-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, In5eVPTHB909FOKD8srnozq6uXMcmTGTFBJ7D7rWCk5iUZOIK+ss6n9w6At2OmvC cbaHGZTBoEIAGzNTGkpYBg== 0000829750-96-000020.txt : 19961118 0000829750-96-000020.hdr.sgml : 19961118 ACCESSION NUMBER: 0000829750-96-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES HERITAGE FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000829750 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 010137770 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16947 FILM NUMBER: 96662594 BUSINESS ADDRESS: STREET 1: ONE PORTLAND SQ STREET 2: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112 BUSINESS PHONE: 2077618500 MAIL ADDRESS: STREET 1: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112-9540 10-Q 1 FORM 10-Q 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, 1996 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 01-0137770 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 each of the Registrant's classes of common stock as of November 1, 1996 is: Common stock, par value $.01 per share 22,734,434 (Class) (Outstanding) INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Consolidated Balance Sheets - September 30, 1996 and December 31, 1995. Consolidated Statements of Income - Three months ended September 30, 1996 and 1995; nine months ended September 30, 1996 and 1995. Consolidated Statements of Changes in Shareholders' Equity - Nine months ended September 30, 1996 and 1995. Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and 1995. Notes to Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal proceedings. Item 2. Changes in securities. Item 3. Defaults upon senior securities. Item 4. Submission of matters to a vote of security holders. Item 5. Other information. Item 6. Exhibits and reports on Form 8-K. PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Number of Shares and Per Share Data) (Unaudited)
September 30, December 31, 1996 1995 Assets Cash and due from banks $ 211,162 $ 190,436 Federal funds sold 41,000 100,255 Securities available for sale, at market value 758,920 766,648 Loans held for sale, market value $91,450 and $71,872, respectively 89,747 70,979 Loans and leases: Residential real estate mortgages 1,030,897 798,076 Commercial real estate mortgages 813,559 797,686 Commercial business loans and leases 430,794 408,592 Consumer loans and leases 904,006 774,229 3,179,256 2,778,583 Less: Allowance for loan and lease losses 61,663 60,975 Net loans and leases 3,117,593 2,717,608 Bank premises and equipment 57,302 56,021 Goodwill and other intangibles 37,822 22,792 Mortgage servicing rights 26,710 20,309 Other real estate and repossessed assets owned 11,246 14,232 Deferred income taxes 32,194 32,972 Interest and dividends receivable 29,799 30,726 Other assets 42,749 35,148 $4,456,244 $4,058,126 Liabilities and Shareholders' Equity Deposits: Regular savings $ 595,353 $ 557,896 Money market access accounts 503,681 490,575 Certificates of deposit (including certificates of $100 or more of $173,646 and $116,472, respectively) 1,441,327 1,363,095 NOW accounts 357,435 351,481 Demand deposits 487,409 434,091 Total deposits 3,385,205 3,197,138 Federal funds purchased 16,814 1,500 Securities sold under repurchase agreements 182,114 180,957 Borrowings from Federal Home Loan Bank of Boston 413,938 252,446 Other borrowings 19,838 22,029 Deferred income taxes 11,222 12,577 Other liabilities 50,102 36,554 Total liabilities 4,079,233 3,703,201 Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, none issued) -0- -0- Common stock (par value $0.01 per share, 100,000,000 shares and 30,000,000 shares authorized, respectively, 25,596,550 shares issued) 256 256 Paid-in capital 224,267 224,267 Retained earnings 159,100 134,444 Net unrealized gain (loss) on securities available for sale (704) 3,763 Treasury stock at cost (396,655 shares and 524,062 shares, respectively) (5,908) (7,805) Total shareholders' equity 377,011 354,925 $4,456,244 $4,058,126 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Number of Shares and Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Interest and dividend income: Interest on loans and leases (1) $72,715 $65,548 $211,937 $187,165 Interest on mortgage-backed investments 4,706 3,262 12,213 9,420 Interest on other investments 7,606 10,103 24,804 27,609 Dividends on equity securities 479 485 1,391 1,474 Total interest and dividend income 85,506 79,398 250,345 225,668 Interest expense: Interest on deposits 29,477 28,949 88,833 78,514 Interest on borrowed funds 8,085 6,395 21,598 20,526 Total interest expense 37,562 35,344 110,431 99,040 Net interest income 47,944 44,054 139,914 126,628 Provision for loan losses -0- 1,080 900 3,150 Net interest income after provision for loan losses 47,944 42,974 139,014 123,478 Noninterest income: Customer services 3,986 3,174 10,902 8,851 Mortgage banking services 3,315 3,113 9,850 7,959 Trust and investment advisory services 1,930 1,474 5,454 4,279 Loan related services 549 590 1,455 1,442 Net securities gains (losses) (1) 42 503 (107) Other noninterest income 25 33 305 662 9,804 8,426 28,469 23,086 Noninterest expenses: Salaries and employee benefits 18,388 17,721 54,019 49,998 Occupancy 2,923 2,552 9,322 7,855 Data processing 3,126 2,242 8,895 6,379 Equipment 2,204 1,786 6,195 4,899 Advertising and marketing 901 1,091 2,900 3,440 Deposit and other assessments 2,270 165 2,939 3,876 Collection and carrying costs of nonperforming assets 502 757 1,384 1,981 Merger expenses -0- 658 5,105 1,258 Other noninterest expenses 5,942 4,938 19,665 15,373 36,256 31,910 110,424 95,059 Income before income tax 21,492 19,490 57,059 51,505 Income tax expense 7,300 6,701 20,118 17,445 Net income $14,192 $12,789 $ 36,941 $ 34,060 Weighted average shares outstanding 25,191,163 25,009,519 25,163,246 24,573,433 Earnings per share $ 0.56 $ 0.51 $ 1.47 $ 1.39 (1) Interest on loans and leases includes interest on loans held for sale. See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Thousands, Except Number of Shares and Per Share Data) (Unaudited)
