 33,271 33,350 103,412 95,744
Data processing 5,408 4,404 14,221 12,637
Occupancy 5,208 4,787 16,651 14,563
Equipment 3,739 4,458 12,510 13,235
Distributions on securities of subsidiary trust 2,265 2,297 6,795 6,072
Amortization of goodwill and other intangibles 2,888 2,044 8,664 5,362
Advertising and marketing 2,021 2,967 6,522 7,171
Merger expenses - 11,031 35,374 11,031
Other noninterest expenses 11,734 11,786 38,323 34,655
----------- ----------- ----------- -----------
66,534 77,124 242,472 200,470
----------- ----------- ----------- -----------
Income before income tax expense 46,743 29,281 99,320 105,499
Applicable income tax expense 14,097 10,848 31,324 37,105
----------- ----------- ----------- -----------
Net income $ 32,646 $ 18,433 $ 67,996 $ 68,394
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 87,722,653 86,851,533 88,151,549 87,485,149
Diluted 89,026,040 88,327,558 89,591,751 88,961,175
Earnings per share:
Basic $ 0.37 $ 0.22 $ 0.77 $ 0.79
Diluted 0.37 0.21 0.76 0.77
See accompanying Notes to Consolidated Financial Statements.
4
5
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
Accumulated
Other
Par Paid in Retained Comprehensive Treasury
Value Capital Earnings Income Stock Total
----- --------- -------- ------------- --------- --------
(Unaudited)
Balances at December 31, 1997 $893 $436,367 $303,864 $5,805 $(26,146) $720,783
Cancellation of CFX treasury shares
at acquisition (110,586 shares) (1) (1,879) - - 1,880 -
Issuance of 727,038 shares of common
stock under stock option and purchase
plans and related tax effects 8 7,366 - - - 7,374
Treasury stock issued for employee
benefit plans (523,057 shares at
an average price of $12.60) - - (2,122) - 8,715 6,593
Treasury stock purchased
(1,048,040 shares at an average
price of $23.34) - - - - (24,457) (24,457)
Change in unrealized gains on
securities available for sale,
net of tax - - - 437 - 437
Net income - - 67,996 - - 67,996
Payment of fractional shares (36) (36)
Cash dividends, $0.33 per share - - (28,036) - - (28,036)
---- -------- -------- ------ -------- --------
Balances at September 30, 1998 $900 $441,818 $341,702 $6,242 $(40,008) $750,654
==== ======== ======== ====== ======== ========
See accompanying Notes to Consolidated Financial Statements.
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6
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
-----------------------------
(Unaudited)
1998 1997
------------ ------------
Cash flows from operating activities:
Net Income $ 67,996 $ 68,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 9,702 3,385
Provision for depreciation 11,088 9,471
Amortization of goodwill and other intangibles 8,664 5,362
Net increase (decrease) in net deferred tax liabilities 30,874 8,745
Net (gains) losses realized from sales of securities
and consumer loans (3,510) (1,372)
Net (gains) realized from sales of loans held for
sale (a component of mortgage banking services) 16,564 (6,926)
Net decrease (increase) in mortgage servicing rights 2,905 368
Proceeds from sales of loans held for sale 4,464,749 1,662,700
Residential loans originated and purchased for sale (4,568,069) (1,718,797)
Net decrease (increase) in interest and dividends
receivable and other assets (38,340) (49,723)
Net increase (decrease) in other liabilities (45,700) (32,209)
----------- -----------
Net cash provided (used) by operating activities $ (43,077) $ (50,602)
=========== ===========
Cash flows from investing activities:
Proceeds from maturities and principal repayments
of investment securities $ - $ 40,606
Purchase of investment securities - (31,009)
Proceeds from sales of securities available for sale 385,768 264,977
Proceeds from maturities and principal repayments
of securities available for sale 561,014 509,976
Purchases of securities available for sale (992,982) (1,012,048)
Net (increase) decrease in loans and leases 86,980 (643,976)
Proceeds from sales of loans - 53,102
Net additions to premises and equipment (6,200) (6,950)
----------- -----------
Net cash provided (used) by investing activities $ 34,580 $ (825,322)
=========== ===========
Cash flows from financing activities:
Net increase (decrease) in deposits $ 134,753 $ 271,283
Net increase (decrease) in securities sold
under repurchase agreements (13,416) 154,227
Proceeds from Federal Home Loan Bank of Boston borrowings 2,573,945 989,773
Payments on Federal Home Loan Bank of Boston borrowings (2,391,706) (488,712)
Net increase (decrease) in other borrowings 9,967 (8,327)
Proceeds from issuance of subsidiary trust - 98,347
Issuance of stock 13,931 11,684
Purchase of treasury stock (24,457) (35,721)
Cash dividends paid to shareholders (28,036) (28,284)
----------- -----------
Net cash provided by financing activities $ 274,981 $ 964,270
=========== ===========
Increase (decrease) in cash and cash equivalents $ 266,484 $ 88,346
Cash and cash equivalents at beginning of period 322,812 491,388
----------- -----------
Cash and cash equivalents at end of period $ 589,296 $ 579,734
=========== ===========
- --------------------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and 1997, interest of $267,548 and $210,924 and
income taxes of $23,673 and $36,742 were paid, respectively.
See accompanying Notes to Consolidated Financial Statements.
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7
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(IN THOUSANDS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and predominant
practices within the banking industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 1997 Annual Report
on Form 10-K or its 1997 Supplemental Consolidated Financial Statements included
in the current report on Form 8-K, filed on July 23, 1998.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations and other data for the
nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for any other interim period or the entire year
ending December 31, 1998. Certain amounts in the prior periods have been
reclassified to conform to the current presentation.
On April 10, 1998, the Company completed its merger with CFX 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, 1997,
CFX had total assets of $2.9 billion and total shareholders' equity of $245.7
million. Effective April 10, 1998, the Company transferred all securities
considered by CFX to be held to maturity to available for sale. This was done to
be consistent with the combined Company's interest rate risk profile. The
Company also reclassified $122 million of automobile lease receivables to loans
and leases held for sale, reflecting the Company's intention to exit this
business and sell such receivables. A valuation allowance of $6.5 million was
recorded to reflect these receivables at the lower of cost or market.
NOTE 2 - OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was issued in July 1997. The Company adopted SFAS No. 130
on January 1, 1998, as required. SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components. The main
objective of the statement is to report a measure of all changes in equity that
result from transactions and other economic events during the period other than
transactions with owners. The components of total comprehensive income for the
Company are net income and unrealized gains on securities available for sale,
net of tax.
The following is a reconciliation of comprehensive income for the nine month
periods ended September 30, 1998 and 1997.
Nine Months Ended
September 30,
------- -------
1998 1997
------- -------
(Unaudited)
Net income $67,996 $68,394
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period 1,893 6,739
Less: reclassification adjustment for gains included in net income 1,456 594
------- -------
Net 437 6,145
------- -------
Comprehensive income $68,433 $74,539
======= =======
7
8
Accumulated Other Comprehensive Income: Unrealized Gains
on Securities
----------------
Balance at December 31, 1997 $5,805
Change, net of tax 437
------
Balance at September 30, 1998 $6,242
======
NOTE 3 - SHAREHOLDERS' EQUITY
On April 28, 1998, shareholders of the Company approved an amendment to the
Company's articles of incorporation to increase the number of authorized shares
of common stock from 100,000,000 to 200,000,000 and the Board of Directors of
the Company approved a 2 for 1 split of the outstanding common stock effective
as of May 18, 1998. The shares herein have been restated as if the split had
occurred during the earliest period shown. References to authorized common stock
and outstanding shares in the Consolidated Financial Statements have been
adjusted to reflect these actions.
NOTE 4 - OTHER MATTERS
In July 1998, the Company reached a definitive agreement to acquire SIS Bancorp,
Inc., a $1.8 billion bank holding company based in Springfield, Massachusetts.
