-----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, IIZNvGrIUBuyPfpmaidmg9HgS19mObziv1he5ZnsjLg+C87O0AS1nduAupRmXUTo 4T8T/2YtnYT4hUmLftJAfg== 0000829750-96-000015.txt : 19960814 0000829750-96-000015.hdr.sgml : 19960814 ACCESSION NUMBER: 0000829750-96-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 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: 96610890 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 10-Q 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 June 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 August 1, 1996 is: Common stock, par value $.01 per share 25,190,748 (Class) (Outstanding) INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Consolidated Balance Sheets - June 30, 1996 and December 31, 1995. Consolidated Statements of Income - Three months ended June 30, 1996 and 1995; six months ended June 30, 1996 and 1995. Consolidated Statements of Changes in Shareholders' Equity - Six months ended June 30, 1996 and 1995. Consolidated Statements of Cash Flows - Six months ended June 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)
June 30, December 31, 1996 1995 Assets Cash and due from banks $ 234,481 $ 190,436 Federal funds sold 32,500 100,255 Securities available for sale, at market value 757,453 766,648 Loans held for sale, market value $66,190 and $71,872, respectively 65,957 70,979 Loans and leases: Residential real estate mortgages 1,022,595 798,076 Commercial real estate mortgages 820,871 797,686 Commercial business loans and leases 432,446 408,592 Consumer loans and leases 839,177 774,229 3,115,089 2,778,583 Less: Allowance for loan and lease losses 63,654 60,975 Net loans and leases 3,051,435 2,717,608 Bank premises and equipment 57,357 56,021 Goodwill and other intangibles 38,849 22,792 Mortgage servicing rights 26,326 20,309 Other real estate and repossessed assets owned 11,349 14,232 Deferred income taxes 32,194 32,972 Interest and dividends receivable 29,635 30,726 Other assets 34,173 35,148 $4,371,709 $4,058,126 Liabilities and Shareholders' Equity Deposits: Regular savings $ 598,386 $ 557,896 Money market access accounts 508,919 490,575 Certificates of deposit (including certificates of $100 or more of $158,657 and $116,472, respectively) 1,443,205 1,363,095 NOW accounts 366,664 351,481 Demand deposits 465,909 434,091 Total deposits 3,383,083 3,197,138 Federal funds purchased -0- 1,500 Securities sold under repurchase agreements 149,417 180,957 Borrowings from Federal Home Loan Bank of Boston 401,442 252,446 Other borrowings 20,465 22,029 Deferred income taxes 10,934 12,577 Other liabilities 40,108 36,554 Total liabilities 4,005,449 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, 25,596,220 shares issued) 256 256 Paid-in capital 224,268 224,268 Retained earnings 149,175 134,443 Net unrealized gain (loss) on securities available for sale (1,159) 3,763 Treasury stock at cost (421,666 shares and 524,062 shares, respectively) (6,280) (7,805) Total shareholders' equity 366,260 354,925 $4,371,709 $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 Six Months Ended June 30, June 30, 1996 1995 1996 1995 Interest and dividend income: Interest on loans and leases (1) $71,292 $61,580 $139,222 $121,617 Interest on mortgage-backed investments 4,011 3,060 7,507 6,158 Interest on other investments 8,294 9,364 17,198 17,506 Dividends on equity securities 488 433 912 989 Total interest and dividend income 84,085 74,437 164,839 146,270 Interest expense: Interest on deposits 29,788 25,977 59,356 49,565 Interest on borrowed funds 7,466 6,992 13,513 14,131 Total interest expense 37,254 32,969 72,869 63,696 Net interest income 46,831 41,468 91,970 82,574 Provision for loan losses 450 1,040 900 2,070 Net interest income after provision for loan losses 46,381 40,428 91,070 80,504 Noninterest income: Customer services 3,647 2,960 6,916 5,677 Mortgage banking services 3,171 2,628 6,535 4,846 Trust and investment advisory services 1,880 1,456 3,524 2,805 Loan related services 464 469 906 852 Net securities gains (losses) -0- (54) 504 (149) Other noninterest income 34 104 280 629 9,196 7,563 18,665 14,660 Noninterest expenses: Salaries and employee benefits 17,393 15,858 35,631 32,277 Occupancy 3,102 2,646 6,399 5,303 Data processing 2,971 2,093 5,769 4,137 Equipment 1,983 1,635 3,991 3,113 Advertising and marketing 1,005 1,173 1,999 2,349 Deposit and other assessments 324 1,832 669 3,711 Collection and carrying costs of nonperforming assets 378 410 882 1,224 Merger expenses 4,652 300 5,105 600 Other noninterest expenses 7,778 5,059 13,723 10,435 39,586 31,006 74,168 63,149 Income before income tax 15,991 16,985 35,567 32,015 Applicable income tax 5,848 5,775 12,818 10,744 Net income $10,143 $11,210 $ 22,749 $ 21,271 Weighted average shares outstanding 25,169,568 24,220,365 25,149,123 24,348,783 Earnings per share $ 0.40 $ 0.46 $ 0.90 $ 0.87 (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)