Net Par Paid in Retained Unrealized Treasury Value Capital Earnings Gain (loss) Stock Total Balances at December 31, 1994 $256 $224,267 $ 99,955 $(9,079) $(10,960) $304,439 Treasury stock purchased (646,600 shares at an average price of $12.84) -- -- -- -- (8,301) (8,301) Treasury stock issued for employee benefit plans (105,227 shares at an average price of $10.66) -- -- (387) -- 1,508 1,121 Reissuance of treasury stock pursuant to acquisition (751,600 shares at $15.00) -- -- 1,710 -- 9,564 11,274 Change in unrealized gains (losses) on securities available for sale, net of tax -- -- -- 9,844 -- 9,844 Net income -- -- 34,060 -- -- 34,060 Cash dividends $0.37 -- -- (8,034) -- -- (8,034) Balances at September 30, 1995 $256 $224,267 $127,304 $ 765 $ (8,189) $344,403 Balances at December 31, 1995 $256 $224,267 $134,444 $ 3,763 $ (7,805) $354,925 Treasury stock issued for employee benefit plans (127,407 shares at an average price of $13.43) -- -- (186) -- 1,897 1,711 Change in unrealized gains (losses) on securities available for sale, net of tax -- -- -- (4,467) -- (4,467) Net income -- -- 36,941 -- -- 36,941 Cash dividends $0.48 -- -- (12,099) -- -- (12,099) Balances at September 30, 1996 $256 $224,267 $159,100 $ (704) $ (5,908) $377,011 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended September 30, 1996 1995 Cash flows from operating activities: Net income $ 36,941 $ 34,060 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 900 3,150 Provision for depreciation 5,442 4,712 Provision for losses and writedowns (credits) of other real estate owned -0- (983) Amortization of goodwill and other intangibles 3,200 1,614 Amortization of servicing rights 3,001 2,802 Net decrease in net deferred tax assets 1,816 3,481 Net losses realized from sales of other real estate owned 243 838 Net (gains) realized from sales of securities and consumer loans (503) (98) Net (gains) realized from sales of loans held for sale (a component of mortgage banking services) (5,150) (3,052) Proceeds from sales of loans held for sale 740,748 353,569 Residential loans originated and purchased for sale (754,366) (403,575) Net increase in interest and dividends receivable and other assets (6,674) (3,121) Net increase (decrease) in other liabilities 13,548 (3,060) Net cash provided (used) by operating activities $ 39,146 $ (9,663) Cash flows from investing activities: Maturities of investment securities $ -0- $ 124,266 Purchases of investment securities -0- (113,368) Proceeds from sales of securities available for sale 31,385 11,066 Proceeds from maturities and principal repayments of securities available for sale 356,961 75,640 Purchases of securities available for sale (386,975) (150,752) Net increase in loans and leases (401,724) (124,422) Purchase of mortgage servicing rights (11,984) (5,097) Sale of mortgage servicing rights 2,582 -0- Premiums paid on deposits purchased (18,230) (4,290) Net additions to premises and equipment (6,723) (10,684) Proceeds from sales of other real estate owned 3,670 10,826 Net increase decrease in repossessed assets owned (88) 167 Net cash used by investing activities $ (431,126) $ (186,648) See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (In Thousands) (Unaudited)
Nine Months Ended September 30, 1996 1995 Cash flows from financing activities: Net increase in deposits $ 188,067 $ 278,477 Net increase in securities sold under repurchase agreements 1,157 19,526 Advances from Federal Home Loan Bank of Boston borrowings 401,998 274,498 Payments on Federal Home Loan Bank of Boston borrowings (240,506) (361,000) Net increase (decrease) in other borrowings (2,191) 13,809 Sale of treasury stock 1,711 1,121 Purchase of treasury stock -0- (8,301) Issuance of treasury stock for acquisition -0- 11,274 Cash dividends paid to shareholders (12,099) (8,034) Net cash provided by financing activities $ 338,137 $ 221,370 Increase (decrease) in cash and cash equivalents $ (53,843) $ 25,059 Cash and cash equivalents at beginning of period 289,191 220,103 Cash and cash equivalents at end of period $ 235,348 $ 245,162 Supplemental disclosures of information: Interest paid on deposits and borrowings $ 108,623 $ 97,136 Income taxes paid 16,334 9,855 Income tax refunds 580 2,900 Noncash investing transactions: Loans transferred to other real estate owned 2,599 9,761 Loans originated to finance the sales of other real estate owned 1,720 4,801 Increases (decreases) resulting from SFAS No. 115: Securities available for sale 6,860 15,449 Deferred income taxes - liabilities 2,393 5,605 Net unrealized gain on securities available for sale 4,467 9,844 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. 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 three and nine months ended September 30, 1996 are not necessarily indicative of results that may be expected for any other interim period or the entire year ending December 31, 1996. Certain amounts in prior periods have been reclassified to conform to the current presentation. On April 2, 1996, Peoples Heritage Financial Group, Inc. (the "Company") acquired Bank of New Hampshire Corporation ("BNHC"). The acquisition was accounted for as a pooling of interests and, accordingly, the financial information for all prior periods presented has been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented. Subsequent to the acquisition of BNHC, the Company merged its other New Hampshire-based banking subsidiary - The First National Bank of Portsmouth ("Portsmouth") - into Bank of New Hampshire ("BNH") under the pooling-of-interests method of accounting. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of." The implementation of this Statement did not have a material effect on the Company's results of operations or financial condition. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue to follow the accounting under Accounting Principal Board ("APB") Opinion No. 25. SFAS No. 123 requires companies which elect to continue to follow APB Opinion No. 25 to disclose in the notes to their financial statements the pro forma net income and earnings per share as if the value based method established under SFAS 123 had been applied. PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I - ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. General Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank holding company which is incorporated under the laws of the State of Maine and headquartered in Portland, Maine. The Company's direct subsidiaries, both of which are wholly-owned, are Peoples Heritage Bank (the "Bank") and Bank of New Hampshire Corporation ("BNHC"), which wholly owns the Bank of New Hampshire ("BNH"). The Bank conducts business from its headquarters in Portland, Maine and 61 additional offices located throughout the State of Maine. At September 30, 1996, the Bank had total assets of $2.7 billion and total shareholder's equity of $174.4 million. BNH conducts business from its headquarters in Manchester, New Hampshire and 43 additional offices located throughout the State of New Hampshire. At September 30, 1996, BNH had total assets of $1.8 billion and total shareholder's equity of $133.8 million. On February 16, 1996, five branch offices and $160.9 million in related deposits located in New Hampshire were acquired by Portsmouth from Fleet Bank NH (the "Branch Acquisition"). In addition to various assets related to the acquired branches, approximately $216.4 million of loans were purchased in connection with this transaction, which consisted primarily of $178.6 million of single-family residential loans. On July 1, 1995, Bankcore, Inc. ("Bankcore"), the New Hampshire-based holding company for North Conway Bank, was acquired and North Conway Bank was merged into Portsmouth. 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. As a result of the transaction, $3.4 million of goodwill was created, which is being amortized over 15 years. On June 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. Five of the seven branches purchased were merged with and into existing branches of the Bank. The purchase resulted in the transfer of $46.1 million in deposits and $17.1 million in loans. Results of Operations The Company reported net income of $14.2 million and $36.9 million for the three and nine months ended September 30, 1996, respectively, compared with $12.8 million and $34.1 million for the comparable period in 1995. The results for the three and nine month periods in 1996 were impacted by a one-time after-tax Savings Association Insurance Fund ("SAIF") assessment of $1.2 million. The results for the nine month period ended September 30, 1996 were also impacted by after-tax merger related expenses associated with BNHC of $3.9 million. Excluding both SAIF assessment expenses and the BNHC merger related expenses, the Company would have reported net income of $15.4 million and $42.1 million for the three and nine months ended September 30, 1996, respectively. The improved results in 1996 were primarily attributable to the improvement in net interest income as a result of an increase in earning assets and increased noninterest income, which were offset in part by higher noninterest expenses. Net Interest Income The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. For purposes of the 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 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. Information is based on average daily balances during the indicated periods.
Three Months Ended Three Months Ended September 30, 1996 September 30, 1995 Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,117,953 $22,105 7.91% $ 880,267 $17,941 8.15% Commercial real estate mortgages 820,851 20,127 9.75 769,090 19,643 10.13 Commercial loans and leases 428,292 10,236 9.51 393,401 9,954 10.04 Consumer loans and leases 867,533 20,422 9.36 756,285 18,200 9.55 Total loans and leases 3,234,629 72,890 8.96 2,799,043 65,738 9.32 Investment securities (3) 799,857 12,668 6.30 813,607 12,671 6.18 Federal funds sold 16,129 186 4.59 88,397 1,300 5.83 Total earning assets 4,050,615 85,744 8.42 3,701,047 79,709 8.54 Nonearning assets 343,924 251,927 Total assets $4,394,539 $3,952,974 Interest-bearing deposits: Regular savings 599,793 4,089 2.71 586,688 4,195 2.84 NOW accounts 357,741 1,086 1.21 339,118 1,201 1.41 Money market access accounts 502,154 4,521 3.58 442,830 4,285 3.84 Certificates of deposit 1,403,091 19,781 5.50 1,351,530 19,268 5.66 Total interest-bearing deposits 2,889,779 29,477 4.06 2,720,166 28,949 4.22 Borrowed funds 602,873 8,085 5.34 446,055 6,397 5.69 Total interest bearing liabilities 3,492,652 37,562 4.28 3,166,221 35,346 4.43 Demand deposits 463,251 400,987 Other liabilities (3) 65,805 50,847 Shareholders' equity (3) 372,831 334,919 Total liabilities and shareholders' equity $4,394,539 $3,952,974 Net earning assets $ 557,963 $ 534,826 Net interest income (fully-taxable equivalent) 48,182 44,363 Less: fully-taxable equivalent adjustments (238) (309) Net interest income $47,944 44,054 Net interest rate spread (fully-taxable equivalent) 4.14% 4.11% Net interest margin (fully-taxable equivalent) 4.73% 4.76% (1) Annualized. (2) Loans and leases includes loans available for sale. (3) Excludes effect of unrealized gains or losses on investment securities.
Nine Months Ended Nine Months Ended September 30, 1996 September 30, 1995 Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,067,562 $ 63,836 7.97% $ 838,858 $ 51,418 8.17% Commercial real estate mortgages 819,274 60,058 9.79 753,468 55,854 9.91 Commercial loans and leases 419,256 30,333 9.66 363,017 27,393 10.09 Consumer loans and leases 826,286 58,179 9.41 742,871 53,022 9.54 Total loans and leases 3,132,378 212,406 9.06 2,698,214 187,687 9.30 Investment securities (3) 776,392 36,707 6.32 763,157 35,204 6.17 Federal funds sold 50,019 1,872 5.00 80,869 3,608 5.97 Total earning assets 3,958,789 250,985 8.47 3,542,240 226,499 8.55 Nonearning assets 281,821 254,297 Total assets $4,240,610 $3,796,537 Interest-bearing deposits: Regular savings 590,270 12,082 2.73 596,117 12,706 2.85 NOW accounts 352,814 3,263 1.24 322,742 3,486 1.44 Money market access accounts 503,374 13,621 3.61 390,736 10,642 3.64 Certificates of deposit 1,433,043 59,867 5.58 1,279,669 51,680 5.40 Total interest-bearing deposits 2,879,501 88,833 4.12 2,589,264 78,514 4.05 Borrowed funds 546,887 21,598 5.28 478,781 20,526 5.73 Total interest bearing liabilities 3,426,388 110,431 4.31 3,068,045 99,040 4.32 Demand deposits 427,250 358,441 Other liabilities (3) 21,897 47,496 Shareholders' equity (3) 365,075 322,555 Total liabilities and shareholders' equity $4,240,610 $3,796,537 Net earning assets $ 532,401 $ 474,195 Net interest income (fully-taxable equivalent) 140,554 127,459 Less: fully-taxable equivalent adjustments (640) (528) Net interest income $139,914 $126,628 Net interest rate spread (fully-taxable equivalent) 4.16% 4.23% Net interest margin (fully-taxable equivalent) 4.74% 4.81% (1) Annualized. (2) Loans and leases includes loans available for sale. (3) Excludes effect of unrealized gains or losses on investment securities.