Under terms of the agreement, shareholders of SIS will receive 2.25 shares of
Peoples Heritage Common Stock for each whole share of SIS Common stock plus cash
in lieu of any fractional share. Approximately 16.8 million shares of Peoples
Heritage common stock will be issued in the transaction. The exchange is
expected to be tax free and accounted for as a pooling of interests. The
transaction, which received approval by SIS shareholders on November 12, 1998,
is subject to approval by various regulatory agencies, and is anticipated to be
completed by the end of 1998 .
8
9
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
On April 10, 1998, People Heritage Financial Group, Inc. (the "Company")
completed its merger with CFX Corporation ("CFX"),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. The Company recognized $24.0 million of
after-tax merger-related charges in the second quarter. Results excluding these
and other merger-related charges are referred to herein as operating. At
December 31, 1997, CFX had total assets of $2.9 billion and total shareholders'
equity of $245.7 million.
The results of Atlantic Bancorp ("Atlantic"), the parent company of Atlantic
Bank N.A., and Morse, Payson and Noyes, an insurance agency, which were acquired
on October 1, 1997 and October 10, 1997, respectively in transactions accounted
for as purchases, are included from the date of acquisition.
SUMMARY
The Company reported net income of $32.6 million, or $0.37 per diluted share,
for the third quarter of 1998. This compares with $18.4 million, or $0.21 per
diluted share, for the third quarter of 1997 and $8.3 million, or $0.09 per
diluted share, for the second quarter of 1998. The Company reported operating
income of $32.6 million, or $0.37 per diluted share, for the third quarter of
1998 compared with $25.6 million, or $0.29 per diluted share, for the third
quarter of 1997 and $32.4 million, or $0.36 per diluted share for the second
quarter of 1998. This represents a 28% increase in operating earnings per
diluted share, compared to the same period last year and an 11% annualized
increase compared to the second quarter of 1998.
Third quarter operating return on equity was 17.78%, which compared to 14.67% in
the third quarter of 1997 and 17.96% in the second quarter of 1998. The third
quarter operating return on assets was 1.33%, which compared to 1.18% for the
same period in 1997 and 1.33% in the second quarter of 1998.
The improved operating results for the third quarter of 1998, compared to the
third quarter of 1997, reflect strong revenue growth coupled with significant
cost savings achieved as a result of the CFX merger. Compared to the third
quarter of 1997, net interest income grew 5% and non-interest income grew 25%.
However, operating non-interest expense grew just 1%, resulting in an efficiency
ratio (exclusive of distributions on securities of subsidiary trust, special
charges, and net securities gains) of 55.62% for the third quarter of 1998
compared to 59.49% for the third quarter of 1997 and 55.98% for the second
quarter of 1998. Selected quarterly data, both as reported and on an operating
basis, are provided in Table 1.
The Company reported net income for the nine months ended September 30, 1998 of
$68.0 million or $0.76 per diluted share compared to $68.4 million or $0.77 per
diluted share for the same period last year. Return on average equity was 12.50%
and 13.28% for the nine months ended September 30, 1998 and 1997, respectively.
Return on average assets was 0.93% and 1.12% for the nine months ended
September 30, 1998 and 1997, respectively.
The Company's operating income was $92.6 million or $1.03 per diluted share, and
$75.6 million or $0.85 per diluted share for the nine months ended September 30,
1998 and 1997, respectively Operating return on average equity and operating
return on average assets were 17.02% and 1.27% for the nine months ended
September 30, 1998, respectively, compared to 14.67% and 1.24% for the nine
months ended September 30, 1997, respectively.
9
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- -------------------------------------------------------------------------------------------------------------
TABLE 1 - SELECTED Third Second First Fourth Third Second First
QUARTERLY DATA 1998 1998 1998 1997 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------
(Dollars, Except Per Share Data, in Thousands)
Net interest income $91,321 $90,836 $91,821 $91,611 $87,335 $84,429 $81,101
Provision for loan and
lease losses 3,721 2,983 2,998 1,163 1,423 1,020 942
------- ------- ------- ------- ------- ------- -------
Net interest income after loan
and lease loss provision 87,600 87,853 88,823 90,448 85,912 83,409 80,159
------- ------- ------- ------- ------- ------- -------
Noninterest income (excluding
securities transactions) 24,221 26,934 22,855 24,983 19,899 17,456 17,763
Securities gains 1,456 - 2,050 1,196 594 475 302
Noninterest expenses (excluding
special charges) 66,534 68,208 72,356 72,714 66,093 62,674 60,672
Special charges(1) - 34,474 900 7,560 11,031 - -
------- ------- ------- ------- ------- ------- -------
Income before income taxes 46,743 12,105 40,472 36,353 29,281 38,666 37,552
Income tax expense 14,097 3,795 13,432 12,412 10,848 13,214 13,043
------- ------- ------- ------- ------- ------- -------
Net income $32,646 $ 8,310 $27,040 $23,941 $18,433 $25,452 $24,509
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.37 $ 0.09 $ 0.31 $ 0.27 $ 0.22 $ 0.29 $ 0.28
Diluted 0.37 0.09 0.30 0.27 0.21 0.29 0.27
Earnings per share (excluding
special charges):
Basic $ 0.37 $ 0.37 $ 0.31 $ 0.33 $ 0.29 $ 0.29 $ 0.28
Diluted 0.37 0.36 0.31 0.32 0.29 0.29 0.27
Return on avg. assets(2) 1.33% 0.34% 1.13% 1.03% 0.86% 1.27% 1.27%
Return on avg. equity(2) 17.78 4.58 15.04 13.61 10.60 14.86 14.45
Return on average assets
(excluding special charges)(2) 1.33 1.33 1.16 1.24 1.19 1.26 1.27
Return on average equity
(excluding special charges)(2) 17.78 17.96 15.36 16.41 14.72 14.86 14.45
Efficiency ratio(3) 55.62 55.98 61.06 60.44 59.51 59.28 61.30
(1) Special charges consists of merger-related expenses and one-time charges related to CFX Funding.
(2) Annualized.
(3) Excludes distributions on securities of subsidiary trust, special charges and net securities gains.
10
11
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's fully-taxable-equivalent net interest income in the third quarter
of 1998 increased 5% from the third quarter of 1997 due to loan growth and the
impact of the acquisition of Atlantic in the fourth quarter of 1997. Table 2
shows the 1998 and 1997 quarterly amounts of net interest income by category and
Table 3 shows the changes in tax equivalent net interest income by category due
to changes in rate and volume. The third quarter of 1998 net interest margin was
4.12% compared to 4.44% for the third quarter of 1997 and 4.09% in the second
quarter of 1998. The decline in the margin from the third quarter of 1997
primarily reflects the 19 basis points decrease in yields on securities
available for sale and a 36 basis point decrease in average loan yields due to
the repricing and mix of loans. It is expected that competitive pressure on
pricing of loans and deposits will continue. The fully-taxable equivalent net
interest margin increased slightly from the second quarter of 1998 primarily due
to lower deposit costs. See "Interest Rate Risk and Asset Liability Management"
below.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yields; (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost; (iii) net
interest income; (iv) interest rate spread; and (v) net interest margin. For
purposes of the tables and the following discussion, (i) income from
interest-earning assets and net interest income is presented on a fully-taxable
equivalent basis primarily by adjusting income and yields earned on tax-exempt
interest received on loans to qualifying borrowers and on certain of the
Company's securities to make them equivalent to income and yields earned on
fully-taxable investments, assuming a federal income tax rate of 35%, and (ii)
nonaccrual loans have been included in the appropriate average balance loan
category, but unpaid interest on nonaccrual loans has not been included for
purposes of determining interest income. Average balances are based on average
daily balances during the indicated periods.
