-----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, IgIKv7QBsMy3kQ5PE7WHGxkhD4ron2UEx8runbYpyZ3GWrgvklLP9AiTubJvjRuL 6Al2yI5+35nR+8IIVDh7LA== 0000829750-97-000007.txt : 19970815 0000829750-97-000007.hdr.sgml : 19970815 ACCESSION NUMBER: 0000829750-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97662436 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1997 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, 1997 is: Common stock, par value $.01 per share 27,457,107 (Class) (Outstanding) INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Consolidated Balance Sheets - June 30, 1997 and December 31, 1996. Consolidated Statements of Income - Three months ended June 30, 1997 and 1996; six months ended June 30, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity - Six months ended June 30, 1997 and 1996. Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and 1996. 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, 1997 1996 Assets Cash and due from banks $ 295,610 $ 276,995 Federal funds sold --- 83,000 Securities available for sale, at market value 1,169,169 1,045,069 Loans held for sale, market value $140,801 and $103,790 respectively 137,466 103,270 Loans and leases: Residential real estate mortgages 1,140,017 1,176,874 Commercial real estate mortgages 984,179 962,375 Commercial business loans and leases 536,108 477,402 Consumer loans and leases 1,094,507 1,037,949 3,754,811 3,654,600 Less: Allowance for loan and lease losses 64,783 67,488 Net loans and leases 3,690,028 3,587,112 Premises and equipment 71,296 73,956 Goodwill and other intangibles 67,895 71,649 Mortgage servicing rights 34,426 33,314 Other assets 125,290 124,033 $5,591,180 $5,398,398 Liabilities and Shareholders' Equity Deposits: Regular savings $ 746,584 $ 760,340 NOW and money market accounts 1,019,645 1,023,448 Certificates of deposit (including certificates of $100 or more of $243,128 and $232,880, respectively) 1,796,653 1,796,521 Demand deposits 651,074 604,980 Total deposits 4,213,956 4,185,289 Federal funds purchased 56,105 --- Securities sold under repurchase agreements 231,713 197,005 Borrowings from the Federal Home Loan Bank of Boston 482,779 470,080 Other borrowings 17,762 23,884 Other liabilities 57,143 85,130 Total liabilities 5,059,458 4,961,388 Company obligated, mandatorily redeemable securities of subsidiary trust holding solely parent Company junior subordinated debentures 100,000 --- Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, none issued) --- --- Common stock (par value $0.01 per share, 100,000,000 shares authorized, 28,576,885 shares issued) 286 286 Paid-in capital 271,790 271,790 Retained earnings 196,293 170,855 Net unrealized gain (loss) on securities available for sale 354 (582) Treasury stock at cost (1,206,208 shares and 355,385 shares, respectively) (37,001) (5,339) Total shareholders' equity 431,722 437,010 $5,591,180 $5,398,398 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, 1997 1996 1997 1996 Interest and dividend income: Interest on loans and leases $86,363 $71,292 $170,105 $139,222 Interest on mortgage-backed investments 11,751 4,011 22,175 7,507 Interest on other investments 6,782 8,294 13,900 17,198 Dividends on equity securities 564 488 1,203 912 Total interest and dividend income 105,460 84,085 207,383 164,839 Interest expense: Interest on deposits 35,602 29,788 70,960 59,356 Interest on borrowed funds 9,933 7,466 18,785 13,513 Total interest expense 45,535 37,254 89,745 72,869 Net interest income 59,925 46,831 117,638 91,970 Provision for loan and lease losses --- 450 --- 900 Net interest income after provision for loan and lease losses 59,925 46,381 117,638 91,070 Noninterest income: Customer services 5,763 3,647 11,102 6,916 Mortgage banking services 3,542 3,171 7,773 6,535 Trust and investment advisory services 2,276 1,880 4,163 3,524 Net securities gains --- --- 3 504 Other noninterest income 791 498 1,665 1,186 12,372 9,196 24,706 18,665 Noninterest expenses: Salaries and employee benefits 22,090 17,393 43,273 35,631 Data processing 3,510 2,971 7,167 5,769 Occupancy 3,073 3,102 6,883 6,399 Equipment 2,831 1,983 5,758 3,991 Distributions on securities of subsidiary trust 2,265 --- 3,775 --- Amortization of goodwill and deposit premiums 1,886 1,251 3,772 2,174 Advertising and marketing 1,568 1,005 3,088 1,999 Merger expenses --- 4,652 --- 5,105 Other noninterest expenses 7,382 7,229 14,123 13,100 44,605 39,586 87,839 74,168 Income before income tax expense 27,692 15,991 54,505 35,567 Applicable income tax expense 9,904 5,848 19,707 12,818 Net income $17,788 $10,143 $ 34,798 $ 22,749 Weighted average shares outstanding 27,785,362 25,169,568 28,067,162 25,149,123 Earnings per share $ 0.64 $ 0.40 $ 1.24 $ 0.90 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, 1995 $256 $224,268 $134,443 $ 3,763 $ (7,805) $354,925 Treasury stock issued for employee benefit plans (102,396 shares at an average price of $8.86) -- -- (242) -- 1,525 1,283 Change in unrealized gains (losses) on securities available for sale, net of tax -- -- -- (4,922) -- (4,922) Net income -- -- 22,749 -- -- 22,749 Cash dividends $0.31 -- -- (7,775) -- -- (7,775) Balances at June 30, 1996 $256 $224,268 $149,175 $ (1,159) $ (6,280) $366,260 Balances at December 31, 1996 $286 $271,790 $170,855 $ (582) $ (5,339) $437,010 Treasury stock issued for employee benefit plans (260,970 shares at an average price of $11.53) -- -- 667 -- 3,887 4,554 Treasury stock purchased (1,111,800 shares at an average price of $31.97) -- -- -- -- (35,549) (35,549) Change in unrealized gains (losses) on securities available for sale, net of tax -- -- -- 936 -- 936 Net income -- -- 34,798 -- -- 34,798 Cash dividends $0.36 -- -- (10,027) -- -- (10,027) Balances at June 30, 1997 $286 $271,790 $196,293 $ 354 $(37,001) $431,722 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Six Months Ended June 30, 1997 1996 Cash flows from operating activities: Net income $ 34,798 $ 22,749 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses --- 900 Provision for depreciation 5,072 3,466 Amortization of goodwill and other intangibles 3,754 2,174 Net decrease (increase) in mortgage servicing rights (1,112) (6,017) Net decrease in net deferred tax assets 3,894 1,426 Net (gains) losses realized from sales of other real estate owned (493) 60 Net (gains) losses realized from sales of securities and consumer loans (3) (505) Net (gains) realized from sales of loans held for sale (a component of mortgage banking services) (3,983) (3,082) Proceeds from sales of loans held for sale 769,040 496,517 Residential loans originated and purchased for sale (799,253) (488,413) Net decrease (increase) in interest and