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Six Months Ended June 30, 1996 1995 Cash flows from operating activities: Net income $ 22,749 $ 21,271 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 900 2,070 Provision for depreciation 3,466 3,153 Provision for losses and writedowns (credits) of other real estate owned -0- (983) Amortization of goodwill and other intangibles 2,174 1,014 Amortization of servicing rights 1,928 1,383 Net decrease in net deferred tax assets 1,426 3,746 Net losses realized from sales of other real estate owned 60 706 Net (gains) losses realized from sales of securities and consumer loans (505) 149 Net (gains) realized from sales of loans held for sale (a component of mortgage banking services) (3,082) (1,714) Proceeds from sales of loans held for sale 496,517 193,629 Residential loans originated and purchased for sale (488,413) (182,464) Net decrease (increase) in interest and dividends receivable and other assets 2,065 (56) Net increase (decrease) in other liabilities 3,554 (4,652) Net cash provided by operating activities $ 42,839 $ 37,252 Cash flows from investing activities: Maturities of investment securities $ -0- $ 84,915 Purchases of investment securities -0- (84,441) Proceeds from sales of securities available for sale 31,144 11,703 Proceeds from maturities and principal repayments of securities available for sale 265,360 55,538 Purchases of securities available for sale (294,017) (90,284) Net increase in loans and leases (335,410) (27,873) Purchase of mortgage servicing rights (7,945) (2,115) Premiums paid on deposits purchased (18,231) (838) Net additions to premises and equipment (4,802) (5,162) Proceeds from sales of other real estate owned 2,938 3,700 Net decrease in repossessed assets owned 569 2,796 Net cash used by investing activities $ (360,394) $ (52,061) See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (In Thousands) (Unaudited)
Six Months Ended June 30, 1996 1995 Cash flows from financing activities: Net increase in deposits $ 185,945 $ 122,823 Net increase (decrease) in securities sold under repurchase agreements (31,540) 18,422 Advances from Federal Home Loan Bank of Boston borrowings 258,998 101,000 Payments on Federal Home Loan Bank of Boston borrowings (110,002) (188,000) Net increase (decrease) in other borrowings (1,564) 6,454 Sale of treasury stock 1,283 555 Purchase of treasury stock -0- (8,301) Cash dividends paid to shareholders (7,775) (5,125) Net cash provided by financing activities $ 295,345 $ 47,828 Increase (decrease) in cash and cash equivalents $ (22,210) $ 33,019 Cash and cash equivalents at beginning of period 289,191 220,103 Cash and cash equivalents at end of period $ 266,981 $ 253,122 Supplemental disclosures of information: Interest paid on deposits and borrowings $ 70,962 $ 62,844 Income taxes paid 9,692 7,839 Income tax refunds 1,108 18 Noncash investing transactions: Loans transferred to other real estate owned 1,728 7,716 Loans originated to finance the sales of other real estate owned 1,044 4,414 Increases (decreases) resulting from SFAS No. 115: Securities available for sale (7,213) 15,369 Deferred income taxes - liabilities (2,291) 5,586 Net unrealized gain (loss) on securities available for sale (4,922) 9,783 See accompanying Notes to Consolidated Financial Statements. PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 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 six months ended June 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 Savings Bank (the "Bank") and Bank of New Hampshire Corporation ("BNHC"), which wholly 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 June 30, 1996, the Bank had total assets of $2.6 billion and total shareholder's equity of $189.1 million. BNH conducts business from its headquarters in Manchester, New Hampshire and 44 additional offices located throughout the State of New Hampshire. At June 30, 1996, BNH had total assets of $1.8 billion and total shareholder's equity of $143.8 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. A deposit premium of $18.2 million was paid which is being amortized over seven years. 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 $10.1 million and $22.7 million for the three and six months ended June 30, 1996, respectively, compared with $11.2 million and $21.3 million for the comparable periods in 1995. The results for both the three and six month periods in 1996 have been impacted by $4.7 and $5.1 million, respectively, of merger related expenses associated with BNHC. Excluding merger related expenses, the Company would have reported net income of $13.6 million and $26.7 million, respectively, for the three and six months ended June 30, 1996. The improved results in 1996 (exclusive of the BNHC merger related expenses) 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.