11
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- ---------------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1998 1998
Third Quarter Second Quarter
--------------------------------- ---------------------------------
Average Yield/(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
---------- -------- --------- ---------- -------- ---------
(Dollars in Thousands)
Loans and leases(2):
Residential real estate mortgages $3,035,085 $ 56,299 7.42% $3,108,026 $ 57,458 7.39%
Commercial real estate mortgages 1,413,832 34.044 9.55 1,418,750 33,655 9.51
Commercial loans and leases 844,566 19,510 9.40 851,950 20,103 9.46
Consumer loans and leases 1,817,816 41,067 8.96 1,838,076 40,823 8.91
---------- -------- ---------- --------
Total loans and leases 7,111,299 150,920 8.45 7,216,802 152,039 8.44
---------- -------- ---------- --------
Securities available for sale(3) 1,732,951 26,571 6.24 1,662,019 26,110 6.29
Federal funds sold 58,689 790 5.34 54,549 104 5.54
---------- -------- ---------- --------
Total earning assets 8,902,939 178,281 7.97 8,933,370 178,253 7.99
---------- -------- ---------- --------
Nonearning assets 832,059 844,238
---------- ----------
Total assets $9,734.998 $9,777,608
========== ==========
Interest-bearing deposits:
Regular savings $1,037.397 6,601 2.52 $1,092,867 6,745 2.48
NOW and money market accounts 1,596,785 9,701 2.41 1,567,724 9,891 2.53
Certificates of deposit 2,851,704 39,458 5.49 2,905,439 39,968 5.54
Brokered deposits 280,012 4,147 5.88 315,289 4,507 5.73
---------- -------- ---------- --------
Total interest-bearing deposits 5,765,898 59.907 4.12 5,881,319 61,111 4.17
Borrowed funds 1,927,458 26,429 5.44 1,901,454 25,776 5.44
---------- -------- ---------- --------
Total interest-bearing liabilities 7,693,356 86,336 4.45 7,782,773 86,887 4.48
---------- -------- ---------- --------
Demand deposits 1,103,814 1,067,278
Other liabilities(3) 114,736 96,919
Securities of subsidiary trust 100,000 100,000
Shareholders' equity(3) 723,092 730,638
---------- ----------
Total liabilities and shareholders'
equity $9,734,998 $9,777,608
========== ==========
Net earning assets $1,209,583 $1,150,597
========== ==========
Net interest income (fully-taxable
equivalent) 91,945 91,366
Less: fully-taxable equivalent adjustments (624) (530)
-------- --------
Net interest income $ 91,321 $ 90,836
======== ========
Net interest rate spread (fully-taxable
equivalent) 3.52% 3.51%
==== ====
Net interest margin (fully-taxable
equivalent) 4.12% 4.09%
==== ====
- ---------------------------------------------------------------------------------------------------------------------
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
12
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- ---------------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1998 1997
First Fourth
Quarter Quarter
---------------------------------- ------------------------------------
Average Yield(1) Average Yield/(1)
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ---------
(Dollars in Thousands)
Loans and leases (2):
Residential real estate mortgages $3,116,182 $ 60,224 7.73% $2,784,525 $ 54,524 7.83%
Commercial real estate mortgages 1,408,203 33,421 9.63 1,391,087 34,059 9.71
Commercial loans and leases 798,535 18,529 9.41 771,305 18,724 9.63
Consumer loans and leases 1,800,883 40,052 9.02 1,724,577 39,598 9.11
---------- -------- ---------- --------
Total loans and leases 7,123,803 152,226 8.62 6,671,494 146,905 8.76
---------- -------- ---------- --------
Securities available for sale (3) 1,683,576 27,389 6.55 1,833,909 30,668 6.66
Federal funds sold 47,054 675 5.82 42,689 644 5.99
---------- -------- ---------- --------
Total earning assets 8,854,433 180,290 8.21 8,548,092 178,217 8.30
---------- -------- ---------- --------
Nonearning assets 821,175 769,989
---------- ----------
Total assets $9,675,608 $9,318,081
========== ==========
Interest-bearing deposits:
Regular savings $1,084,150 6,995 2.62 $1,080,708 7,219 2.65
NOW and money market accts 1,485,191 9,291 2.54 1,458,878 9,387 2.55
Certificates of deposit 2,913,756 39,792 5.54 2,885,314 40,359 5.58
Brokered deposits 290,177 4,246 5.93 220,086 3,324 5.99
---------- -------- ---------- --------
Total interest-bearing deposits 5,773,274 60,324 4.24 5,644,986 60,289 4.24
Borrowed funds 2,024,437 27,781 5.57 1,812,396 26,106 5.71
---------- -------- ---------- --------
Total interest-bearing liabilities 7,797,711 88,105 4.58 7,457,382 86,395 4.60
---------- -------- ---------- --------
Demand deposits 963,234 923,978
Other liabilities (3) 85,381 128,147
Securities of subsidiary trust 100,000 103,093
Shareholders' equity (3) 729,282 705,481
---------- ----------
Total liabilities and shareholders'
equity $9,675,608 $9,318,081
========== ==========
Net earning assets $1,056,722 $1,090,710
========== ==========
Net interest income (fully-taxable
equivalent) 92,185 91,822
Less: fully-taxable equivalent
adjustments (364) (211)
-------- --------
Net interest income $ 91,821 $ 91,611
======== ========
Net interest rate spread (fully-taxable
equivalent) 3.63% 3.70%
==== ====
Net interest margin (fully-taxable
equivalent) 4.18% 4.29%
==== ====
- ---------------------------------------------------------------------------------------------------------------------
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
13
14
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1997 1997
Third Quarter Second Quarter
--------------------------------- --------------------------------
Average Yield(1) Average Yield(1)
Balance Interest Rate Balance Interest Rate
---------- -------- -------- ---------- -------- --------
(Dollars in Thousands)
Loans and leases(2):
Residential real estate mortgages $2,425,850 $ 47,896 7.90% $2,207,376 $ 43,951 7.96%
Commercial real estate mortgages 1,259,455 30,589 9.64 1,219,730 29,217 9.61
Commercial loans and leases 763,083 18,359 9.55 738,777 17,653 9.58
Consumer loans and leases 1,532,816 35,573 9.21 1,416,075 32,450 9.19
---------- -------- ---- ---------- --------
Total loans and leases 5,981,204 132,417 8.81% 5,581,958 123,271 8.85
---------- -------- ---- ---------- --------
Securities available for sale(3) 1,868,673 30,288 6.43% 1,856,902 30,731 6.63
Federal funds sold 22,905 163 4.83 18,185 210 4.63
---------- -------- ---------- --------
Total earning assets 7,872,782 162,868 8.23 7,457,045 154,212 8.29
---------- -------- ---------- --------
Nonearning assets 628,148 605,015
---------- ----------
Total assets $8,500,930 $8,062,060
========== ==========
Interest-bearing deposits:
Regular savings $1,047,442 6,982 2.64 $1,053,675 6,929 2.64
NOW and money market accounts 1,379,506 7,817 2.25 1,377,839 8,338 2.43
Certificates of deposit 2,660,703 36,770 5.48 2,627,009 35,837 5.47
Brokered deposits 191,084 2,921 6.06 135,312 2,015 5.97
---------- -------- ---------- --------
Total interest-bearing deposits 5,278,735 54,490 4.10 5,193,835 53,119 4.10
Borrowed funds 1,512,913 20,827 5.46 1,193,979 16,481 5.54
---------- -------- ---------- --------
Total interest-bearing liabilities 6,791,648 75,317 4.40 6,387,814 69,600 4.37
---------- -------- ---------- --------
Demand deposits 841,667 797,533
Other liabilities(3) 77,740 89,887
Securities of subsidiary trust 100,000 100,000
Shareholders' equity(3) 689,875 686,826
---------- ----------
Total liabilities and shareholders' equity $8,500,930 $8,062,060
========== ==========
Net earning assets $1,081,134 $1,069,231
========== ==========
Net interest income (fully-taxable equivalent) 87,551 84,612
Less: fully-taxable equivalent adjustments (216) (183)
-------- --------
Net interest income $ 87,335 $ 84,429
======== ========
Net interest rate spread (fully-taxable equivalent) 3.83% 3.92%
==== ====
Net interest margin (fully-taxable equivalent) 4.44% 4.54%
==== ====
- ---------------------------------------------------------------------------------------------------------------------------
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
14
15
- ------------------------------------------------------------------------------------------
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
1997
First
Quarter
----------------------------------
Average Yield/(1)
Balance Interest Rate
---------- -------- ---------
(Dollars in Thousands)
Loans and leases (2):
Residential real estate mortgages $2,185,645 $ 43,355 7.93%
Commercial real estate mortgages 1,208,268 28,616 9.60
Commercial loans and leases 706,154 16,750 9.62
Consumer loans and leases 1,352,888 30,396 9.11
---------- --------
Total loans and leases 5,452,955 119,117 8.81
---------- --------
Securities available for sale (3) 1,693,222
Federal funds sold 30,517 27,640 6.57
----------
Total earning assets 7,176,694 494 6.57
---------- --------
Nonearning assets 656,784 147,251 8.28
---------- --------
Total assets $7,833,478
==========
Interest-bearing deposits:
Regular savings $1,059,471 6,866 2.63
NOW and money market accounts 1,354,440 8,275 2.48
Certificates of deposit 2,639,136 35,475 5.45
Brokered deposits 72,431 1,065 5.96
---------- --------
Total interest-bearing deposits 5,125,478 51,681 4.09
Borrowed funds 1,097,988 14,330 5.29
---------- --------
Total interest-bearing liabilities 6,223,466 66,011 4.30
---------- --------
Demand deposits 740,847
Other liabilities (3) 130,339
Securities of subsidiary trust 50,806
Shareholders' equity (3) 688,020
----------
Total liabilities and shareholders' equity $7,833,478
==========
Net earning assets $ 953,228
==========
Net interest income (fully-taxable equivalent) 81,240
Less: fully-taxable equivalent adjustments (139)
--------
Net interest income $ 81,101
========
Net interest rate spread (fully-taxable equivalent) 3.98%
====
Net interest margin (fully-taxable equivalent) 4.55%
====
- ------------------------------------------------------------------------------------------
(1) Annualized.