dividends receivable and other assets (2,692) 2,065 Net increase (decrease) in other liabilities (32,918) 3,554 Net cash provided (used) by operating activities $ (23,896) $ 34,894 Cash flows from investing activities: Proceeds from sales of securities available for sale 58,312 31,144 Proceeds from maturities and principal repayments of securities available for sale 216,250 265,360 Purchases of securities available for sale (397,186) (294,017) Net increase in loans and leases (100,624) (335,410) Premiums paid on deposits purchased --- (18,231) Net additions to premises and equipment (2,412) (4,802) Proceeds from sales of other real estate owned 1,618 2,938 Net decrease in repossessed assets owned 185 569 Net cash used by investing activities $ (223,857) $ (352,449) 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, 1997 1996 Cash flows from financing activities: Net increase in deposits $ 28,667 $ 185,945 Net increase (decrease) in securities sold under repurchase agreements 34,708 (31,540) Advances from Federal Home Loan Bank of Boston borrowings 205,911 258,998 Payments on Federal Home Loan Bank of Boston borrowings (193,212) (110,002) Net increase (decrease) in other borrowings (6,122) (1,564) Proceeds from issuance of subsidiary trust 98,333 --- Sale of treasury stock 4,554 1,283 Purchase of treasury stock (35,549) --- Cash dividends paid to shareholders (10,027) (7,775) Net cash provided by financing activities 127,263 295,345 Increase (decrease) in cash and cash equivalents $ (120,490) $ (22,210) Cash and cash equivalents at beginning of period 359,995 289,191 Cash and cash equivalents at end of period $ 239,505 $ 266,981 Supplemental disclosures of information: Interest paid on deposits and borrowings $ 83,468 $ 70,962 Income taxes paid 19,483 9,692 Income tax refunds 859 1,108 Noncash investing transactions: Loans transferred to other real estate owned 3,076 1,728 Loans originated to finance the sales of other real estate owned 5,368 1,044 Increases (decreases) resulting from SFAS No. 115: Securities available for sale 400 (7,213) Deferred income taxes - liabilities 46 (2,291) Net unrealized gain (loss) on securities available for sale 354 (4,922 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and predominant practices within the banking industry. The Company has not changed its accounting and reporting policies from those disclosed in its 1996 Annual Report on Form 10-K. 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, 1997 are not necessarily indicative of results that may be expected for any other interim period or the entire year ending December 31, 1997. Certain amounts in prior periods have been reclassified to conform to the current presentation. PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I - ITEM 2 Management's Discussion and Analysis The results of Family Bank ("Family"), which was accounted for as a purchase, have been included from the date of acquisition, December 6, 1996. On January 31, 1997, Peoples Heritage Financial Group, Inc. (the "Company") issued, through a subsidiary trust, $100 million of 9.06% of Company obligated mandatorily redeemable securities (the "Trust Capital Securities"). See Capital for further details. On April 16, 1997, the Company's Board of Directors approved the repurchase of up to $100 million of its Common Stock on the open market. See Capital for further details. SUMMARY The Company reported net income of $17.8 million, or $.64 per share, for the second quarter of 1997. This compares with $10.1 million, or $.40 per share, for the second quarter of 1996 and $17.0 million, or $.60 per share, for the first quarter of 1997. Second quarter return on equity was 16.35%, which compared to 11.20% in the second quarter of 1996 and 15.55% in the first quarter of 1997. The second quarter return on assets was 1.30%, which compared to 0.93% for the same period in 1996 and 1.28% in the first quarter of 1997. Earnings, when compared with the same period last year, increased due to 26% revenue growth, which was generated both internally and through acquisitions, as well as a reduction in merger related costs. Related expenses, exclusive of merger expenses in 1996 and distributions on securities of subsidiary trust in 1997, increased only 21%, as the Company improved efficiency. During the period, the Company's efficiency ratio, which measures overhead as a percent of revenue, improved from 62.35% in 1996 to 58.56% in 1997 (see Table 1). Compared to the first quarter, earnings increased 5%, primarily due to an increase in average loans outstanding during the quarter. Return on equity increased due to an increase in net income as well as the repurchase of 1.1 million shares of common stock during the second quarter. On a year-to-date basis, the Company earned net income of $34.8 million and $22.7 million, which represents $1.24 and $.90 per share, for the six months ended June 30, 1997 and 1996, respectively. Return on equity and return on assets were 15.99% and 1.29% during the six months ended June 30, 1997, respectively, as compared to 12.65% and 1.08% for the six months ended June 30, 1996, respectively. Cash earnings per share, which is calculated using earnings before the amortization of goodwill and core deposit premiums, was $1.37 and $.99 for the six months ended June 30, 1997 and 1996, respectively. Selected quarterly data is provided in Table 1.
TABLE 1 - Selected Quarterly Data 1997 1996 (Dollars in Thousands) Second First Fourth Third Second First Net interest income $ 59,925 $ 57,713 $ 50,659 $ 47,944 $ 46,831 $ 45,139 Provision for loan losses --- --- --- --- 450 450 Net interest income after loan loss provision 59,925 57,713 50,659 47,944 46,381 44,689 Noninterest income (excluding securities transactions) 12,372 12,331 9,975 9,805 9,196 8,965 Securities gains --- 3 4 (1) --- 504 Noninterest expenses (excluding SAIF assessment and merger charges) 44,605 43,234 37,649 34,404 34,934 34,129 SAIF assessment and merger charges --- --- --- 1,852 4,652 453 Income before income taxes 27,692 26,813 22,989 21,492 15,991 19,576 Income tax expense 9,904 9,803 7,450 7,300 5,848 6,970 Net income $ 17,788 $ 17,010 $ 15,539 $ 14,192 $ 10,143 $ 12,606 Earnings per share $ 0.64 $ 0.60 $ 0.63 $ 0.56 $ 0.40 $ 0.50 Return on average assets 1.30% 1.28% 1.32% 1.29% 0.93% 1.24% Return on average equity 16.35% 15.55% 16.83% 15.21% 11.20% 14.06% Efficiency ratio (1) 58.56% 59.57% 62.09% 59.58% 62.35% 63.08% (1) Excludes securities transactions, SAIF assessment, merger charges and expenses related to Company-obligated, mandatorily redeemable securities of subsidiary trust holding solely parent Company junior subordinated debentures.