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods.
Three Months Ended June 30, Three Months Ended June 30, 1996 1995 Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,128,536 $22,272 7.89% $ 815,552 $16,682 8.18% Commercial real estate mortgages 828,358 19,876 9.65 741,533 18,322 9.91 Commercial loans and leases 423,868 10,137 9.62 357,242 9,158 10.28 Consumer loans and leases 821,400 19,152 9.38 730,371 17,593 9.66 Total loans and leases 3,202,162 71,437 8.97 2,644,698 61,755 9.37 Investment securities (3) 794,510 12,418 6.29 762,229 11,697 6.16 Federal funds sold 39,622 452 4.59 85,292 1,294 6.09 Total earning assets 4,036,294 84,307 8.40 3,492,219 74,746 8.58 Nonearning assets 354,128 244,580 Total assets $4,390,422 $3,736,799 Interest-bearing deposits: Regular savings 595,325 4,014 2.71 578,189 4,100 2.84 NOW accounts 357,015 1,071 1.21 316,251 1,126 1.43 Money market access accounts 507,782 4,461 3.53 384,710 3,601 3.75 Certificates of deposit 1,462,168 20,242 5.57 1,259,158 17,150 5.46 Total interest-bearing deposits 2,922,290 29,788 4.10 2,538,308 25,977 4.10 Borrowed funds 584,974 7,466 5.13 490,981 6,992 5.71 Total interest bearing liabilities 3,507,264 37,254 4.27 3,029,289 32,969 4.37 Demand deposits 423,588 345,981 Other liabilities (3) 94,342 43,725 Shareholders' equity (3) 365,228 317,804 Total liabilities and shareholders' equity $4,390,422 $3,736,799 Net earning assets $ 529,030 $ 462,930 Net interest income (fully-taxable equivalent) 47,053 41,777 Less: fully-taxable equivalent adjustments (222) (309) Net interest income $46,831 41,468 Net interest rate spread (fully-taxable equivalent) 4.13% 4.22% Net interest margin (fully-taxable equivalent) 4.69% 4.80% (1) Annualized. (2) Loans and leases includes loans available for sale. (3) Excludes effect of unrealized gains or losses on investment securities.
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods.