Net interest income on a fully-taxable equivalent basis increased by $3.8 million and $13.1 million for the three and nine months ended September 30, 1996, respectively, compared with the same periods in 1995. The increase was attributable to an increase in the level of net earning assets, which was offset somewhat by a decrease in the Company's net interest margin. Interest income earned on loans and leases increased by $7.1 million and $24.7 million, or 10.9% and 13.2%, for the three and nine months ended September 30, 1996, respectively, as compared with the same respective periods in 1995. These increases in interest income on loans were attributable to loan growth from purchases and acquisitions as well as internal loan growth, which were offset somewhat by a decrease in the weighted average yield on loans. The weighted average yield on loans decreased in 1996 due to an increase in the percentage of lower yielding residential mortgage loans relative to other loan portfolios, as well as increased competition for both consumer and commercial loans. Interest expense on deposits increased by $528 thousand and $10.3 million, or 1.8% and 13.1%, for the three and nine months ended September 30, 1996, respectively, as compared with the same respective periods in 1995. These increases in interest expense paid on deposits were primarily attributable to deposit growth from purchases and acquisitions during the second half of 1995 and the first quarter of 1996. Total average interest-bearing deposits increased by $169.6 million and $290.2 million, or 6.2% and 11.2%, for the three and nine months ended September 30, 1996, respectively, as compared with the same respective periods in 1995. The weighted average rate paid on interest-bearing deposits decreased from 4.22% for the three months ended September 30, 1995 to 4.06% for the three months ended September 30, 1996. The weighted average rate paid on interest-bearing deposits increased from 4.05% for the nine months ended September 30, 1995 to 4.12% for the nine months ended September 30, 1996. Interest expense on borrowed funds increased by $1.7 million and $1.1 million, or 26.4% and 5.2%, for the three and nine months ended September 30, 1996, respectively, as compared with the same respective periods in 1995. The increases were primarily attributable to an increase in the average outstanding balances of borrowed funds, which was offset in part by a decrease in the weighted average rate paid. The outstanding average balances on borrowed funds increased by $156.8 million and $68.1 million, or 35.2% and 14.2%, respectively, as compared with the same respective periods in 1995. The weighted average rate paid decreased from 5.69% and 5.73% for the three and nine months ended September 30, 1995, respectively, to 5.34% and 5.28% for the same respective periods in 1996. The Company's net interest rate spread increased from 4.11% for the three months ended September 30, 1995 to 4.14% for the three months ended September 30, 1996. The increase was attributable to a decrease in the yield on interest-bearing liabilities and an increase in the yield on investment securities, which were offset in part by a decrease in the yield on loans and leases. For the nine months ended September 30, 1996, the Company's net interest rate spread decreased to 4.16% as compared with 4.23% for the nine months ended September 30, 1995. This decrease was attributable to increased rates on interest- bearing deposits and a decreased rate on loans and leases, which were offset in part by higher yields on investment securities and lower rates on borrowed funds. The net interest margin decreased from 4.76% for the three months ended September 30, 1995 to 4.73% for the three months ended September 30, 1996. This decrease was primarily attributable to an increase in the percentage of interest-bearing liabilities as a percentage of earning assets, which was offset in part by an increase in the net interest rate spread. The net interest margin decreased from 4.81% for the nine months ended September 30, 1995 to 4.74% for the nine months ended September 30, 1996. This decrease was primarily attributable to the decreased net interest rate spread. Provision for Loan Losses The provision for loan losses of $-0- and $900 thousand for the three and nine months ended September 30, 1996 decreased $1.1 million and $2.3 million compared to the same respective periods in 1995. The lower provisions resulted from management's ongoing evaluation of the adequacy of the allowance for loan losses after taking into account recent trends in nonperforming loans, delinquent loans and net loan chargeoffs, as well as other asset quality factors. See "Financial Condition - Nonperforming Assets" below. Although management utilizes its judgment in providing for possible losses, there can be no assurance that the Company will not have to increase its provisions for loan and lease losses in the future as a result of changing markets for real estate and economic conditions in the Company's primary market area, future changes in nonperforming assets or for other reasons, which would affect the Company's results of operations. 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 changes to the allowance for loan and lease losses based on their judgments about information available to them at the time of the examination. Noninterest Income Noninterest income increased $1.4 million, or 16.4%, for the three months ended September 30, 1996 compared with the same period in 1995, and increased $5.4 million, or 23.3%, for the nine months ended September 30, 1996 compared with the same period in 1995. The more significant changes to the components of noninterest income are more fully described below. The following table sets forth certain information relating to mortgage banking services income for the periods indicated:
At or for the At or for the Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (In Thousands) Residential mortgages serviced for investors at end of period $2,953,213 $2,476,389 $2,953,213 $2,476,389 Residential mortgage sales income $ 2,068 $ 1,477 $ 5,151 $ 3,027 Residential mortgage servicing income 1,247 1,636 4,699 4,932 Total $ 3,315 $ 3,113 $ 9,850 $ 7,959