TABLE 2 - Average Balances, Yields and Rates 1997 1997 Second First Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,309,724 $ 25,910 7.91% $1,327,467 $ 25,954 7.82% Commercial real estate mortgages 974,276 23,266 9.58 966,083 22,870 9.60 Commercial loans and leases 510,203 12,213 9.60 479,822 11,467 9.69 Consumer loans and leases 1,067,538 25,111 9.43 1,026,128 23,553 9.31 Total loans and leases 3,861,741 86,500 8.98 3,799,500 83,844 8.91 Securities available for sale (3) 1,190,142 19,058 6.42 1,091,909 17,795 6.56 Federal funds sold 8,544 127 5.96 25,340 430 6.88 Total earning assets 5,060,427 105,685 8.37 4,916,749 102,069 8.38 Nonearning assets 413,966 471,757 Total assets $5,474,393 $5,388,506 Interest-bearing deposits: Regular savings $ 754,428 5,042 2.68 $ 760,705 5,013 2.67 NOW and money market accounts 1,011,486 6,292 2.49 980,957 6,166 2.55 Certificates of deposit 1,791,015 24,268 5.44 1,808,264 24,179 5.42 Total interest-bearing deposits 3,556,929 35,602 4.01 3,549,926 35,358 4.04 Borrowed funds 730,820 9,933 5.45 689,014 8,853 5.21 Total interest-bearing liabilities 4,287,749 45,535 4.26 4,238,940 44,211 4.23 Demand deposits 585,412 549,552 Other liabilities (3) 61,674 105,182 Securities of subsidiary trust 100,000 50,806 Shareholders' equity (3) 439,558 444,026 Total liabilities and shareholders' equity $5,474,393 $5,388,506 Net earning assets $ 772,678 $ 677,809 Net interest income (fully-taxable equivalent) 60,150 57,858 Less: fully-taxable equivalent adjustments (225) (145) Net interest income $ 59,925 $ 57,713 Net interest rate spread (fully-taxable equivalent) 4.11% 4.15% Net interest margin (fully-taxable equivalent) 4.76% 4.73% (1) Annualized. (2) Loans and leases includes loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale.
TABLE 2 - (Cont'd) 1996 1996 Fourth Third Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,180,109 $ 23,521 7.97% $1,117,953 $ 22,105 7.91% Commercial real estate mortgages 858,009 20,767 9.63 820,851 20,127 9.75 Commercial loans and leases 445,582 10,581 9.45 428,292 10,236 9.51 Consumer loans and leases 955,172 22,343 9.31 867,533 20,422 9.36 Total loans and leases 3,438,872 77,212 8.93 3,234,629 72,890 8.96 Securities available for sale (3) 845,828 13,373 6.29 799,857 12,668 6.30 Federal funds sold 29,859 467 6.22 16,129 186 4.59 Total earning assets 4,314,559 91,052 8.40 4,050,615 85,744 8.42 Nonearning assets 368,153 343,924 Total assets $4,682,712 $4,394,539 Interest-bearing deposits: Regular savings $ 642,188 4,351 2.70 $ 599,793 4,089 2.71 NOW and money market accounts 902,006 5,899 2.60 859,895 5,607 2.59 Certificates of deposit 1,548,624 21,360 5.49 1,430,091 19,781 5.50 Total interest-bearing deposits 3,092,818 31,610 4.07 2,889,779 29,477 4.06 Borrowed funds 634,938 8,557 5.36 602,873 8,085 5.34 Total interest-bearing liabilities 3,727,756 40,167 4.29 3,492,652 37,562 4.28 Demand deposits 509,547 463,251 Other liabilities (3) 79,146 65,805 Securities of subsidiary trust --- --- Shareholders' equity (3) 366,263 372,831 Total liabilities and shareholders' equity $4,682,712 $4,394,539 Net earning assets $ 586,803 $ 557,963 Net interest income (fully-taxable equivalent) 50,885 48,182 Less: fully-taxable equivalent adjustments (226) (238) Net interest income $ 50,659 $ 47,944 Net interest rate spread (fully-taxable equivalent) 4.11% 4.14% Net interest margin (fully-taxable equivalent) 4.69% 4.73% (1) Annualized. (2) Loans and leases includes loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale.
TABLE 2 (Cont'd) 1996 1996 Second First 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% $ 955,643 $ 19,459 8.14% Commercial real estate mortgages 828,358 19,876 9.65 821,072 20,360 9.97 Commercial loans and leases 423,868 10,137 9.62 402,900 9,887 9.87 Consumer loans and leases 821,400 19,152 9.38 779,603 18,362 9.47 Total loans and leases 3,202,162 71,437 8.97 2,959,218 68,068 9.25 Securities available for sale (3) 794,510 12,418 6.29 752,285 11,646 6.23 Federal funds sold 39,622 452 4.59 93,232 1,235 5.33 Total earning assets 4,036,294 84,307 8.40 3,804,735 80,949 8.56 Nonearning assets 354,128 272,408 Total assets $4,390,422 $4,077,143 Interest-bearing deposits: Regular savings $ 595,325 4,014 2.71 $ 575,680 3,979 2.78 NOW and money market accounts 864,797 5,532 2.57 847,984 5,745 2.72 Certificates of deposit 1,462,168 20,242 5.57 1,406,904 19,843 5.67 Total interest-bearing deposits 2,922,290 29,788 4.10 2,830,568 29,567 4.20 Borrowed funds 584,974 7,466 5.13 450,311 6,048 5.40 Total interest-bearing liabilities 3,507,264 37,254 4.27 3,280,879 35,615 4.37 Demand deposits 423,588 395,453 Other liabilities (3) 94,342 43,838 Securities of subsidiary trust --- --- Shareholders' equity (3) 365,228 356,973 Total liabilities and shareholders' equity $4,390,422 $4,077,143 Net earning assets $ 529,030 $ 523,856 Net interest income (fully-taxable equivalent) 47,053 45,334 Less: fully-taxable equivalent adjustments (222) (195) Net interest income $ 46,831 $ 45,139 Net interest rate spread (fully-taxable equivalent) 4.13% 4.19% Net interest margin (fully-taxable equivalent) 4.69% 4.79% (1) Annualized. (2) Loans and leases includes loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale.