(2) Loans and leases include loans held for sale.
(3) Excludes effect of unrealized gains or losses on securities available for sale.
15
16
TABLE 3 - RATE VOLUME ANALYSIS
Three months ended september 30, 1998 vs. Three months ended september 30, 1997
- ------------------------------------------------------------------------------------------------
Quarterly
Change from Previous Year due to Changes in:
------------------------------------------------------
Volume Rate Rate & Volume(1) Total Change
--------- -------- ---------------- ------------
(Dollars in Thousands)
Interest income:
Loans and leases $ 25,095 $(5,427) $(1,165) $ 18,503
Securities available for sale (2,200) (895) (622) (3,717)
Federal funds sold 436 29 162 627
-------- ------- ------- --------
Total interest income 23,331 (6,293) (1,625) 15,413
-------- ------- ------- --------
Interest expense:
Interest-bearing deposits
Regular savings (67) (317) 3 (381)
NOW and money market accts 1,232 556 96 1,884
Certificates of deposit 2,638 67 (17) 2,688
Brokered deposits 1,358 (87) (45) 1,226
-------- ------- ------- --------
Total interest-bearing deposits 5,161 219 37 5,417
Borrowed funds 5,705 (76) (27) 5,602
-------- ------- ------- --------
Total interest expense 10,866 143 10 11,019
-------- ------- ------- --------
Net interest income (fully
taxable equivalent) $ 12,465 $(6,436) $(1,635) $ 4,394
======== ======= ======= ========
(1) Includes changes in interest income and expense not due solely to volume or
rate changes.
NON-INTEREST INCOME
Third quarter non-interest income of $25.7 million increased $5.2 million, or
25%, from the third quarter of 1997 and decreased 5% from the second quarter of
1998. The third quarter of 1998 included $3.4 million of insurance commissions
earned by Morse, Payson and Noyes, an insurance agency purchased in October
1997. Other significant increases from the third quarter of 1997 were a
$1.2 million increase in trust and investment advisory services income and a
$1.0 million increase in customer service income and an increase of $862
thousand in net securities gains.
Trust and investment advisory services income increased $1.2 million, or 40%,
from the third quarter of 1997 and 3% from the second quarter of 1998. The
increase in income reflects the continued growth in trust assets under
management and increased commissions earned on sales of third party mutual funds
and annuities. Assets under management were $2.9 billion , $2.7 billion and
$2.3 billion at September 30, 1998, December 31, 1997 and September 30, 1997,
respectively.
Customer services income of $8.4 million increased $1.0 million, or 14%, from
the third quarter of 1997 and 3% from the second quarter of 1998. The increases
were primarily attributable to growth in the number of transaction accounts and
increased ATM fees.
16
17
Mortgage banking services income of $4.6 million, $8.7 million and $6.5 million
provided 18%, 32% and 32% of noninterest income for the quarters ended September
30, 1998, June 30, 1998 and September 30, 1997, respectively. Mortgage banking
income declined in the third quarter largely because of a $1 million loss
realized on the sale of rights to service approximately $2.2 billion of
residential mortgage loans which reduced capitalized mortgage servicing rights
by $43 million and $6.2 million of gross impairment of the remaining capitalized
mortgage servicing rights. The Company undertook the servicing rights sale to
reduce its level of risk against declining interest rates. The loss incurred by
the sale and the negative impact of impairment on the remaining capitalized
servicing rights was partially offset by a $2.2 million gain on interest rate
floor contracts, a $1.5 million gain on the sale of securities and increased
gains on loans sold to the secondary market. The Company recorded a gain of $1.7
million on the sale of servicing rights during the quarter ended June 30, 1998
and a $802 thousand gain was recorded during the quarter ended September 30,
1997. The Company expects to continue to sell servicing rights periodically in
the future. The Company had $1.8 million in mortgage servicing income in the
third quarter of 1998 compared to $3.1 million in the second quarter of 1998 and
$2.7 million in the third quarter of 1997. The decrease from the second quarter
was primarily due to a smaller servicing portfolio. The amount of loans serviced
for others was $4.6 billion, $6.6 billion and $4.6 billion at September 30,
1998, June 30, 1998 and September 30, 1997, respectively.
Capitalized mortgage servicing rights amounted to $56.8 million at September 30,
1998, compared to $95 million at June 30, 1998, $60 million at December 31, 1997
and $45 million at September 30, 1997. The decrease was due to the sale of
mortgage servicing rights totaling $43 million in the third quarter coupled with
the $6.2 million impairment reserve as discussed above. See Table 4 for details.
Because mortgage servicing rights are an interest-rate sensitive asset, the
value of the Company's mortgage servicing rights and the related mortgage
banking income may be adversely impacted if mortgage interest rates decline and
actual or expected loan prepayments increase. To mitigate the prepayment risk
associated with adverse changes in interest rates and the resultant impairment
to capitalized mortgage servicing rights and effects on mortgage banking income,
the Company has established a hedge program against its capitalized mortgage
servicing rights to help protect its value and mortgage banking income.
Notwithstanding the foregoing, there can be no assurance that significant
declines in interest rates will not have a material impact on the Company's
mortgage servicing rights and mortgage banking income or that the hedge program
will be successful in mitigating the effects of such a decline.