Six Months Ended June 30, Six Months Ended June 30, 1996 1995 Average Yield/ Average Yield/(1) Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,042,090 $41,730 8.01% $ 817,811 $33,480 8.19% Commercial real estate mortgages 818,477 39,931 9.81 744,527 36,211 9.81 Commercial loans and leases 414,689 20,084 9.74 349,590 17,453 10.07 Consumer loans and leases 805,434 37,756 9.43 736,052 34,820 9.54 Total loans and leases 3,080,690 139,501 9.11 2,647,980 121,964 9.29 Investment securities (3) 764,530 24,050 6.33 741,839 22,525 6.12 Federal funds sold 67,630 1,686 5.01 77,641 2,309 6.00 Total earning assets 3,912,850 165,237 8.49 3,467,460 146,798 8.54 Nonearning assets 324,308 249,243 Total assets $4,237,158 $3,716,703 Interest-bearing deposits: Regular savings 585,500 7,993 2.75 600,916 8,511 2.86 NOW accounts 350,323 2,177 1.25 314,418 2,286 1.47 Money market access accounts 506,072 9,100 3.62 364,257 6,356 3.52 Certificates of deposit 1,434,536 40,086 5.62 1,243,143 32,412 5.26 Total interest-bearing deposits 2,876,431 59,356 4.15 2,522,734 49,565 3.96 Borrowed funds 519,066 13,513 5.24 496,125 14,131 5.74 Total interest bearing liabilities 3,395,497 72,869 4.32 3,018,859 63,696 4.25 Demand deposits 409,363 337,875 Other liabilities (3) 71,380 44,307 Shareholders' equity (3) 360,918 315,662 Total liabilities and shareholders' equity $4,237,158 $3,716,703 Net earning assets $ 517,353 $ 448,601 Net interest income (fully-taxable equivalent) 92,368 83,102 Less: fully-taxable equivalent adjustments (398) (528) Net interest income $91,970 82,574 Net interest rate spread (fully-taxable equivalent) 4.18% 4.28% Net interest margin (fully-taxable equivalent) 4.75% 4.83% (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 $5.4 million and $9.4 million for the three and six months ended June 30, 1996, respectively, compared with the same periods in 1995. The increase was attributable to an increase in the level of interest-earning assets, which was offset somewhat by a decrease in the Company's net interest rate spread. Interest income earned on loans and leases increased by $9.7 million and $17.5 million, or 15.7% and 14.4%, for the three and six months ended June 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 $3.8 million and $9.8 million, or 14.7% and 19.8%, for the three and six months ended June 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 $384.0 million and $353.7 million, or 15.1% and 14.0%, for the three and six months ended June 30, 1996, respectively, as compared with the same respective periods in 1995. The weighted average rate paid on interest-bearing deposits was 4.10% for both three month periods ended June 30, 1996 and 1995. The weighted average rate paid on interest-bearing deposits increased from 3.96% for the six months ended June 30, 1995 to 4.15% for the six months ended June 30, 1996. Interest expense on borrowed funds increased $474 thousand, or 6.8%, for the three months ended June 30, 1996, as compared with the same period in 1995. The increase was 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 $94.0 million, or 19.1%, for the three months ended June 30, 1996, as compared with the same period in 1995. The weighted average rate paid decreased from 5.71% for the three months ended June 30, 1995 to 5.13% for the three months ended June 30, 1996. In contrast, interest expense on borrowed funds decreased $618 thousand, or 4.4%, for the six months ended June 30, 1996, as compared with the same period in 1995. The decrease was attributable to a decrease in the weighted average rate paid from 5.74% for the six months ended June 30, 1995 to 5.24% for the six months ended June 30, 1996, which was offset somewhat by a $22.9 million, or 4.6%, increase in the average outstanding balances of borrowed funds during the same periods. The Company's net interest rate spread decreased from 4.22% for the three months ended June 30, 1995 to 4.13% for the three months ended June 30, 1996. This decrease was attributable to a decreased yield on loans and leases, which was offset in part by a decrease in rates paid on interest- bearing liabilities and an increase in the yield on investment securities. For the six months ended June 30, 1996, the Company's net interest rate spread decreased to 4.18% as compared with 4.28% for the six months ended June 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 4.80% for the three months ended June 30, 1995 to 4.69% for the three months ended June 30, 1996 and decreased from 4.83% for the six months ended June 30, 1995 to 4.75% for the six months ended June 30, 1996. These decreases were attributable to the decreased net interest rate spread, which was offset in part by the higher level of net earning assets during the three and six month periods ended June 30, 1996, as compared with the same periods in 1995. Provision for Loan Losses. The provision for loan losses of $450 thousand and $900 thousand for the three and six months ended June 30, 1996 decreased $590 thousand and $1.2 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 best 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 $1.6 million, or 21.6%, for the three months ended June 30, 1996 compared with the same period in 1995, and increased $4.0 million, or 27.3%, for the six months ended June 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 Six Months Ended June 30, June 30, 1996 1995 1996 1995 (In Thousands) Residential mortgages serviced for investors at end of period $2,819,545 $2,414,091 $2,819,545 $2,414,091 Residential mortgage sales income $ 1,550 $ 1,108 $ 3,082 $ 1,550 Residential mortgage servicing income 1,621 1,520 3,453 3,296 Total $ 3,171 $ 2,628 $ 6,535 $ 4,846