EARNING ASSETS The discussion and analysis that follows is based upon information set forth in Table 2 regarding average balances, yields and rates. Loans Average loans and leases of $3.9 billion rose $659.6 million from a year earlier and $62.2 million from the first quarter. The acquisition of Family during the fourth quarter of 1996 added $469.8 million of loans. Excluding the Family loans, internal growth during the past year and quarter has been concentrated in the commercial loan and consumer loan portfolios. Average loans as a percentage of average earning assets fell from 79.9% during the third quarter of 1996 to 76.3% during the second quarter of 1997 due primarily to the 54.4% loans to earning assets ratio of Family at the time of acquisition. The Company expects to increase the percentage of average loans to average earning assets in the future as the Family acquisition is assimilated. Average residential real estate loans (which includes loans held for sale) of $1.3 billion grew 16.1% from the second quarter of 1996 and decreased 1.3% from the first quarter of 1997. Excluding $189.6 million of Family loans added during the fourth quarter, average outstanding residential real estate loans decreased 0.75% from the second quarter of 1996. The decrease in the average outstanding balance of residential loans is consistent with the strategy of the Company to replace lower yielding residential loans with higher yielding commercial business and consumer loans. The Company continues to originate residential real estate loans primarily for sale to investors in the secondary mortgage market. During the second quarter, originations were $437.6 million, of which $324.0 million represented correspondent production. This compares to $352.9 million and $188.2 million, respectively, in the second quarter of 1996 and $428.1 million and $339.1 million, respectively, in the first quarter. Mortgage originations, particularly refinancings, are highly dependent upon interest rates. At June 30, 1997, 50% of portfolio loans were fixed rate and 50% were variable rate. Portfolio adjustable rate loans are generally indexed 3.50% above the 1-year constant maturity treasury (CMT), after an initial below market rate. Average commercial loans of $510.2 million grew 20.4% from the second quarter of 1996 and 6.3% from the first quarter of 1997. Excluding $49.1 million of Family loans added during the fourth quarter, average outstanding commercial loans increased 8.8% from the second quarter of 1996. The growth in commercial loans is consistent with the Company's focus on lending to sound, small and medium size business customers within its geographic markets. The average yield on commercial loans of 9.6% was equal to the second quarter of 1996. Average commercial real estate loans of $974.3 million grew 17.6% from last year and 0.9% from the first quarter. Excluding $151.2 million of Family loans added during the fourth quarter, average outstanding commercial real estate loans decreased 0.6% from the second quarter of 1996. The decrease in commercial real estate loans is consistent with management's strategy to reduce commercial real estate as a percent of total loans. The average yield on commercial real estate loans declined slightly from 9.65% during the second quarter of 1996 to 9.58% during the second quarter of 1997 reflecting increased competition. Average consumer loans of $1.1 billion grew 30.0% from the second quarter of 1996 and 4.0% from the first quarter of 1997. Excluding $79.1 million of Family loans added during the fourth quarter, average outstanding consumer loans increased 20.3% from the second quarter of 1996. The growth in consumer loans resulted primarily from an increase in home equity and indirect auto loans. Mobile home loan balances continue to decline as the Company has de- emphasized this product. The average yield on consumer loans increased slightly from 9.38% during the second quarter of 1996 to 9.43% during the second quarter of 1997 reflecting a change in the mix of consumer loans. Securities Available for Sale and Other Earning Assets The Company's $1.2 billion securities portfolio at June 30, 1997 consisted primarily of U. S. Treasury Securities and AAA or equivalent rated mortgage backed securities. Average securities increased 49.8% from last year and 9.0% from the first quarter. Excluding $356.2 million of Family securities added during the fourth quarter, average outstanding securities increased 5.0%. The average securities yield was 6.42% for the second quarter of 1997, as compared to 6.29% for the second quarter of 1996 and 6.56% for the first quarter. The increased yield, on a year-to-year comparison basis, was due primarily to reinvesting maturing U.S. Treasury securities into higher- yielding mortgage-backed securities, higher market interest rates and the addition of higher yielding securities at Family. At June 30, 1997, the available-for-sale portfolio had a $400 thousand net unrealized gain, compared to a net unrealized loss of $1.9 million at both June 30, 1996 and March 31, 1997. The increase in market value was due to a decrease in market interest rates in the second quarter. DEPOSITS AND OTHER FUNDING SOURCES Deposits Average deposits of $4.1 billion increased 24% from the second quarter of last year and 1% from the first quarter. Excluding $774.6 million of Family deposits added during the fourth quarter, average deposits increased 1% from the second quarter of 1996. At June 30, 1997, the ratio of loans to deposits stood at 89%, down from 92% at June 30, 1996 but up from 87% at December 31, 1996. This was primarily the result of the acquisition of Family, which had a loan to deposit ratio of 60.6% at the time of acquisition on December 6, 1996. Average transaction accounts (demand deposit, NOW and money market accounts) of $1.6 billion were up 24% from last year and 4% from the first quarter. Excluding $233.2 million of Family transaction deposits added during the fourth quarter, average outstanding transaction deposits increased 6% from the second quarter of 1996. The increases in transaction deposits is consistent with the Company's increased marketing of these lower cost accounts. The average rate paid on NOW and money market accounts declined from 2.57% during the second quarter of 1996 to 2.49% during the second quarter of 1997 due to an increase in lower yielding NOW accounts. Average savings and time deposit balances of $2.5 billion increased 24% from last year and decreased 1% from the first quarter. Excluding $523.9 million of Family deposits added during the fourth quarter, average savings and time deposits decreased 2%. The decrease is consistent with the Company's current strategy to reduce its dependence on higher cost time deposits. The average rate paid on savings accounts has remained relatively flat, while the rate paid on time deposits has declined on a year-to-year basis, reflecting the Company's pricing strategy and a change in the mix of time deposits. Other Funding Sources The Company's primary source of funding, other than deposits, is the Federal Home Loan Bank ("FHLB"). Average FHLB borrowings for the second quarter were $491.9 million, compared with $389.5 million for the first quarter of last year and $464.1 million for the first quarter. FHLB borrowings increased because growth in earning assets exceeded growth in deposits. FHLB borrowings are