17
18
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 4 - MORTGAGE BANKING SERVICES
At or for the Three Months Ended
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Residential mortgages serviced
for investors at end of period $4,592,901 $6,648,233 $6,242,085 $5,381,003 $4,637,704 $4,107,607 $4,627,562
========== ========== ========== ========== ========== ========== ==========
Residential mortgage sales
income $ 7,762 $ 4,231 $ 2,164 $ 4,970 $ 2,978 $ 2,625 $ 1,920
Impairment reserve for
mortgage servicing rights (6,151) (359) - - - - -
Residential mortgage servicing
income, net 1,812 3,123 3,538 2,650 2,712 2,337 2,334
Valuation adjustments - hedge 2,180 - - - - - -
Gain (loss) on sale of
mortgage servicing (997) 1,681 - 325 802 - 1,253
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 4,606 $ 8,676 $ 5,702 $ 7,945 $ 6,492 $ 4,962 $ 5,507
========== ========== ========== ========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS
Balance at beginning of period $ 95,157 $ 79,365 $ 59,702 $ 44,814 $ 42,038 $ 35,288 $ 40,958
Mortgage servicing rights
capitalized and purchased 13,914 24,327 35,679 25,111 15,278 9,840 8,226
Amortization charged against
mortgage servicing fee income (3,110) (3,596) (3,865) (2,517) (2,011) (1,702) (1,695)
Impairment reserve (6,151) (359) - - - - -
Mortgage servicing rights sold (43,013) (4,580) (12,151) (7,706) (10,491) (1,388) (12,201)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at end of period $ 56,797 $ 95,157 $ 79,365 $ 59,702 $ 44,814 $ 42,038 $ 35,288
========== ========== ========== ========== ========== ========== ==========
18
19
NON-INTEREST EXPENSE
Excluding special charges, amortization of intangibles and distribution on
securities of subsidiary trust, non-interest expense decreased $371 thousand
from the third quarter of 1997 and decreased $1.6 million from the second
quarter of 1998. The decreases were the results of cost savings from the
integration of CFX as well as efforts by management to control noninterest
expense. As compared with the third quarter of 1997, the cost savings related to
the CFX merger were partially offset by additional costs related to the purchase
of Atlantic Bank and Morse, Payson and Noyes in the fourth quarter of 1997. The
efficiency ratio was 55.62%, 59.49% and 55.98% for the quarters ended September
30, 1998, September 30, 1997 and June 30, 1998, respectively, excluding special
charges, distributions on securities of subsidiary trust and net securities
gains.
Salaries and benefits expense of $33.3 million was essentially unchanged from
the third quarter of last year and the second quarter of 1998. Third quarter
full-time equivalent employees continued to decrease as the recent acquisitions
of CFX and Atlantic were further assimilated.
Occupancy expense increased $421 thousand from the third quarter of 1997 and
decreased $214 thousand from the second quarter of 1998. The increased expense
from the third quarter of 1997 was to accommodate the expansion of operations as
the recent acquisitions were assimilated. The decrease in expense from the
second quarter of 1998 was primarily reflective of the divestiture of five
branches and the consolidation of eight branch offices, all related to the CFX
acquisition. The Company had 188 branch offices at September 30, 1998, as
compared to 191 branch offices at September 30, 1997 and 194 branch offices at
June 30, 1998.
Data processing expense increased $1.0 million from the third quarter of last
year and increased $1.2 million from the second quarter of 1998. The increases
were due to increased volumes as the Company continues to grow, the cost of
upgrades to a larger mainframe, new systems initiatives, and the costs of year
2000 testing.
Equipment expense decreased $719 thousand from the third quarter of last year
and decreased $125 thousand from the second quarter of 1998. The decrease in
equipment expenses was primarily due to cost savings related to the CFX
acquisition.
Advertising and marketing expense decreased $946 thousand and $291 thousand
from the third quarter of 1997 and second quarter of 1998, respectively. The
decreases in advertising and marketing expenses were primarily due to savings
resulting from the CFX acquisition.
Amortization of goodwill and other intangibles during the third quarter of 1998
increased $844 thousand from the third quarter of 1997 due to the goodwill
associated with the October 1997 purchase of Morse, Payson and Noyes and
Atlantic Bank.
There were no merger expenses in the third quarter of 1998. Merger expenses of
$34.5 million pre-tax were incurred during the second quarter of 1998 related to
the acquisition of CFX on April 10, 1998. Merger expenses were $24.0 million on
an after-tax basis and represent reorganization and restructuring costs net of
an $8.1 million after-tax gain from the sale of five CFX branches in connection
with the transaction. The after-tax reorganization and restructuring costs
consisted of costs relating to termination of employment contracts and severance
obligations ($7.8 million), professional fees ($6.8 million), writedown of
assets ($10.4 million), data processing/integration costs ($4.8 million) and
charges related to CFX Funding ($2.3 million). These expenses reduced the
Company's income during the quarter ended June 30, 1998 by approximately
$24.0 million or $0.27 per diluted share. Merger expenses in 1997 relate to
CFX's acquisition of Portsmouth Bankshares, Inc and Community Bankshares, Inc.
in August 1997.
19
20
The following table summarizes the activity in the merger and restructuring
accrual established for the CFX merger as of September 30, 1998.
Activity Through
September 30, 1998
------------------
(in thousands)
Establishment of Accrual $34,474
Cash payments 15,405
Non-cash items 15,394
-------
Balance at September 30, 1998 $ 3,675
=======
Other noninterest expenses for the third quarter of 1998 decreased by $52
thousand from the third quarter of 1997 and were $1.9 million lower than the
second quarter of 1998. The decline from the second quarter of 1998 was due
mainly to lower miscellaneous loan costs related to origination volume as well
as the reversal of litigation reserves in light of a legal settlement. See
Table 5 for details.
- -----------------------------------------------------------------------------------------------------
TABLE 5 - OTHER NON-INTEREST EXPENSES
1998 1998 1998 1997 1997 1997 1997
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Miscellaneous loan cost $ 1,735 $ 2,288 $ 1,116 $ 1,385 $ 1,266 $ 1,440 $ 1,113
Telephone 2,070 1,628 1,758 1,838 1,527 1,443 1,395
Postage and freight 1,274 1,583 1,574 1,367 1,198 1,336 1,373
Office supplies 1,309 1,594 1,518 1,690 1,305 1,360 1,323
Deposits and other assessments 611 629 663 510 579 584 493
Collection and carrying costs
of non-performing assets 628 846 668 893 508 228 391
Other 4,107 5,054 5,670 6,945 5,403 5,422 4,547
------- ------- ------- ------- ------- ------- -------
Total $11,734 $13,622 $12,967 $14,628 $11,786 $11,813 $10,635
======= ======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------
20
21
TAXES
The third quarter effective tax rate was 30% compared to 37% for the third
quarter of 1997 and 31% in the second quarter of 1998. The lower rate for 1998
was due primarily to the reorganization of certain corporate entities, increased
levels of bank-owned life insurance (BOLI) and lower state taxes.
IMPACT OF THE YEAR 2000 ISSUE
The Company's Year 2000 project is monitored by a Year 2000 senior management
committee. They provide direct oversight of the Year 2000 initiative and are
updated biweekly on the project's progress. The Company's Board of Directors
receives project updates on a quarterly basis.
The Company started its Year 2000 initiative in early 1997. It has completed its
assessment of Year 2000 issues, developed a plan, and arranged for the required
resources to complete the necessary remediation efforts. The Company will
utilize both internal and external resources to reprogram, or replace, and test
the software and hardware for Year 2000 modification.
The Company is in the process of remediating, testing, and returning to
production of all its critical applications. This activity continues to track in
accordance with the original plan and the Company expects to have substantially
completed the remediation of all critical applications by the end of 1998. The
Company established a separate test environment to accommodate its Year 2000
specific testing activity and the anticipated need to test with its customers
and other third parties during 1999.
The Company relies on several third party service providers for key business
processes. It continues to work closely with these companies to monitor the
progress of their Year 2000 efforts. The Company's Year 2000 project management
has contacted all critical service providers to discuss and assess their Year
2000 readiness. In addition, the Company is receiving written and verbal
verification from its significant third party service providers and vendors as
to their Year 2000 readiness.
The Company will begin Year 2000 testing with several of these key vendors in
the fourth quarter of 1998 and plans to complete testing with service providers
by the end of the first quarter of 1999. This activity continues to track in
line with the Year 2000 project plan. Validation of Year 2000 readiness of all
the Company's vendors continues with a particular focus on the readiness, where
possible, for vendors that have been identified as critical.