The Company's portfolio of residential mortgages serviced for investors increased by $476.8 million, net of amortization and prepayments, or 19.3%, from September 30, 1995 to September 30, 1996. The Company's portfolio of mortgages serviced for others continues to increase as a result of its strategy to originate and sell primarily fixed rate 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 $589 thousand, or 39.9%, and $2.1 million, or 70.2%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. The increase in residential sales income reflects the lower interest rate environment that existed during most of the nine month period ended September 30, 1996 as compared with the same period in 1995, which resulted in an increase in direct originations by the subsidiary banks of the Company as well as an increase in the volume of loans originated indirectly through the Bank's correspondent network. Residential real estate mortgage originations from correspondent lenders increased $31.1 million, or 22.6%, and $199.0 million, or 85.4%, for the three and nine months ended September 30, 1996, respectively, compared with the same periods in 1995. Residential mortgage servicing income decreased $389 thousand and $233 thousand, or 23.8% and 4.7% for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. During the three months ended September 30, 1996 the Company reclassified the amortization expense of the CMT floors (discussed below) to residential mortgage servicing income from other non- interest expenses, which resulted in a $356 thousand decrease in mortgage servicing income in the three and nine months ended September 30, 1996 as compared with the same respective periods in 1995. In addition, the Company accelerated the amortization of the carrying value of the CMT floors by $200 thousand during the three months ended September 30, 1996 to reflect the underlying market value of the CMT floors. Excluding the CMT floor amortization expense recorded in 1996 as an offset to mortgage servicing income, mortgage servicing income would have been $1.8 million and $5.3 million for the three and nine months ended September 30, 1996, respectively, or $167 thousand and $323 thousand greater than the same respective periods in 1995. The core increases in mortgage servicing income relate to the increase in the size of the portfolio of residential mortgages serviced for others. Residential mortgage servicing income has lagged increases in the portfolio of mortgages serviced for investors 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. In order to mitigate the prepayment risk associated with mortgage servicing rights and protect economic value, the Company has purchased constant maturity treasury floors ("CMT"). The value of a CMT is inversely related to movements in interest rates. As interest rates decline, the value of a CMT floor 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 on mortgage loan prepayment speeds. The value of mortgage servicing rights generally increases as market interest rates increase and decreases as market interest rates decrease. While 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 CMTs are intended to offset, in part, the prospective impairment to mortgage servicing rights. The CMT floors are included in other assets on the Company's balance sheet at September 30, 1996 at amortized cost of $406 thousand. The following table shows the composition of net gains (losses ) on the sales of securities for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (In Thousands) Securities losses $ (1) $ 42 $ (10) $(188) Securities gains -0- -0- 513 81 (1) 42 $ 503 $(107)
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 from such activities. Customer services income increased $812 thousand, or 25.6%, and $2.1 million, or 23.2%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 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 increased volume associated with the Branch Acquisition, the purchase of Bankcore and the purchase of all of the branches of Fleet Bank of Maine located in Aroostook County. Trust and investment advisory services income increased $456 thousand, or 30.9%, and $1.2 million, or 27.5%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. The increase in trust and investment advisory income in 1996 as compared with 1995 reflects primarily the growth of the trust department at the Bank, 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. Noninterest Expenses Total noninterest expenses increased $4.3 million, or 13.6%, and $15.4 million, or 16.2%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. Excluding merger expenses and the one-time assessment of all SAIF-insured deposits to recapitalize the SAIF, total noninterest expenses increased $3.2 million, or 9.2%, and $9.7 million, or 10.3%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. Salaries and employee benefits increased $667 thousand, or 3.8%, and $4.0 million, or 8.0%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. These increases were principally the result of the employment of additional employees in connection with the expansion of the retail franchise, increased mortgage banking activities and trust services, as well as normal salary and wage increases. Occupancy expenses increased $371 thousand, or 14.5%, and $1.5 million, or 18.7%, for the three and nine months ended September 30, 1996, respectively, compared with the same periods in 1995. These increases were primarily attributable to the expansion of the Company's branch network, which resulted in higher rent, depreciation, utilities and maintenance expenses. Data processing expenses increased $884 thousand, or 39.4%, and $2.5 million, or 39.4%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. The increases in data processing expenses were primarily attributable to 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. In addition to the above, the increase in transaction accounts, a larger retail delivery system, the expanded mortgage banking operation and expanded operational capabilities to support new product offerings and services are the other factors accounting for the increase in data processing costs in 1996 as compared with 1995. Effective July 1, 1996, the computer systems and other back office functions of BNH were merged with those of the Bank. Equipment expenses increased $418 thousand, or 23.4%, and $1.3 million, or 26.5%, for the three and nine months ended September 30, 1996, respectively, as compared with the same periods in 1995. The increases in equipment expenses were primarily attributable to increased investment in alternative delivery systems, office automation equipment and a larger branch network. Deposit and other assessment expenses of $2.3 million and $2.9 million for the three and nine months ended September 30, 1996, respectively, include a Congressionally mandated one-time SAIF assessment of all SAIF-insured deposits, which amounted to $1.9 million in the case of the Company. Excluding the one-time SAIF assessment, deposit and other assessment expenses increased $253 thousand for the three months ended September 30, 1996 as compared with the same period in 1995 and decreased by $2.8 million for the nine months ended September 30, 1996 as compared with the same period in 1995. Included in the three month period ended September 30, 1995 was a refund of pre-paid deposit premiums due to a retroactive adjustment of the Bank Insurance Fund ("BIF") deposit premium rate. The decrease in deposit premium expense for the nine month period ended September 30, 1996 (excluding the one-time SAIF assessment) was directly attributable to the reduction in deposit insurance premiums paid by the Bank and BNH to the BIF from $0.23 per $100.00 of deposits to $0.04 per $100.00 of deposits in June, 1995 and then to the minimum annual amount of $2,000 starting January, 1996. During this period the Company continued to pay $0.23 per $100.00 of deposits for the approximately 11% of its deposits that