secured by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by 1-4 family properties, certain unencumbered securities and other qualified assets. At June 30, 1997, FHLB borrowings amounted to $482.8 million. The Company's estimated additional borrowing capacity with the FHLB at June 30, 1997 was $663.9 million. ASSET-LIABILITY MANAGEMENT Net interest income, the Company's primary source of revenue, is affected by changes in interest rates as well as fluctuations in the level and duration of assets and liabilities contained on the Company's balance sheet. The impact of changes in interest rates on the Company's net interest income represents its level of interest rate risk. The Company analyzes the estimated future impact on net interest income of changing interest rates based on projections, including anticipated business activity, anticipated changes in interest rates and other variables, which are adjusted periodically. The results of this analysis indicates that the Company is relatively rate neutral within a twelve month period. Management estimates that an instantaneous 2% change in interest rates would have less than a 3% impact on net interest income over a twelve month period. This assessment is 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 deposits. 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. The primary objective of the Company's asset-liability management is to maximize net interest income while maintaining acceptable levels of interest-rate sensitivity. The Liquidity and Funds Management Committee sets specific rate-sensitivity limits for the Company. The Committee monitors and adjusts the Company's exposure to changes in interest rates to achieve predetermined risk targets that it believes are consistent with current and expected market conditions. Management strives to minimize the negative impact on net interest income caused by changes in interest rates. At this time, management believes the Company's asset-liability mix is sufficiently balanced within a broad range of interest rate scenarios to minimize the impact of significant rate movements. The Company controls its interest rate risk by managing the level and duration of certain on-balance-sheet assets and liabilities. The Company does not currently use off-balance- sheet instruments (derivatives) to manage its interest rate sensitivity position. The Company has, however, purchased interest rate floors tied to the CMT index and Treasury options to mitigate the prepayment risk associated with mortgage servicing rights (see " Non-Interest Income" for further details). The value of the CMT floors is inversely related to movements in interest rates, while the value of the servicing rights is positively related to movements in interest rates. When rates decline, people are more likely to refinance their mortgages, which reduces the value of the servicing rights to the Company. When rates increase, the opposite is true. 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 CMT floors are intended to offset, in part, the prospective impairment of the servicing rights. The CMT floors are carried at amortized value of $60 thousand and are included in other assets. Amortization of the CMT floors reduced mortgage banking income by $46 thousand, $132 thousand, and $66 thousand in the second quarter of 1997, the second quarter of 1996, and the first quarter of 1997, respectively. NET INTEREST INCOME The Company's taxable-equivalent net interest income, which represented 83% of revenues, was $60.2 million in the second quarter, up 28% from the second quarter of 1996 and 4% from the first quarter. The increases primarily reflect higher earning assets as a result of the Family acquisition during the fourth quarter as well as internal loan growth. Table 3 shows the changes from the second quarter of 1996 to the second quarter of 1997 in tax equivalent net interest income by category due to rate and volume.
TABLE 3 - Rate Volume Analysis Three Months Ended June 30, 1997 vs. Three Months Ended June 30, 1996 Quarterly change from previous year due to: Total Volume Rate (1) Change (Dollars in Thousands) Interest income: Loans and leases $14,755 $ 308 $15,063 Investment securities 6,201 439 6,640 Federal funds sold (356) 31 (325) Total interest income 20,600 778 21,378 Interest expense: Deposits Regular savings 1,076 (48) 1,028 NOW and money market accounts 893 (133) 760 Certificates of deposit 4,565 (538) 4,027 Total deposits 6,534 (719) 5,815 Borrowed funds 1,867 599 2,466 Total interest expense 8,401 (120) 8,281 Net interest income (fully taxable equivalent) $12,199 $ 898 $13,097 (1) Includes changes in interest income and expense not due solely to volume or rate changes.
The second quarter of 1997 net interest margin was 4.76% compared to 4.69% in the second quarter of 1996 and 4.73% in the first quarter of 1997. The seven basis point annual improvement resulted from both an increase in net earning assets as well as the issuance of $100.0 million of Trust Capital Securities on January 31, 1997, which was offset in part by the acquisition of Family Bank in the fourth quarter of 1996, which had lower net interest margin than the Company. The three basis point quarter to quarter improvement resulted from the full quarter beneficial impact of the Trust Capital Securities, an increase in net earning assets and the conversion of Family investment securities into higher yielding loans, offset in part by slightly higher rates on interest-bearing liabilities and slightly lower yields on earning assets. NONINTEREST INCOME Second quarter noninterest income of $12.4 million increased 35% from the second quarter of 1996 and was flat when compared with the first quarter of 1997. The annual increase was attributable to both the Family acquisition during the fourth quarter of 1997 and internal initiatives to increase noninterest income. Noninterest income was flat when compared with the first quarter of 1997 due largely to a $1.3 million gain from sale of mortgage servicing rights during the first quarter and no comparable sale during the second quarter. Excluding the first quarter gain on the sale of servicing, noninterest income increased 12% from the first quarter of 1997. Customer services income of $5.8 million increased 58% from the second quarter of last year and 8% from the first quarter of 1997. Excluding Family, customer services revenue increased 18% from the second quarter of last year. The increases in customer services income were attributable to growth in the number of transaction accounts and related fees and increases in ATM charges. Mortgage banking services income of $3.5 million increased 12% from last year and decreased 16% from the first quarter. The first quarter of 1997 included a $1.3 million gain from the sale of servicing rights, compared to no servicing rights sales in either the second quarter of 1997 or the second quarter of 1996. The gain in the first quarter of 1997 resulted from the sale of $11.3 million of mortgage servicing rights related to $766.5 million of residential mortgages serviced for investors. The Company expects to continue to sell servicing rights periodically in the future in order to manage the size of its servicing asset. Mortgage servicing rights amounted to $34.4 million at June 30, 1997, which was 31% higher than a year earlier and 27% higher than on March 31, 1997. See Table 4 for details.