While the Company continues to discuss these matters with, obtain written
certification from and test the systems of such other companies as to the Year
2000 compliance, there can be no assurance that any potential impact associated
with incompatible systems after December 31, 1999 would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company had already established business continuity plans for its lines of
business. The Company is in the process of assessing these plans for the
possible impact of Year 2000 failures. It will encompass the primary risk areas
of software and hardware, security, communications, operations, transportation,
power and cash access. The Company will adjust its existing business continuity
plans where appropriate and possible for those scenarios that may have the most
severe impact on its operations. Areas of uncertainty include data
communications, network systems (external service provider systems), and third
party data file exchanges. This activity is expected to be substantially
complete in the first quarter of 1999.
The Company anticipates that the incremental cost of the Year 2000 project will
not exceed $2.6 million. The company has incurred $1.1 million of expenses in
1998.
21
22
FINANCIAL CONDITION
LOANS AND LEASES
Average loans of $7.1 billion during the third quarter of 1998 decreased 1.5%
from the second quarter of 1998 and increased 19% from the third quarter of
1997. The increase from the third quarter of 1997 was primarily a result of the
acquisition of Atlantic and internal growth in residential and consumer loans.
Loans as a percent of average earning assets were 80% at September 30, 1998
compared to 76% at September 30, 1997.
Average residential real estate loans (which includes mortgage loans held for
sale) of $3.0 billion grew 25% from the third quarter of last year. Excluding
$156 million of loans from the acquisition of Atlantic, residential real estate
loans increased 19% from the third quarter of 1997. Mortgage loans held for sale
amounted to $371 million at September 30, 1998 and $183 million at September 30,
1997.
Average commercial real estate loans of $1.4 billion increased 12% from the
third quarter of last year. Excluding $102.0 million of loans from the
acquisition of Atlantic, commercial real estate loans grew 4%. The average yield
on commercial real estate loans during the third quarter of 1998 was 9.55% as
compared to 9.64% in the third quarter of 1997, which is indicative of increased
competition and falling interest rates.
Average commercial loans of $845 million during the third quarter of 1998
increased 11% from the third quarter of 1997. Excluding the Atlantic
acquisition, commercial loans increased 7% from the third quarter of 1997. The
yield on commercial loans decreased to 9.40% in the third quarter of 1998 from
9.55% in the third quarter of 1997.
Average consumer loans of $1.8 billion during the third quarter of 1998
increased 19% from the third quarter of 1997. Excluding the Atlantic
acquisition, consumer loans increased 14%. The increase was primarily in
indirect automobile, student and home equity loans. Mobile home loans continue
to decline as the Company has emphasized other types of consumer loan products.
The average yield on consumer loans declined from 9.21% in the third quarter of
1997 to 8.96% in the third quarter of 1998.
SECURITIES AND OTHER EARNING ASSETS
The Company's securities portfolio averaged $1.7 billion during the third
quarter of 1998 and $1.9 billion in the third quarter of 1997 and consisted
primarily of U.S. Treasury securities and mortgage-backed securities, most of
which are seasoned 15 year agency securities. Other securities consisted of
collateralized mortgage obligations and asset-backed securities. Substantially
all securities are rated AAA or equivalently rated. The average yield on
securities was 6.24%, 6.29%, and 6.43% for the quarters ended September 30,
1998, June 30, 1998 and September 30, 1997, respectively. The decline in yields
was due to reinvestment of maturing securities at lower yields during a
declining interest rate environment. Securities available for sale are carried
at fair value and had a pre-tax unrealized gain of $10.3 million and $7.1
million at September 30 and June 30, 1998, respectively.
22
23
ASSET QUALITY
As shown in Table 6, nonperforming assets were $65.7 million at September 30,
1998, or 0.66% of total assets, compared to $66.8 million at June 30, 1998 and
$62.4 million at September 30, 1997. The increase from the third quarter of 1997
was primarily due to the Atlantic acquisition. The Company continues to monitor
asset quality with regular reviews of its portfolio in accordance with its
lending and credit policies.
The Company's residential loan portfolio accounted for 37% of the total loan
portfolio at September 30, 1998 as compared with 38% at September 30, 1997. The
Company's residential loans are generally secured by 1-4 family homes and have a
maximum loan to value ratio of 80%, unless they are protected by mortgage
insurance. At September 30, 1998, 0.53% of the Company's residential loans were
nonperforming, as compared with 0.60% at September 30, 1997.
The Company's commercial real estate loan portfolio accounted for 22% of the
total loan portfolio at September 30, 1998 and 1997. At September 30, 1998,
1.41% of the Company's commercial real estate loans were nonperforming, as
compared with 1.69% at September 30, 1997.
The Company's commercial business loan portfolio accounted for 13% of the total
loan portfolio at September 30, 1998 and 1997. Commercial business loans are not
concentrated in any particular industry, but reflect the broad-based economies
of Maine, New Hampshire and northern Massachusetts. The Company's commercial
business loans are generally to small and medium size businesses located within
its geographic market area. At September 30, 1998, 1.62% of the Company's
commercial business loans were non-performing, as compared with 1.36% at
September 30, 1997.
The Company's consumer loan portfolio accounted for 27% of the total loan
portfolio at September 30, 1998 and 26% at September 30, 1997. The Company has a
diversified consumer loan portfolio consisting of home equity, automobile,
mobile home, boat and recreational vehicles and education loans. At September
30, 1998, 0.49% of the Company's consumer loans were nonperforming, as compared
with 0.44% at September 30, 1997.
23
24
- -----------------------------------------------------------------------------------------------------------------
TABLE 6 - NONPERFORMING ASSETS
9/30/98 6/30/98 3/31/98 12/3197 9/30/97 6/30/97 3/31/97
------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Residential real estate loans:
Nonaccrual loans $12,844 $ 9,735 $12,688 $15,323 $13,259 $ 9,735 $10,540
Commercial real estate loans:
Nonaccrual loans 19,846 19,714 20,700 19,582 19,314 20,127 19,717
Troubled debt restructurings 200 1,044 2,178 2,304 2,285 2,520 2,637
------- ------- ------- ------- ------- ------- -------
Total 20,046 20,758 22,878 21,886 21,599 22,647 22,354
------- ------- ------- ------- ------- ------- -------
Commercial business loans and leases:
Nonaccrual loans 13,613 16,810 17,442 13,255 9,880 9,326 8,573
Troubled debt restructurings 70 71 207 114 118 193 199
------- ------- ------- ------- ------- ------- -------
Total 13,683 16,881 17,649 13,369 9,998 9,519 8,772
------- ------- ------- ------- ------- ------- -------
Consumer loans and leases:
Nonaccrual loans 8,578 8,075 9,771 8,473 7,020 6,966 6,737
------- ------- ------- ------- ------- ------- -------
Total nonperforming loans:
Nonaccrual loans 54,881 54,334 60,601 56,633 49,473 46,154 45,567
Troubled debt restructurings 270 1,115 2,385 2,418 2,403 2,713 2,836
------- ------- ------- ------- ------- ------- -------
Total 55,151 55,449 62,986 59,051 51,876 48,867 48,403
------- ------- ------- ------- ------- ------- -------
Other nonperforming assets:
Other real estate owned,
net of related reserves 6,756 6,949 5,453 7,158 8,671 12,380 10,408
In substance foreclosures, - - - - - - 1,964
net of allowance
Repossessions, net of
related reserves 3,786 4,380 4,158 3,218 1,837 2,843 199
------- ------- ------- ------- ------- ------- -------
Total other nonperforming assets 10,542 11,329 9,611 10,376 10,508 15,223 12,571
------- ------- ------- ------- ------- ------- -------
Total nonperforming assets $65,693 $66,778 $72,597 $69,427 $62,384 $64,090 $60,974
======= ======= ======= ======= ======= ======= =======
Accruing loans which are 90 days overdue $ 7,526 $ 9,969 $ 8,953 $ 8,355 $ 6,324 $ 5,866 $ 6,398
======= ======= ======= ======= ======= ======= =======
Total nonperforming loans as a
percentage of total loans (1) 0.86% 0.87% 0.98% 0.91% 0.89% 0.88% 0.91%
Total nonperforming assets as a
percentage of total assets 0.66% 0.68% 0.72% 0.72% 0.70% 0.77% 0.76%
Total nonperforming assets as a
percentage of total loans and leases
(1) and total other nonperforming assets 1.02% 1.04% 1.13% 1.06% 1.07% 1.15% 1.15%
- -----------------------------------------------------------------------------------------------------------------
(1) Total loans and leases are exclusive of loans held for sale.