The Company's portfolio of residential mortgages serviced for investors increased by $405.5 million, net of amortization and prepayments, or 16.8%, from June 30, 1995 to June 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. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," which changes the method of accounting for certain mortgage banking activities. The Company elected early adoption of SFAS No. 122 in the second quarter of 1995 and consequently the impact of the adoption is not included in the results of operations of the Company which were reported for the three months ended March 31, 1995. A total of $273 thousand in originated mortgage servicing rights were attributable to mortgage banking sales activities for the three months ended March 31, 1995 but were reported in the results of operations for the three months ended June 30, 1995. Residential mortgage sales income increased $442 thousand, or 39.9%, and $1.5 million, or 98.8%, for the three and six months ended June 30, 1996, respectively, as compared with the same periods in 1995. Excluding the $273 thousand of originated mortgage servicing rights attributable to mortgage sales activities during the three months ended March 31, 1995, the comparable increase in mortgage sales income during the three months ended June 30, 1996 was $715 thousand, or 85.6%. The increase in residential mortgage sales income reflects the lower interest rate environment during the three and six months ended June 30, 1996, as compared with the same period in 1995, which increased the level of both refinancing and purchase mortgages as well as an increase in the volume of loans originated directly by the Bank and indirectly through the Bank's correspondent network. Residential real estate mortgage originations from correspondent lenders increased $115.5 million, or 158.8%, and $276.2 million, or 292.3%, for the three and six months ended June 30, 1996, respectively, compared with the same periods in 1995. Residential mortgage servicing income increased $101 thousand, or 6.6%, and $157 thousand, or 4.8%, for the three and six months ended June 30, 1996, respectively, as compared with the same periods in 1995. The 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 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 June 30, 1996 at amortized cost of $736 thousand. The following table shows the composition of net gains (losses ) on the sales of securities for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 (In Thousands) Securities losses $ -0- $ (54) $ (9) $(188) Securities gains -0- -0- 513 39 -0- (54) $ 504 $(149)
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 $687 thousand, or 23.2%, and $1.2 million, or 21.8%, for the three and six months ended June 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 expansion of the retail branch franchise from 100 branches at June 30, 1995 to 107 at June 30, 1996. Trust and investment advisory services income increased $424 thousand, or 29.1%, and $719 thousand, or 25.6%, for the three and six months ended June 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 $8.6 million, or 27.7%, and $11.0 million, or 17.4%, for the three and six months ended June 30, 1996, respectively, as compared with the same periods in 1995. Excluding merger expenses, total noninterest expenses increased $4.2 million, or 13.7%, and $6.5 million, or 10.4%, for the three and six months ended June 30, 1996, respectively, as compared with the same periods in 1995. Salaries and employee benefits increased $1.5 million, or 9.7%, and $3.4 million, or 10.4%, for the three and six months ended June 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 $456 thousand, or 17.2%, and $1.1 million, or 20.7%, for the three and six months ended June 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 $878 thousand, or 41.9%, and $1.6 million, or 39.5%, for the three and six months ended June 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 $348 thousand, or 21.3%, and $878 thousand, or 28.2%, for the three and six months ended June 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 decreased $1.5 million, or 82.3%, and $3.0 million, or 82.0%, for the three and six months ended June 30, 1996, respectively, as compared with