TABLE 4 - Mortgage Banking At or for the Three Months Ended June 30, March 31, December 31, September 30, June 30, March 31, 1997 1997 1996 1996 1996 1996 (Dollars in Thousands) Residential mortgages serviced for investors at end of period $2,905,274 $3,346,804 $3,227,659 $2,953,213 $2,819,545 $2,701,552 Residential mortgage sales income $ 1,617 $ 1,113 $ 1,722 $ 1,419 $ 1,550 $ 1,332 Residential mortgage servicing income 1,925 1,865 1,132 1,247 1,621 1,832 Gain on sale of mortgage servicing --- 1,253 236 649 --- 200 Total $ 3,542 $ 4,231 $ 3,090 $ 3,315 $ 3,171 $ 3,364
Trust and investment advisory services income of $2.3 million increased 21% from the second quarter of 1996 and 21% from the first quarter of 1997 due primarily to increases in assets under management and, relative to the increase from the first quarter, to annual tax preparation fees. Assets under management amounted to $1.3 billion at June 30, 1997, an increase of $116.2 million from December 31, 1996. The Company recorded no securities gains during either the second quarter of 1997 or 1996 as compared to $3 thousand in the first quarter of 1997. NONINTEREST EXPENSE Noninterest expense of $44.6 million increased 13% from the second quarter of 1996 and 3% from the first quarter of 1997. The year-to-year increase is primarily attributable to the Family acquisition during the fourth quarter of 1996 and the issuance of the Trust Capital Securities during the first quarter of 1997. While the overall total of non-interest expenses have increased, the Company's efficiency ratio, which excludes distributions on the Trust Capital Securities, has decreased to 58.56% during the second quarter of 1997 as compared with 59.57% during the first quarter of 1997 and 62.35% during the second quarter of 1996. The lower efficiency ratio reflects efficiencies created by the acquisition and assimilation of both Bank of New Hampshire and Family. Salaries and benefits expense of $22.1 million increased 27% from last year and 4% from the first quarter. In addition to Family, the increases are attributable to expansion of the retail franchise and additional staffing to support the increased volume of deposit and loan transactions. Second quarter full-time equivalent employees were 2,400, compared to 2,072 for the same period last year and 2,365 for the first quarter. Data processing expense increased 18% from the second quarter of last year and was 4% lower than the first quarter. The decrease from the first quarter is primarily attributable to higher costs in the first quarter associated with computer system upgrades related to the assimilation of Family. Occupancy expense decreased 1% from the second quarter of last year and 19% from the first quarter of 1997. Included as a reduction to occupancy expense during the second quarter is a net gain associated principally with the sale of the former operations center of Bank of New Hampshire of $503 thousand. Excluding the net gain, occupancy expense increased 12% from the second quarter of last year and decreased 6% from the first quarter of 1997. The year-to-year increase was primarily related to Family but also reflects the cost associated with the expansion of the branch network. The decrease in occupancy expense from the first quarter relates primarily to seasonal factors. Equipment expense increased 43% from the second quarter of last year and decreased 3% from the first quarter of 1997. The year- to-year increase was related to Family as well as the expansion of the Company's branch and ATM networks and continued investments in computer-related technology. The quarter-to- quarter decrease was primarily related to lower equipment maintenance expense. Amortization of goodwill and deposit premiums during the second quarter of 1997 increased 51% from the second quarter of 1996 and was flat when compared with the first quarter. The year-to- year increase was directly related to the purchase of Family during the fourth quarter of 1996. Advertising and marketing expenses increased 56% from the second quarter of 1996 and was 3% higher than the first quarter. The increases were related in large part to the addition of Family but also reflected the Company's efforts to promote its products and services in an increasingly competitive market for financial services. Merger expense in the second quarter of 1996 relates to the acquisition of Bank of New Hampshire which was accounted for as a pooling of interests. The breakdown of other noninterest expenses is included in Table 5, which follows.
TABLE 5 - Other Non-Interest Expenses 1997 1997 1996 1996 1996 1996 Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter (Dollars in Thousands) Miscellaneous loan costs $1,231 $ 912 $1,078 $ 778 $ 978 $ 394 Telephone 1,018 1,005 1,215 921 838 677 Postage and freight 1,004 1,070 765 825 673 815 Office supplies 876 824 1,009 755 677 677 Deposits and other assessments 378 372 111 2,270 (1) 324 345 Collection and carrying costs of non-performing assets 9 213 189 502 378 504 Other 2,866 2,350 2,206 1,413 3,361 2,458 $7,382 $6,746 $6,573 $7,464 $7,229 $5,870 (1) Third quarter 1996 includes a $1.9 million Savings Association Insurance Fund ("SAIF") assessment.
TAXES The second quarter effective tax rate of 36% compares to 37% in the second quarter of 1996 and 37% in the first quarter. ASSET QUALITY As shown in Table 6, nonperforming assets were $46.3 million at June 30, 1997, which represented 0.83% of total assets. This compares to $46.9 million or 1.07% at June 30, 1996 and $45.2 million or 0.86% at December 31, 1996. Year to year, declines in nonperforming assets have resulted from sales of Other Real Estate Owned ("OREO"), which were offset in part by an increase in nonaccrual loans and repossessions.
TABLE 6 -- Nonperforming Assets June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, 1997 1997 1996 1996 1996 1996 (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $ 5,406 $ 5,053 $ 3,867 $ 3,901 $ 5,032 $ 6,089 Commercial real estate loans: Nonaccrual loans 16,785 15,854 15,270 16,233 15,628 16,917 Troubled debt restructurings 1,356 1,473 1,581 1,691 1,878 1,793 Total 18,141 17,327 16,851 17,924 17,506 18,710 Commercial loans: Nonaccrual loans 7,732 6,875 8,016 7,688 7,567 5,631 Troubled debt restructurings 193 199 579 614 1,114 1,349 Total 7,925 7,074 8,595 8,302 8,681 6,980 Consumer loans: Nonaccrual loans 6,564 6,439 5,097 4,505 4,368 4,099 Total nonperforming loans: Nonaccrual loans 36,487 34,221 32,250 32,327 32,595 32,736 Troubled debt restructurings 1,549 1,672 2,160 2,305 2,992 3,142 Total 38,036 35,893 34,410 34,632 35,587 35,878 Other nonperforming assets: Other real estate owned, net of related reserves 5,652 7,390 10,000 9,674 10,033 11,089 Repossessions, net of related reserves 2,564 1,964 1,818 1,572 1,316 1,865 Total other nonperforming assets 8,216 9,354 11,818 11,246 11,349 12,954 Total nonperforming assets $46,252 $45,247 $46,228 $45,878 $46,936 $48,832 Accruing loans which are 90 days overdue $ 4,894 $ 5,820 $ 8,038 $ 5,123 $ 2,840 $ 5,090 Total nonperforming loans as a percentage of total loans (1) 1.01% 0.98% 0.94% 1.09% 1.14% 1.19% Total nonperforming assets as a percentage of total assets 0.83% 0.83% 0.86% 1.03% 1.07% 1.15% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 1.23% 1.24% 1.26% 1.44% 1.50% 1.61% Note: The Company has changed its definition of non-performing assets to exclude loans 90 days past due still accruing interest. Prior periods have been restated accordingly. (1) Exclusive of loans held for sale.