are insured by the SAIF. Merger expenses of $5.1 million for the nine month period in 1996 related to the acquisition of BNHC by the Company. Significant BNHC related merger expenses included employee severance costs, professional fees, branch consolidation costs and operational consolidation costs. Merger expenses during the three and nine month periods in 1995 related to the acquisition of Bankcore by the Company. Other categories of noninterest expenses include collection and carrying costs of nonperforming assets, which decreased $597 thousand for the nine months ended September 30, 1996, as compared to the same period in 1995, and advertising and marketing expenses, which decreased $540 thousand for the nine months ended September 30, 1996, as compared with the same period in 1995. Other noninterest expenses increased $1.0 million, or 20.3%, and $4.3 million, or 27.9%, for the three and nine months ended September 30, 1996, respectively, compared with the same respective periods in 1995. The following table sets forth information relating to other noninterest expenses during the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (In Thousands) Telephone $ 921 $ 601 $ 2,436 $ 1,702 Office supplies 755 666 2,109 1,900 Amortization of deposit premiums 742 93 1,900 198 Postage and freight 625 605 2,113 1,863 Amortization of goodwill 508 507 1,524 1,416 Other 2,391 2,466 9,583 8,294 $ 5,942 $ 4,938 $19,665 $15,373
The increase in amortization of deposit premiums was attributable to the Branch Acquisition. Income Tax Expense Income tax expense was $7.3 million and $6.7 million for the three months ended September 30, 1996 and 1995, respectively, which amounted to effective income tax rates of 34.0% and 34.4%, respectively. Income tax expense was $20.1 million and $17.4 million for the nine months ended September 30, 1996 and 1995, respectively, which amounted to effective income tax rates of 35.3% and 33.9%, respectively. Financial Condition Set forth below is a discussion of the material changes in the Company's financial condition from December 31, 1995 to September 30, 1996. Securities Available for Sale Securities available for sale decreased $7.7 million, or 1.0%. Securities available for sale are reported at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity (net of related taxes). At September 30, 1996, $704 thousand of net unrealized loss (net of related taxes) was included in shareholders' equity. A summary of the carrying values of securities available for sale follows:
September 30, December 31, 1996 1995 (In Thousands) U.S. Government obligations and obligations of U.S. Government agencies and corporations $408,514 $526,576 Other bonds and notes 29,953 16,531 Mortgage-backed securities 288,925 195,823 Total debt securities 727,392 738,930 Equity securities 31,528 27,718 Total securities available for sale $758,920 $766,648
Loans Held for Sale Loans held for sale, all of which were residential mortgage loans, increased $18.8 million. The outstanding dollar amount of loans held for sale can vary greatly from period to period as a result of mortgage origination levels, timing and delivery of loan sales, changes in market interest rates and asset/liability management strategies. The change in loans held for sale from December 31, 1995 to September 30, 1996 was primarily attributable to timing and delivery of loan sales. Loans and Leases Total loans and leases held for investment increased $400.7 million, or 14.4%, for the nine months ended September 30, 1996. The increase was primarily attributable to $216.4 million of loans acquired through the Branch Acquisition, as well as internal loan growth in the consumer and residential loan portfolios. Residential real estate mortgages increased $232.8 million, or 29.2%, for the nine months ended September 30, 1996. This increase was primarily attributable to $177.6 million of residential mortgage loans that were acquired in conjunction with the Branch Acquisition. In addition, the increase reflects a decision by the Company to retain a portfolio of 15 year fixed rate residential mortgages and certain adjustable rate residential mortgages. While the Company generally originates fixed rate residential mortgages for sale in the secondary market, the Company will, from time to time, retain a portion of originated fixed rate residential mortgages in its loan portfolio. Commercial real estate mortgages increased $15.9 million, or 2.0%, for the nine months ended September 30, 1996. This increase was attributable to $23.0 million of commercial mortgage loans that were acquired in conjunction with the Branch Acquisition. 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. Commercial business loans and leases increased $22.2 million, or 5.4%, for the nine months ended September 30, 1996. This increase was consistent with the Company's strategy to focus on lending to sound small and medium-sized business customers within its geographic market. The Company acquired $5.9 million in commercial business loans in conjunction with the Branch Acquisition. Consumer loans increased $129.8 million, or 16.8%, for the nine months ended September 30, 1996. The growth in consumer loans was concentrated in home equity loans, automobile loans and educational loans. The Company acquired $11.6 million in consumer loans in conjunction with the Branch Acquisition. Nonperforming Assets The following table sets forth information regarding nonperforming assets at the dates indicated:
September 30, June 30, March 31, December 31, 1996 1996 1996 1995 (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $ 3,901 $ 5,032 $ 6,089 $ 5,713 Accruing loans which are 90 days overdue 3,528 2,238 3,800 3,728 Total 7,429 7,270 9,889 9,441 Commercial real estate mortgages: Nonaccrual loans 16,233 15,628 16,917 17,029 Accruing loans which are 90 days overdue -0- -0- 128 -0- Troubled debt restructurings 1,691 1,878 1,793 3,186 Total 17,924 17,506 18,838 20,215 Commercial business loans and leases: Nonaccrual loans 7,688 7,567 5,631 6,735 Accruing loans which are 90 days overdue -0- -0- 111 25 Troubled debt restructurings 614 1,114 1,349 1,859 Total 8,302 8,681 7,091 8,619 Consumer loans and leases: Nonaccrual loans 4,505 4,368 4,099 3,586 Accruing loans which are 90 days overdue 1,595 602 1,051 659 Total 6,100 4,970 5,150 4,245 Total nonperforming loans: Nonaccrual loans 32,327 32,595 32,736 33,063 Accruing loans which are 90 days overdue 5,123 2,840 5,090 4,412 Troubled debt restructurings 2,305 2,992 3,142 5,045 Total 39,755 38,427 40,968 42,520 Other nonperforming assets: Other real estate owned, net of related reserves 9,674 10,033 11,089 12,679 Repossessions, net of related reserves 1,572 1,316 1,865 1,553 Total other nonperforming assets 11,246 11,349 12,954 14,232 Total nonperforming assets $51,001 $49,776 $53,922 $56,752 Total nonperforming loans as a percentage of total loans (1) 1.25% 1.23% 1.36% 1.53% Total nonperforming assets as a percentage of total assets 1.14% 1.14% 1.27% 1.40% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 1.60% 1.59% 1.67% 2.03% (1) Exclusive of loans held for sale.