the same periods in 1995. The decrease is directly attributable to the reduction in deposit insurance premiums paid by the Bank and BNH to the Bank Insurance Fund ("BIF") from $0.23 per $100.00 of deposits to $0.04 per $100 of deposits in June, 1995 and then to the minimum annual amount of $2,000 starting January, 1996. Approximately 89% of the Company's deposits are insured by BIF. The Company continues to pay $0.23 per $100 of deposits for the approximately 11% of its deposits that are insured by the Savings Association Insurance Fund ("SAIF"). Merger expenses of $4.7 million and $5.1 million for the three and six month periods in 1996, respectively, relate 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 six 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 $342 thousand for the six months ended June 30, 1996, as compared to the same period in 1995, and advertising and marketing expenses, which decreased $350 thousand for the six months ended June 30, 1996 as compared with the same period in 1995. Other noninterest expenses increased $2.7 million, or 53.7%, and $3.3 million, or 31.5%, for the three and six months ended June 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 Six Months Ended June 30, June 30, 1996 1995 1996 1995 (In Thousands) Telephone $ 838 $ 588 $ 1,515 $ 1,101 Amortization of deposit premiums 743 52 1,158 105 Office supplies 677 668 1,354 1,234 Postage and freight 673 589 1,488 1,258 Amortization of goodwill 508 451 1,016 909 Other 4,339 2,711 7,192 5,828 $ 7,778 $ 5,059 $13,723 $10,435
The increase in amortization of deposit premiums was attributable to the Branch Acquisition noted above. Income Tax Expenses Income tax expense was $5.8 million and $5.8 million for the three months ended June 30, 1996 and 1995, respectively, which amounted to effective income tax rates of 36.6% and 34.0%, respectively. Income tax expense was $12.8 million and $10.7 million for the six months ended June 30, 1996 and 1995, respectively, which amounted to effective income tax rates of 36.0% and 33.6%, respectively. Financial Condition Set forth below is a discussion of the material changes in the Company's financial condition from December 31, 1995 to June 30, 1996. Securities Available for Sale Securities available for sale decreased $9.2 million, or 1.2%. 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 June 30, 1996, $1.2 million 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:
June 30, December 31, 1996 1995 (In Thousands) U.S. Government obligations and obligations of U.S. Government agencies and corporations $451,827 $526,576 Other bonds and notes 30,041 16,531 Mortgage-backed securities 245,121 195,823 Total debt securities 726,989 738,930 Equity securities 30,464 27,718 Total securities available for sale $757,453 $766,648
Loans Held for Sale Loans held for sale, all of which were residential mortgage loans, decreased $5.0 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 June 30, 1996 was primarily attributable to timing and delivery of loan sales. Loans and Leases Total loans and leases held for investment increased $336.5 million, or 12.1%, for the six months ended June 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, residential and commercial loan portfolios. Residential real estate mortgages increased $224.5 million, or 28.1%, for the six months ended June 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 significant refinancing activity due to a favorable interest rate environment and 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 on the secondary market, the Company will, from time to time, retain a portion of originated residential mortgages in its loan portfolio. Commercial real estate mortgages increased $23.2 million, or 2.9%, for the six months ended June 30, 1996. This increase is primarily 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 $23.9 million, or 5.8%, for the six months ended June 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 $64.9 million, or 8.4%, for the six months ended June 30, 1996. The growth in consumer loans was concentrated in home equity loans and automobile 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:
June 30, March 31, December 31, September 30, 1996 1996 1995 1995 (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $ 5,032 $ 6,089 $ 5,713 $ 5,856 Accruing loans which are 90 days overdue 2,238 3,800 3,728 3,988 Total 7,270 9,889 9,441 9,844 Commercial real estate mortgages: Nonaccrual loans 15,628 16,917 17,029 20,552 Accruing loans which are 90 days overdue -0- 128 -0- 356 Troubled debt restructurings 1,878 1,793 3,186 4,540 Total 17,506 18,838 20,215 25,448 Commercial business loans and leases: Nonaccrual loans 7,567 5,631 6,735 6,305 Accruing loans which are 90 days overdue -0- 111 25 35 Troubled debt restructurings 1,114 1,349 1,859 1,953 Total 8,681 7,091 8,619 8,293 Consumer loans and leases: Nonaccrual loans 4,368 4,099 3,586 4,237 Accruing loans which are 90 days overdue 602 1,051 