PROVISION/ALLOWANCE FOR LOAN LOSSES
The Company provided $3.7 million for loan and lease losses in the third quarter
of 1998, compared to $1.4 million in the third quarter of 1997. As shown in
Table 7, net charge-offs for the third quarter of 1998 were $3.1 million, or 17
basis points of average loans outstanding, compared to $2.8 million, or 19 basis
points of average loans outstanding, for the third quarter of 1997.
At September 30, 1998, the allowance for loan and lease losses amounted to
$88.7 million or 1.38% of total portfolio loans and leases, as compared to 1.45%
at September 30, 1997. The ratio of the allowance for loan and lease losses to
nonperforming loans was 161% at September 30, 1998 and 163% at September 30,
1997. Management considers the allowance appropriate and adequate to cover
potential losses inherent in the loan portfolio based on the current economic
environment.
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Provisions for loan losses are attributable to management's ongoing evaluation
of the adequacy of the allowance for loan and lease losses, which includes,
among other procedures, consideration of the character and size of the loan
portfolio, monitoring trends in nonperforming loans, delinquent loans and net
charge-offs, as well as new loan originations and other asset quality factors.
Although management utilizes its best judgment in providing for possible losses,
there can be no assurance that the Company will not have to change its
provisions for loan and lease losses in subsequent periods. Changing economic
and business conditions in northern New England, fluctuations in local markets
for real estate, future changes in nonperforming asset trends, large upward
movements in market-based interest rates or other reasons could affect the
Company's future provisions for loans losses.
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TABLE 7 - ALLOWANCE FOR LOAN AND LEASE LOSSES
1998 1998 1998 1997 1997 1997 1997
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Average loans and leases
outstanding during
the period(1) $7,111,299 $7,216,802 $7,123,803 $6,671,494 $5,981,204 $5,581,958 $5,452,955
========== ========== ========== ========== ========== ========== ==========
Allowance at beginning
of period $ 88,075 $ 89,454 $ 89,983 $ 84,370 $ 85,736 $ 87,038 $ 87,820
Additions due to
acquisitions and purchases - - 7,361 - - -
Charge-offs:
Real estate mortgages 2,622 2,070 1,487 1,534 791 799 1,622
Commercial business
loans and leases 509 1,270 519 2,827 1,787 1,295 482
Consumer loans and leases 2,806 2,879 3,651 2,784 3,794 1,620 1,866
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans charged off 5,937 6,219 5,657 7,145 6,372 3,714 3,970
---------- ---------- ---------- ---------- ---------- ---------- ----------
Recoveries:
Real estate mortgages 1,584 1,004 743 2,420 1,598 557 1,248
Commercial business
loans and leases 545 476 709 958 1,454 574 721
Consumer loans and leases 683 377 678 856 541 251 277
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans recovered 2,812 1,857 2,130 4,234 3,593 1,382 2,246
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net charge-offs 3,125 4,362 3,527 2,911 2,779 2,332 1,724
Additions charged to
operating expenses 3,721 2,983 2,998 1,163 1,413 1,030 942
---------- ---------- ---------- ---------- ---------- ---------- ----------
Allowance at end of period $ 88,671 $ 88,075 $ 89,454 $ 89,983 $ 84,370 $ 85,736 $ 87,038
========== ========== ========== ========== ========== ========== ==========
Ratio of net charge-offs to
average loans and leases
outstanding during the
period-annualized(1) 0.17% 0.24% 0.20% 0.17% 0.19% 0.17% 0.13%
Ratio of allowance to total
loans and leases
at end of period(2) 1.38% 1.38% 1.40% 1.38% 1.45% 1.54% 1.64%
Ratio of allowance to
nonperforming loans at
end of period 161% 159% 142% 152% 163% 176% 182%
Ratio of net charge-offs as
a percent of average outstanding
loans-annualized(1):
Real estate mortgages 0.09% 0.09% 0.07% 0.09% 0.09% 0.03% 0.04%
Commercial business loans and
leases (0.02%) 0.37% (0.10%) 0.97% 0.17% 0.39% (0.14%)
Consumer loans and leases 0.47% 0.55% 0.66% 0.45% 0.85% 0.39% 0.47%
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Total loans and leases are exclusive of loans held for sale.
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DEPOSITS
Average deposits of $6.9 billion during the third quarter of 1998 increased 12%
from the third quarter of 1997 primarily as a result of the assumption of
$354.4 million of Atlantic deposits in the fourth quarter of 1997 and increased
brokered deposits, which averaged $280 million and $191 million during the three
months ended September 30, 1998 and 1997, respectively. The portfolio loan to
retail deposit ratio was 97% and 100% at September 30, 1998, and December 31,
1997, respectively.
Average transaction accounts (demand deposit, NOW and money market accounts) of
$2.7 billion during the third quarter of 1998 increased 22% from the third
quarter of 1997. The increase included the assumption of Atlantic's $98 million
of transaction deposits as well as significant internal growth in both
commercial and retail deposit balances. The average rates paid on NOW and money
market accounts during the third quarter of 1998 was 2.41%, as compared to 2.25%
in the third quarter of 1997 reflective of increased competition.
Average savings and time deposit balances, excluding brokered deposits, of
$3.9 billion during the third quarter of 1998 increased 4.9% from the third
quarter of 1997. The average rates paid on savings deposits decreased slightly
while time deposit rates remained relatively stable.
OTHER FUNDING SOURCES
The Company's primary source of funding, other than deposits, are securities
sold under repurchase agreements and advances from the Federal Home Loan Bank of
Boston ("FHLB"). Average FHLB borrowings for the third quarter of 1998 were $1.5
billion, which was relatively unchanged from the second quarter of 1998 as the
growth in earning assets was funded during the third quarter by increased
deposits. FHLB collateral consists primarily of first mortgage loans secured by
1 - 4 family properties, certain unencumbered securities and other qualified
assets. At September 30, 1998, the Company's FHLB borrowings amounted to
$1.6 billion and its additional borrowing capacity was $1.2 billion.
Average balances for securities sold under repurchase agreements were
$403 million and $356 million for the quarters ended September 30 and June 30,
1998, respectively. These borrowings are secured by mortgage-backed securities
and U.S. Government obligations.
LIQUIDITY
The Company does not have material unconsolidated liabilities or commitments
and, as a result, does not have material liquidity requirements on an
unconsolidated basis. For the Company's subsidiary banks, liquidity represents
the ability to meet both loan commitments and deposit withdrawals. Funds to meet
these needs generally can be obtained by converting liquid assets to cash or by
attracting new deposits or other sources of funding. Many factors affect a
bank's ability to meet liquidity needs, including variations in the markets
served, its asset-liability mix, its reputation and credit standing in the
market and general economic conditions.
In addition to traditional in-market deposit sources, the Company has many other
sources of liquidity, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and other non-relationship funding
sources, such as FHLB borrowings, senior or subordinated debt, commercial paper
and wholesale purchased funds. Management believes that the high proportion of
residential and installment consumer loans in the Company's loan portfolio
provides it with an additional amount of contingent liquidity through the
conventional securitization programs that exist today. Management believes that
the level of liquidity is sufficient to meet current and future funding
requirements.
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CAPITAL
At September 30, 1998, shareholders' equity amounted to $750.7 million. In
addition, through a subsidiary trust, the Company has issued $100 million of
Capital Securities which mature in 2027 and qualify as Tier 1 Capital. The
Company paid a $0.11 per share dividend during the third quarter of 1998.