It is the policy of the Company to place all commercial real estate loans and commercial business loans 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 are placed on nonaccrual and nonperforming status generally when they are 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 nonperforming status loans currently performing in accordance with their terms but which in management's judgment are likely to present future principal and/or interest repayment problems and thus ultimately could be classified as nonperforming. At September 30, 1996, $8.1 million of commercial real estate and commercial business loans and leases, or 30.7%, of total nonperforming commercial real estate and commercial business loans, were on nonaccrual status and thus disclosed as nonperforming loans even though they were less than 90 days past due. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These statements require changes in both the disclosure and impairment measurement of nonperforming loans. Certain loans which had previously been reported as nonperforming and certain in- substance foreclosures are currently required to be disclosed as impaired loans. At adoption, the Company reclassified $2.2 million of in-substance foreclosures and related reserves of $96 thousand to loans and the allowance for loan losses, respectively. Prior year balances were not reclassified, as management deemed the amounts to be immaterial. Restructured accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure, these loans may be removed from impaired loan status provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. Restructured, accruing loans entered into prior to the adoption of these statements are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms. Commercial business and commercial real estate loans are considered impaired when it is probable that the Company will not be able to collect all amounts due according to the original contractual terms of the loan agreement. The amount of impairment for 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, in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. The Company recognizes income on impaired loans also classified as nonperforming on a cash basis when the ability to collect the principal balance is not in doubt. At September 30, 1996, total impaired loans were $27.9 million, of which $20.9 million had related allowances of $5.2 million. During the three months ended September 30, 1996, the income recognized related to impaired loans was $381 thousand and the average balance of outstanding impaired loans was $27.6 million. During the nine months ended September 30, 1996, the income recognized related to impaired loans was $1.1 million and the average balance of outstanding impaired loans was $28.4 million. 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, it is recorded at the lower of carrying or fair value less estimated selling costs at the date of acquisition or classification and any writedown resulting therefrom is charged to the allowance for loan losses. Interest accrual ceases on the date of acquisition and all costs incurred from that date in maintaining the property and subsequent reductions in value are expensed. Nonperforming assets at September 30, 1996 included $9.7 million of other real estate owned and $1.6 million of repossessed assets, in each case net of related reserves. Potential Nonperforming Assets At September 30, 1996, the Company had classified a total of $78.9 million of commercial real estate loans and commercial business loans and leases as substandard or lower on its risk rating system, as compared to $91.1 million at December 31, 1995. Included in this amount was the Company's $26.2 million of nonperforming commercial business and commercial real estate loans. In the opinion of management, the remaining $52.7 million of commercial real estate loans and commercial business loans and leases classified as substandard or lower at September 30, 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 any previously established specific reserves which have resulted in chargeoffs, 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 losses. Allowance for Loan Losses The following table sets forth information regarding activity in the allowance for loan losses for the three and nine months ended September 30, 1996 and 1995, as well as certain related ratios:
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (Dollars in Thousands) Average loans and leases outstanding during the period $3,234,629 $2,799,043 $3,132,378 $2,698,214 Allowance at beginning of period $ 63,654 $ 58,383 $ 60,975 $ 63,675 Chargeoffs: Residential real estate loans 495 924 2,230 2,927 Commercial real estate loans 1,658 1,355 3,705 7,905 Commercial business loans and leases 249 383 1,782 1,619 Consumer loans and leases 722 722 2,417 1,961 Total loans and leases charged off 3,124 3,384 10,134 14,412 Recoveries: Residential real estate loans 93 155 410 330 Commercial real estate loans 591 1,705 3,820 3,583 Commercial business loans and leases 245 527 756 1,755 Consumer loans and leases 204 127 626 512 Total loans and leases recovered 1,133 2,514 5,612 6,180 Net chargeoffs 1,991 870 4,522 8,232 Additions charged to operating expenses -0- 1,080 900 3,150 Additions due to purchase acquisition -0- 2,314 4,310 2,314 Allowance at end of period $ 61,663 $ 60,907 $ 61,663 $ 60,907 Ratio of net chargeoffs to average loans and leases outstanding during the period - annualized (1) .25% 0.12% 0.19% 0.41% Ratio of allowance to total loans and leases at end of period (2) 1.94% 2.21% 1.94% 2.21% Ratio of allowance to nonperforming loans and leases at end of period 155.1% 126.3% 155.1% 126.3% (1) Average loans and leases include portfolio loans and loans held for sale. (2) Excludes loans held for sale.