659 395 Total 4,970 5,150 4,245 4,632 Total nonperforming loans: Nonaccrual loans 32,595 32,736 33,063 36,950 Accruing loans which are 90 days overdue 2,840 5,090 4,412 4,774 Troubled debt restructurings 2,992 3,142 5,045 6,493 Total 38,427 40,968 42,520 48,217 Other nonperforming assets: Other real estate owned, net of related reserves 10,033 11,089 12,679 14,548 Repossessions, net of related reserves 1,316 1,865 1,553 1,638 Total other nonperforming assets 11,349 12,954 14,232 16,186 Total nonperforming assets $49,776 $53,922 $56,752 $64,403 Total nonperforming loans as a percentage of total loans (1) 1.23% 1.36% 1.53% 1.75% Total nonperforming assets as a percentage of total assets 1.14% 1.27% 1.40% 1.61% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 1.59% 1.67% 2.03% 2.33% (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 June 30, 1996, $9.9 million of commercial real estate and commercial business loans and leases, or 37.9%, 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 June 30, 1996, total impaired loans were $27.8 million, of which $22.1 million had related allowances of $4.8 million. During the three months ended June 30, 1996, the income recognized related to impaired loans was $423 thousand and the average balance of outstanding impaired loans was $28.0 million. During the six months ended June 30, 1996, the income recognized related to impaired loans was $756 thousand and the average balance of outstanding impaired loans was $28.6 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 June 30, 1996 included $10.0 million of other real estate owned and $1.3 million of repossessed assets, in each case net of related reserves. Potential Nonperforming Assets At June 30, 1996, the Company had classified a total of $86.5 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 $60.3 million of commercial real estate loans and commercial business loans and leases classified as substandard or lower at June 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 six months ended June 30, 1996 and 1995, as well as certain related ratios:
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 (Dollars in Thousands) Average loans and leases outstanding during the period $3,202,162 $2,644,698 $3,080,690 $2,647,980 Allowance at beginning of period $ 65,533 $ 59,462 $ 60,975 $ 63,675 Chargeoffs: Residential real estate 1,163 1,184 1,597 2,003 Commercial real estate 1,158 1,959 2,046 6,550 Commercial business loans and leases 679 904 1,534 1,236 Consumer 1,092 626 1,833 1,239 Total loans charged off 4,092 4,673 7,010 11,028 Recoveries: Residential real estate 248 106 310 175 Commercial real estate 1,169 1,510 3,229 1,878 Commercial business loans and leases 92 648 512 1,228 Consumer 254 290 428 385 Total loans recovered 1,763 2,554 4,479 3,666 Net chargeoffs 2,329 2,119 2,531 7,632 Additions charged to operating expenses 450 1,040 900 2,070 Additions due to purchase acquisition -0- -0- 4,310 -0- Allowance at end of period $ 63,654 $ 58,383 $ 63,654 $ 58,383 Ratio of net chargeoffs to average loans and leases outstanding during the period - annualized (1) .29% 0.32% 0.16% 0.56% Ratio of allowance to total loans and leases at end of period (2) 2.04% 2.22% 2.04% 2.22% Ratio of allowance to nonperforming loans at end of period 165.6% 117.4% 165.6% 117.4% (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: June 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 $ 7,809 0.76% $10,118 1.27% Commercial real estate loans 37,634 4.58 31,673 3.97 Commercial business loans and leases 8,831 2.04 9,491 2.32 Consumer loans 9,380 1.12 9,693 1.25 $63,654 2.04 $60,975 2.19
Deposits and Borrowings Total deposits increased by $185.9 million, or 5.8%, during the six months ended June 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 $80.1 million, or 5.9%, an increase in regular savings of $40.5 million, or 7.3%, an increase in money market accounts of $18.3 million, or 3.7%, and a combined increase in NOW and demand deposits of $47.0 million, or 6.0%. The changes in deposit balances principally reflect the impact of the Branch Acquisition completed during February, 1996 but also reflect the Company's current strategy to emphasize relationship banking, cash management services and core deposits. Total borrowings increased by $114.4 million, or 25.0%, for the six months ended June 30, 1996. The increase was attributable to a $149.0 million increase in Federal Home Loan Bank borrowings, which was offset in part by a $31.5 million decrease in securities sold under repurchase agreements and a decrease in other borrowings of $3.1 million. The increase in Federal Home Loan Bank borrowings was attributable to the Branch Acquisition and loan growth. At June 30, 1996, the Company estimates its additional available borrowing capacity from the Federal Home Loan Bank to be approximately $506 million. Shareholders' Equity Total shareholders' equity increased by $11.3 million, or 3.2%, during the six months ended June 30, 1996. This increase was the result of $22.7 million of net income and $1.3 million of treasury stock sales related to various employee benefit plans of the Company, the effects of which were offset in part by cash dividends of $7.8 million and a $4.9 million reduction in the net unrealized gain (net of tax effect) in the market value of securities available for sale. Regulatory Capital Requirements At June 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 June 30, 1996:
Actual Required The The Minimums Bank BNH Company Risk-based capital ratios: Tier I 4% 11.08% 16.42% 11.82% Total 8 12.35 17.68 13.08 Tier I leverage capital ratios 3 (1) 7.54 8.52 7.66
(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 six months ended June 30, 1996. Net cash, short term and marketable assets amounted to $804.5 million, or 23.2% of net deposits and short term liabilities at June 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 June 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 June 30, 1996, there were 4,215,211 shares of Family Common Stock outstanding. At June 30, 1996, Family had total assets of $925.2 million and shareholders' equity of $70.0 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. 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. In recent periods, the U.S. Senate and the U.S. House of Representatives have considered various bills which would, among other things, recapitalize the Savings Association Insurance Fund ("SAIF") administered by the FDIC by a one- time assessment on the deposits of all SAIF-insured institutions and provide for an eventual merger of the SAIF and the Bank Insurance Fund ("BIF") administered by the FDIC. Under the proposals accepted by the U.S. Congress in late 1995 but not signed into law, the deposit assessment rate would be based on deposits as of March 31, 1995 and set by the FDIC at a level which would be sufficient to recapitalize the SAIF to the designated statutory reserve ratio. It was estimated at the time the assessment rate under this proposal would be approximately $.85 for every $100 of assessable deposits as of March 31, 1995. Most legislative proposals have contained provisions which provide certain relief for institutions, such as the Bank and BNH (as successor to Portsmouth), which are members of the BIF but have acquired SAIF-insured deposits as a result of acquisitions of savings institutions in the transactions effected pursuant to Section 5(d)(3) of the Federal Deposit Insurance Act ("FDIA"). Such institutions do not pay SAIF assessments based on the actual amount of the SAIF deposits acquired, but as adjusted to reflect increases or decreases in such deposits subsequent to the FDIA. The Company currently is unable to predict the likelihood of legislation effecting the foregoing changes, although a consensus among legislators, regulators and bankers appears to be developing in this regard. At March 31, 1995, the date the proposal adopted by the U.S. Congress uses as the measurement date, the adjusted attributable amount of SAIF deposits of the Company's banking subsidiaries amounted to $352.4 million, or 12.3%, of the Company's total deposits. If an assessment of $.85 per $100 of assessable deposits was effected on these deposits (and assuming no downward adjustment on the assessment rate for institutions such as the Bank and BNH), the one-time assessment which would be payable by the Company's banking subsidiaries would aggregate approximately $3.0 million on a pre-tax basis. Management of the Company currently is unable to predict whether there will be legislation to recapitalize SAIF and, if so, whether and to what extend the Company's banking subsidiaries may be assessed in order to recapitalize the SAIF. Item 6. Exhibits and reports on Form 8-K. (a) On June 5, 1996, the Company filed a report on form 8-K announcing the execution of an agreement to acquire Family Bancorp by the Company. (b) On June 21, 1996, the Company filed a report on Form 8- K reporting that an issuer tender offer likely would be the means by which the Company would seek to acquire 2,600,000 shares of Common Stock of the Company in connection with the pending acquisition of Family Bancorp. (c) 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. 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 August 13, 1996 By: William J. Ryan Chairman, President and Chief Executive Officer Date August 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 August 13, 1996 By: William J. Ryan Chairman, President and Chief Executive Officer /s/ Peter J. Verrill Date August 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 6-MOS DEC-31-1996 JUN-30-1996 234,481 0 32,500 0 757,453 0 0 3,115,089 63,654 4,371,709 3,383,083 571,324 51,042 0 256 0 0 366,004 4,371,709 139,222 24,705 912 164,839 59,356 13,513 91,970 900 504 74,168 35,567 35,567 0 0 22,749 .90 .90 4.75 32,595 2,840 2,992 0 60,975 7,010 4,479 63,654 63,654 0 0
-----END PRIVACY-ENHANCED MESSAGE-----