The Company's residential loan portfolio accounts for 30% of the total loan portfolio at June 30, 1997 as compared with 33% at June 30, 1996 and 32% at December 31, 1996. The reductions are consistent with the strategy of the Company to reduce lower yielding residential loans as a percentage of the overall loan portfolio. The Company's residential loans are generally secured by 1-4 family homes, conform to federal agency underwriting standards and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At June 30, 1997, 0.47% of the Company's residential loans were non-performing, as compared with 0.49% at June 30, 1996 and 0.33% at December 31, 1996. The Company's commercial real estate loan portfolio accounts for 26% of the total loan portfolio at June 30, 1997 as compared with 26% at June 30, 1996 and 26% at December 31, 1996. It is the intention of the Company to maintain commercial real estate loans as a percentage in the overall loan portfolio at the same or lower levels in the future. At June 30, 1997, 1.84% of the Company's commercial real estate loans were non-performing, as compared with 2.13% at June 30, 1996 and 1.75% at December 31, 1996. The Company's commercial business loan portfolio accounts for 14% of the total loan portfolio at June 30, 1997 as compared with 14% at June 30, 1996 and 13% at December 31, 1996. It is the intention of the Company to increase commercial business loans as a percentage in the overall loan portfolio. Commercial business loans are not concentrated in any particular industry, but reflect the broad-based economies of Maine, New Hampshire and northeastern Massachusetts. The Company's commercial business loans are generally to small and medium size business located within its geographic market area. At June 30, 1997, 1.48% of the Company's commercial business loans were non-performing, as compared with 2.01% at June 30, 1996 and 1.80% at December 31, 1996. The Company's consumer loan portfolio accounts for 29% of the total loan portfolio at June 30, 1997, as compared with 27% at June 30, 1996 and 28% at December 31, 1996. It is the intention of the Company to increase consumer loans as a percentage in the overall loan portfolio. The Company has a diversified consumer loan portfolio comprised of 35% home equity loans, 21% automobile loans, 18% mobile home loans and 26% of other loan types. At June 30, 1997, 0.60% of the Company's consumer loans were non-performing, as compared with 0.52% at June 30, 1996 and 0.49% at December 31, 1996. Net Charge-offs As shown in Table 7, second quarter net charge-offs were $1.8 million or 19 basis points of average loans and leases outstanding. This compares to $2.3 million or 29 basis points for the second quarter of 1996 and $887 thousand or 9 basis points for the first quarter.
TABLE 7 - Allowance for Loan and Lease Losses 1997 1997 1996 1996 1996 1996 Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter (Dollars in Thousands) Average loans and leases outstanding during the period (1) $3,861,741 $3,799,500 $3,438,872 $3,234,629 $3,202,162 $2,959,218 Allowance at beginning of period $ 66,601 $ 67,488 $ 61,663 $ 63,654 $ 65,533 $ 60,975 Additions due to acquisitions and purchases --- --- 7,055 --- --- 4,310 Charge-offs: Residential real estate mortgages 425 516 582 495 1,163 434 Commercial real estate mortgages 214 261 5,064 1,658 1,158 888 Commercial business loans and leases 1,021 323 1,211 249 679 855 Consumer loans and leases 1,522 1,568 1,182 722 1,092 741 Total loans charged off 3,182 2,668 8,039 3,124 4,092 2,918 Recoveries: Residential real estate mortgages 113 90 97 93 248 62 Commercial real estate mortgages 448 890 5,721 591 1,169 2,060 Commercial business loans and leases 563 574 780 245 92 420 Consumer loans and leases 240 227 211 204 254 174 Total loans recovered 1,364 1,781 6,809 1,133 1,763 2,716 Net charge-offs 1,818 887 1,230 1,991 2,329 202 Additions charged to operating expenses --- --- --- --- 450 450 Allowance at end of period $ 64,783 $ 66,601 $ 67,488 $ 61,663 $ 63,654 $ 65,533 Ratio of net charge-offs to average loans and leases outstanding during the period-annualized(1) 0.19% 0.09% 0.14% 0.25% 0.29% 0.03% Ratio of allowance to total loans and leases at end of period(2) 1.73% 1.82% 1.85% 1.94% 2.04% 2.17% Ratio of allowance to non- performing loans at end of period 170% 186% 196% 178% 179% 183% (1) Average loans and leases include portfolio loans and loans held for sale. (2) Excludes loans held for sale.
Provision/Allowance for Loan Losses The Company did not record a provision for loan losses for either the first or second quarter of 1997. The provision for the second quarter of 1996 was $450 thousand. At June 30, 1997, the allowance for loan and lease losses amounted to $64.8 million or 1.73% of loans, as compared to 2.04% at June 30, 1996 and 1.85% at December 31, 1996. Management considers the allowance appropriate and adequate to cover potential losses inherent in the loan portfolio based on the current economic environment. Provisions for loan losses are attributable to management's ongoing evaluation of the adequacy of the allowance for loan and lease losses, which includes, among other procedures, consideration of the character and size of the loan portfolio, monitoring trends in nonperforming loans, delinquent loans and net charge-offs, as well as new loan originations and other asset quality factors. Although management utilizes its best judgment in providing for possible losses, there can be no assurance that the Company will not have to change its provisions for loan losses in subsequent periods. Changing economic and business conditions in northern New England, fluctuations in local markets for real estate, future changes in nonperforming asset trends, large upward movements in market-based interest rates or other reasons could affect the Company's future provisions for loan losses. The ratio of allowance for loan losses to nonperforming loans was 170% at June 30, 1997, as compared to 179% at June 30, 1996 and 196% at December 31, 1996. LIQUIDITY For banks, liquidity represents the ability to meet both loan commitments and deposit withdrawals. Funds to meet these needs generally can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional in-market deposit sources, the Company has many other sources of liquidity, including proceeds from maturing securities and loans, the sale of securities, asset securitization and other non-relationship funding sources, such as FHLB borrowings, senior or subordinated debt, commercial paper and wholesale purchased funds. Management believes that the high proportion of residential and installment consumer loans in the Company's loan portfolio provides it with an additional amount of contingent liquidity through the conventional securitization programs that exist today. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. CAPITAL At June 30, 1997, shareholders' equity totaled $432 million. In addition, in January 1997, a subsidiary trust of the Company issued $100 million of Trust Capital Securities which mature in 2027 and which qualify as Tier 1 Capital. The Company declared and paid an $.18 per share dividend during the second quarter, representing a 28% dividend payout ratio. See attached Table 8 for information regarding the Company's rate of internal capital generation. On April 16, 1997, the Company's Board of Directors approved the repurchase of up to $100 million of its Common Stock on the open market. During the six months ended June 30, 1997, the Company had repurchased $35.5 million of its common stock, representing 1,111,800 shares. The Company is subject to risk-based capital guidelines that measure capital relative to risk-weighted assets. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios, set forth in Table 9. As indicated in such table, the Company's regulatory capital currently substantially exceeds all applicable requirements. The Company's banking subsidiaries also are subject to federal regulatory capital requirements. At June 30, 1997, each of the Company's banking subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency.