The following table sets forth the manner in which the Company's total allowance for loan losses was allocated by type of loan at the dates indicated:
September 30, 1996 December 31, 1995 Allowance as Allowance as % of Total % of Total Loans by Loans by Amount Category Amount Category (Dollars in Thousands) Residential real estate loans $ 7,407 0.72% $10,118 1.27% Commercial real estate loans 33,566 4.13 31,673 3.97 Commercial business loans and leases 11,427 2.65 9,491 2.32 Consumer loans and leases 9,263 1.02 9,693 1.25 $61,663 1.94 $60,975 2.19
Deposits and Borrowings Total deposits increased by $188.1 million, or 5.9%, during the nine months ended September 30, 1996. This increase was principally attributable to the $160.9 million of deposits that were acquired in the Branch Acquisition, as described above. The increase in deposits resulted from an increase in certificates of deposit of $78.2 million, or 5.7%, an increase in regular savings of $37.5 million, or 6.7%, an increase in money market accounts of $13.1 million, or 2.7%, and a combined increase in NOW and demand deposits of $59.3 million, or 7.5%. The changes in deposit balances principally reflect the impact of the Branch Acquisition completed during February, 1996, as well as the Company's current strategy to emphasize relationship banking, cash management services and core deposits. Total borrowings increased by $175.8 million, or 38.5%, for the nine months ended September 30, 1996. The increase was primarily attributable to a $161.5 million increase in Federal Home Loan Bank borrowings. The increase in Federal Home Loan Bank borrowings was attributable to the Branch Acquisition and loan growth. At September 30, 1996, the Company estimates its additional available borrowing capacity from the Federal Home Loan Bank to be approximately $548 million. Shareholders' Equity Total shareholders' equity increased by $22.1 million, or 6.2%, during the nine months ended September 30, 1996. This increase was the result of $36.9 million of net income and $1.7 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 $12.1 million and a $4.5 million reduction in the net unrealized gain (net of tax effect) in the market value of securities available for sale. Regulatory Capital Requirements At September 30, 1996, the Company and each of its banking subsidiaries were in compliance with all applicable regulatory capital requirements. The following table sets forth the minimum regulatory capital requirements and the actual capital ratios of the Company and its banking subsidiaries at September 30, 1996:
Actual Required The The Minimums Bank BNH Company Risk-based capital ratios: Tier I 4% 9.59% 10.88% 12.14% Total 8 10.85 12.14 13.40 Tier I leverage capital ratios 3 (1) 6.61 6.31 7.84
(1) The federal banking agencies have indicated that the most highly-rated institutions which meet certain criteria will be subject to a 3% requirement and all other institutions will be required to maintain an additional 1% to 2% of capital. The federal banking agencies have not specified any requirements in this regard with respect to the Company and its subsidiaries. Liquidity and Capital Resources The Company's liquidity decreased during the nine months ended September 30, 1996. Net cash, short term and marketable assets amounted to $743.0 million, or 21.4% of net deposits and short term liabilities at September 30, 1996. This compares to a ratio of 26.5% at December 31, 1995. Liquidity is considered adequate by the Company to meet anticipated cash needs in the foreseeable future. Asset and Liability Management The Company analyzes the future impact on net interest income as a result of changing interest rates based on budget projections, including anticipated business activity, anticipated changes in interest rates and other variables which are adjusted periodically to reflect the interest rate environment and other factors. Based on this analysis and the information and assumptions in effect at September 30, 1996, management of the Company estimates that a 100 to 200 basis point gradual change in interest rates would not significantly affect the Company's annualized net interest income. This assessment is primarily based on management's ability to exert some control with respect to the extent and timing of the change in rates paid on the Company's interest-bearing liabilities and, therefore, to manage the effects somewhat of a negative or positive gap position on net interest income. The Company's methods for analyzing the effects of changes in interest rates on its operations incorporate assumptions concerning, among other things, the amortization and prepayment of assets and liabilities. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. Prospective Acquisition of Family Bancorp The Company, Peoples Heritage Merger Corp. ("PHMC"), a newly-formed, wholly-owned subsidiary of the Company, and Family Bancorp ("Family") have entered into an Agreement and Plan of Merger, dated as of May 30, 1996, which provides, among other things, for (i) the merger of Family with and into PHMC (the "Family Merger") and (ii) the conversion of each share of Family Common Stock outstanding immediately prior to the Family Merger (other than any dissenting shares under Massachusetts law and certain shares held by the Company) into the right to receive 1.26 shares of Company Common Stock, subject to possible adjustment under certain circumstances, plus cash in lieu of any fractional share interest. At September 30, 1996, there were 4,309,709 shares of Family Common Stock outstanding. At September 30, 1996, Family had total assets of $917.8 million and shareholders' equity of $72.9 million. Consummation of the Family Merger is subject to, among other things, the receipt of all necessary regulatory and shareholder approvals and other customary conditions. All necessary regulatory and shareholder approvals have been obtained and, as a result of legislation enacted into law on September 30, 1996, the Company will not become a savings and loan holding company subject to regulation by the Office of Thrift Supervision as a result of its acquisition of Family. The acquisition of Family by the Company is expected to be completed by year end 1996. Issuer Tender Offer The Company purchased, pursuant to the terms of an issuer tender offer completed on October 7, 1996, 2,500,000 shares of Common Stock at $24.00 per share. The 2,500,000 shares represent approximately 9.9% of the Company's then outstanding Common Stock. The tender offer was conducted by the Company in connection with the proposed acquisition of Family. See "Prospective Acquisition of Family Bancorp" above. 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 - none. Item 5. Other Information. Item 6. Exhibits and reports on Form 8-K. (a) July 2, 1996, the Company filed a report on Form 8-K regarding (i) supplemental financial information, including restated supplemental consolidated financial statements, as of December 31, 1995 and 1994 and for the three years ended December 31, 1995 and (ii) supplemental financial information, including restated supplemental consolidated financial statements, as of March 31, 1996 and for the three months ended March 31, 1996 and 1995, in each case giving retroactive effect to the acquisition of BNHC for all periods presented. (b) August 23, 1996, the Company filed a report on Form 8-K regarding the approval by shareholders of both the Company and Family of the prospective acquisition of Family by the Company. 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 13, 1996 By: William J. Ryan Chairman, President and Chief Executive Officer Date November 13, 1996 By: Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer) 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. /s/ William J. Ryan Date November 13, 1996 By: William J. Ryan Chairman, President and Chief Executive Officer /s/ Peter J. Verrill Date November 13, 1996 By: Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer) EX-27 2
9 9-MOS DEC-31-1996 SEP-30-1996 211,162 0 41,000 0 758,920 0 0 3,179,256 61,663 4,456,244 3,385,205 632,704 61,324 0 256 0 0 376,755 4,456,244 211,937 37,017 1,391 250,345 88,833 21,598 139,914 900 503 110,424 57,059 57,059 0 0 36,941 1.47 1.47 4.74 32,327 5,123 2,305 0 60,975 10,134 5,612 61,663 61,663 0 0
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