In April 1998, the Company's Board of Directors declared a two-for-one split of
the issued and outstanding shares of the Company's common stock. In addition, in
June 1998, the Company completed the repurchase of one million shares of the
Company's common stock on the open market pursuant to the Board of Director's
approval. The Company no longer has in effect a share repurchase program.
Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 8. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.
The Company's banking subsidiaries are also subject to federal, and in certain
cases state, regulatory capital requirements. At September 30, 1998, each of the
Company's banking subsidiaries was deemed to be "well capitalized" under the
regulations of the applicable federal banking agency and in compliance with
applicable state capital requirements.
- --------------------------------------------------------------------------------------------------------------
TABLE 8 - REGULATORY CAPITAL REQUIREMENTS
For Capital
Adequacy
Actual Purposes Excess
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
As of September 30, 1998:
Total capital (to risk weighted assets) $797,694 12.96% $492,554 8.00% $305,140 4.96%
Tier 1 capital (to risk weighted assets)
720,588 11.70 246,277 4.00 474,311 7.70
Tier 1 leverage capital ratio (to average
assets) 720,588 7.51 388,812 4.00 336,776 3.51
As of December 31, 1997:
Total capital (to risk weighted assets) 762,391 12.65% 482,056 8.00% 280,335 4.65%
Tier 1 capital (to risk weighted assets)
687,421 11.41 241,028 4.00 446,393 7.41
Tier 1 leverage capital (to average assets) 687,421 7.51 366,124 4.00 321,297 3.51
- --------------------------------------------------------------------------------------------------------------
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INTEREST RATE RISK AND ASSET-LIABILITY MANAGEMENT
The Company's interest rate risk and asset and liability management are the
responsibility of the Company's Liquidity and Funds Management Committee, which
reports to the Liquidity and Funds Management Committee of the Board of
Directors and is comprised of members of the Company's senior management. The
Committee is actively involved in formulating the economic projections used by
the Company in its planning and budgeting process and establishes policies which
monitor and coordinate the Company's sources, uses and pricing of funds.
Interest-rate-risk, including mortgage prepayment risk, is by far the most
significant non-credit related risk to which the Company is exposed. Net
interest income, the Company's primary source of revenue, is affected by changes
in interest rates as well as fluctuations in the level and duration of assets
and liabilities on the Company's balance sheet.
Interest rate risk can be defined as the exposure of the Company's net interest
income or financial position to adverse movements in interest rates. In addition
to directly impacting net interest income, changes in the level of interest
rates can also affect, (i) the amount of loans originated and sold by the
institution, (ii) the ability of borrowers to repay adjustable or variable rate
loans, (iii) the average maturity of loans, which tend to increase when loan
rates are substantially higher than rates on existing loans and, conversely,
decrease when rates on existing loans are substantially lower than current loan
rates (due to refinancing of loans at lower rates), (iv) the value of the
institution's investment securities and mortgage loans and the resultant ability
to realize gains on the sale of such assets, (v) the carrying value of
investment securities classified as available for sale and the resultant
adjustments to shareholders' equity and (vi) the value of mortgage servicing
rights.
The primary objective of the Company's asset-liability management is to maximize
net interest income while maintaining acceptable levels of interest-rate
sensitivity. To accomplish this the Company monitors the Company's interest rate
sensitivity by use of a sophisticated simulation model which analyzes resulting
net interest income under various interest rate scenarios and anticipated levels
of business activity. Complicating management's efforts to measure interest rate
risk is the uncertainty of the maturity, repricing and/or runoff characteristics
of some of the Company's assets and liabilities.
To cope with these uncertainties, management gives careful attention to its
assumptions. For example, many of the Company's interest-bearing deposit
products (NOW accounts, savings and money market deposits) have no contractual
maturity and based on historical experience generally have limited sensitivity
to movements in market rates. Because management believes it has some control
with respect to the extent and timing of rates paid on non-maturity deposits,
certain assumptions based on historical experience are built into the model.
Another major assumption built into the model involves the right customers have
to prepay loans, often without penalty. The risk of prepayment tends to increase
when interest rates fall. Since future prepayment behavior of loan customers is
uncertain, the resultant interest rate sensitivity of loan assets cannot be
determined exactly. The Company utilizes market consensus prepayment assumptions
related to residential mortgages.
The Company uses simulation analysis to measure the sensitivity of net interest
income over a specified time period (generally 1 year) under various
interest-rate scenarios using various assumptions such as those discussed above.
The Company's policy on interest rate risk specifies that if interest rates were
to shift immediately up or down 300 basis points, estimated net interest income
should change by less than 10%. Management estimates, based on its simulation
model, that an instantaneous 300 basis point increase in interest rates at
September 30, 1998 would result in less than a 2% decrease in net interest
income over the next 12 months while a 300 basis point decrease in rates would
result in approximately a 5% decrease in net interest income over the next 12
months. The Company estimates that the exposure of the Company's net interest
income to gradual and/or modest changes in interest rates is relatively small.
For example, using the Company's "most likely" rate scenario, which reflects
only modest changes in interest rates for the next twelve months, the net
interest income of the Company fluctuates less than 1% compared to a flat
scenario. It should be emphasized that the foregoing results are highly
dependent on material assumptions such as those discussed above.
The Company, as a result of acquisitions, has acquired two interest rate floors
with a combined notional amount of $20 million, expiring from 1999-2000. The
Company has no direct or contingent liability as a result of these floors, which
were purchased to protect certain rate-sensitive assets against falling interest
rates.
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29
The Company has purchased interest rate floors tied to the CMT index to mitigate
the prepayment risk associated with mortgage servicing rights. The value of the
CMT floors is inversely related to movements in interest rates, while the value
of the servicing rights is positively related to movements in interest rates.
When rates decline, people are more likely to refinance their mortgages, which
reduces the value of the servicing rights to the Company. When rates increase,
the opposite is true. In the event that interest rates fall, any resulting
increase in the value of the CMT floors are intended to offset, in part, the
prospective impairment of the servicing rights. During the third quarter of
1998, the value of the CMT floor increased by $2.2 million and this gain was
recognized by the Company as part of Mortgage Banking Services income. At
September 30, 1998, the Company had $100 million in notional amount of CMT
floors which expire in 2003.
COMPLETED ACQUISITION
On April 10, 1998, the Company completed the acquisition of CFX Corporation. The
acquisition was effected by means of the merger of CFX with and into the
Company. Each share of common stock of CFX outstanding prior to the merger
(other than dissenting shares) was converted into the right to receive 0.667 of
a share of the Company's common stock, which approximated 32.8 million shares of
common stock. The merger was accounted for as a pooling-of-interests.
PENDING ACQUISITION
On July 20, 1998, the Company announced that it had reached a definitive
agreement to acquire SIS Bancorp, Inc. ("SIS"). Under the terms of the
agreement, the shareholders of SIS will receive 2.25 shares of the Company's
common stock plus cash in lieu of any fractional shares. Consummation of the
acquisition is subject to, among other things, all necessary regulatory
approvals and other customary conditions. The SIS acquisition is expected to be
completed by the end of 1998 and will be accounted for as a
pooling-of-interests.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits", which revises the required
disclosures for employee benefit plans. This Statement will become effective for
the Company's 1998 annual financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which sets accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This Statement is effective
for years beginning January 1, 2000.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of events or circumstances
after the date of such statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate Risk
and Asset - Liability Management" is incorporated herein by reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in
the ordinary course of business which in the aggregate are believed
by management to be immaterial to the financial condition and
results of operations of the Company.
Item 2. Changes in securities - not applicable.
Item 3. Defaults upon senior securities - not applicable.
Item 4. Submission of matters to a vote of security holders - not
applicable.
Item 5. Other Information - not applicable.
Item 6. Exhibits and reports on Form 8-K.
(a) (i). Exhibit 10 - 1996 Equity Incentive Plan, as amended
(ii). Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date November 16, 1998 By: /s/ William J. Ryan
------------------------------
William J. Ryan
Chairman, President and
Chief Executive Officer
Date November 16, 1998 By: /s/ Peter J. Verrill
------------------------------
Peter J. Verrill
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
31