TABLE 8 - Rate of Internal Capital Generation 1997 1996 Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Return on Assets 1.30% 1.28% 1.32% 1.29% 0.93% 1.24% Average equity to assets 8.03% 8.24% 7.82% 8.48% 8.32% 8.76% Return on average equity 16.35% 15.55% 16.83% 15.21% 11.20% 14.06% Total dividend payout ratio 28% 30% 29% 30% 42% 33% Earnings retention rate 72% 70% 71% 70% 58% 67% Internal capital generation rate 11.75% 10.89% 12.02% 10.59% 6.44% 9.37%
TABLE 9 - Regulatory Capital Requirements For Capital Actual Adequacy Purposes Excess Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of June 30, 1997: Total capital (to risk weighted assets) $509,048 14.36% $283,586 8.00% $225,462 6.36% Tier 1 capital (to risk weighted assets) $464,485 13.10% $141,793 4.00% $322,692 9.10% Tier 1 leverage capital ratio (to average assets) $464,485 8.62% $215,614 4.00% $248,871 4.62% As of December 31, 1996: Total capital (to risk weighted assets) $409,144 12.24% $267,428 8.00% $141,716 4.24% Tier 1 capital (to risk weighted assets) $367,041 10.98% $133,714 4.00% $233,327 6.98% Tier 1 leverage capital ratio (to average assets) $367,041 7.96% $184,445 4.00% $182,596 3.96%
Prospective Acquisitions On July 9, 1997, the Company and MPN Holdings ("MPN") entered into a definitive agreement whereby the Company will acquire all of the outstanding stock of MPN. MPN is the holding company of Morse Payson & Noyes Insurance Agency. It is anticipated that the acquisition will be treated as a purchase and will be effected through an exchange of MPN Common Stock for Company Common Stock. Consummation of the acquisition of MPN is subject to, among other things, all necessary regulatory and shareholder approvals and other customary conditions. The MPN acquisition is expected to be completed during the fourth quarter. On June 24, 1997, the Company and Atlantic Bancorp ("Atlantic"), the parent company of Atlantic Bank, National Association entered into a definitive agreement which provides, among other things, for (i) the merger of PHFG, Inc., a newly-formed subsidiary of the Company, into Atlantic (the "Merger"), (ii) the conversion of each outstanding share of Atlantic Common Stock outstanding immediately prior to the Merger (except for any shares as to which the holders thereof have perfected dissenters' rights and as set forth in the agreement) for the right to receive $17.00 and (iii) the conversion of each outstanding share of Atlantic Preferred Stock outstanding immediately prior to the Merger (except for any shares as to which the holders thereof have perfected dissenters' rights and as set forth in the agreement) for the right to receive $17.00 multiplied by the number of shares of Atlantic Common Stock into which each share of Atlantic Preferred Stock may be converted in accordance with its terms. The aggregate purchase price for Atlantic is $70.8 million. Immediately following consummation of the Merger, Atlantic Bank National Association will be merged with and into Peoples Heritage Bank, the Maine-based banking subsidiary of the Company. At June 30, 1997, Atlantic had total assets of $482.4 million and shareholders' equity of $45.1 million. Consummation of the acquisition of Atlantic is subject to, among other things, the receipt of all necessary regulatory and shareholder approvals and other customary conditions. The acquisition of Atlantic is expected to be completed during the fourth quarter and will be accounted for as a purchase. IMPACT OF NEW ACCOUNTING STANDARDS In February, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share." This Statement requires disclosure of "basic" and "diluted" earnings per share. The Statement is required to be implemented retroactively in the fourth quarter of 1997. The Company's current reported earnings per share is the same as "basic." The Company estimates that diluted earnings per share will be lower by less than 3% than the current reported earnings per share. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward- looking statements which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," will," believe," "expect," "estimate," anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U. S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 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) Exhibit 27 - Financial Data Schedule. (b) The following reports on Form 8-K were filed on the dates indicated: (i) On April 8, 1997, the Company filed a report on Form 8-K regarding the exchange of $100 million of restricted 9.06% Capital Securities for a like amount of registered 9.06% Capital Securities. (ii) On April 17, 1997, the Company filed a report of Form 8-K regarding Board of Director authorization for the repurchase of up to $100 million of the Company's outstanding common stock in the open market. (iii) On June 2, 1997, the Company filed a report on Form 8- K regarding the signing of a binding letter of intent to purchase MPN Holdings. (iv) On June 24, 1997, the Company filed a report on Form 8-K announcing the execution of an agreement to acquire Atlantic Bancorp 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 August 14, 1997 By: William J. Ryan Chairman, President and Chief Executive Officer Date August 14, 1997 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 14, 1997 By: William J. Ryan Chairman, President and Chief Executive Officer /s/ Peter J. Verrill Date August 14, 1997 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-31-1997 JUN-30-1997 295,610 0 0 0 1,169,169 0 0 3,754,811 64,783 5,591,180 4,213,956 788,359 57,143 0 286 0 0 431,436 5,591,180 170,105 36,075 1,203 207,383 70,960 18,785 117,638 0 3 87,839 54,505 54,505 0 0 34,798 1.24 1.24 4.76 36,487 4,894 1,549 0 66,601 3,182 1,364 64,783 64,783 0 0
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