-----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, UsTvW+JW6dJfIm7QpcVi5A77yR9SRhgDi+uENOP2n0JElKZalEDUyCWZI+1EtFLG /jseDiOqMdBKQwSMAiCbnA== 0000829750-97-000009.txt : 19971117 0000829750-97-000009.hdr.sgml : 19971117 ACCESSION NUMBER: 0000829750-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-16947 FILM NUMBER: 97718829 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 September 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 November 1, 1997 is: Common stock, par value $.01 per share 27,500,841 (Class) (Outstanding) INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Consolidated Balance Sheets - September 30, 1997 and December 31, 1996. Consolidated Statements of Income - Three months ended September 30, 1997 and 1996; nine months ended September 30, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity - Nine months ended September 30, 1997 and 1996. Consolidated Statements of Cash Flows - Nine months ended September 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) September 30, December 31, 1997 1996 Assets Cash and due from banks $ 421,489 $ 276,995 Federal funds sold 137,000 83,000 Securities available for sale, at market value 1,174,210 1,045,069 Loans held for sale, market value $160,878 and $103,790, respectively 154,352 103,270 Loans and leases: Residential real estate mortgages 1,184,853 1,176,874 Commercial real estate mortgages 1,000,693 962,375 Commercial business loans and leases 515,925 477,402 Consumer loans and leases 1,216,978 1,037,949 3,918,449 3,654,600 Less: Allowance for loan and lease losses 62,961 67,488 Net loans and leases 3,855,488 3,587,112 Bank premises and equipment 70,324 73,956 Goodwill and other intangibles 66,052 71,649 Mortgage servicing rights 36,976 33,314 Other assets 140,192 124,033 $6,056,083 $5,398,398 Liabilities and Shareholders' Equity Deposits: Regular savings $ 732,449 $ 760,340 NOW and money market accounts 1,023,926 1,023,448 Certificates of deposit (including certificates of $100 or more of $275,472 and $232,880, respectively) 1,844,157 1,796,521 Demand deposits 668,023 604,980 Total deposits 4,268,555 4,185,289 Federal funds purchased 96,014 -0- Securities sold under repurchase agreements 257,868 197,005 Borrowings from Federal Home Loan Bank of Boston 802,279 470,080 Other borrowings 15,680 23,884 Other liabilities 64,616 85,130 Total liabilities 5,505,012 4,961,388 Company obligated, mandatorily redeemable securities of subsidiary trust holding solely parent company junior subordinated debentures 100,000 -0- 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 authorized, 28,576,885 shares issued) 286 286 Paid-in capital 271,790 271,790 Retained earnings 208,260 170,855 Net unrealized gain (loss) on securities available for sale 4,030 (582) Treasury stock at cost (1,102,356 shares and 355,385 shares, respectively) (33,295) (5,339) Total shareholders' equity 451,071 437,010 $6,056,083 $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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Interest and dividend income: Interest on loans and leases (1) $ 91,467 $72,715 $261,571 $211,937 Interest on mortgage-backed investments 11,772 4,706 33,947 12,213 Interest on other investments 6,470 7,606 20,371 24,804 Dividends on equity securities 659 479 1,862 1,391 Total interest and dividend income 110,368 85,506 317,751 250,345 Interest expense: Interest on deposits 36,449 29,477 107,409 88,833 Interest on borrowed funds 11,956 8,085 30,741 21,598 Total interest expense 48,405 37,562 138,150 110,431 Net interest income 61,963 47,944 179,601 139,914 Provision for loan losses -0- -0- -0- 900 Net interest income after provision for loan losses 61,963 47,944 179,601 139,014 Noninterest income: Customer services 5,839 3,986 16,941 10,902 Mortgage banking services 4,988 3,315 12,761 9,850 Trust and investment advisory services 2,354 1,930 6,517 5,454 Net securities gains (losses) 48 (1) 51 503 Other noninterest income 1,011 574 2,676 1,760 14,240 9,804 38,946 28,469 Noninterest expenses: Salaries and employee benefits 23,332 18,388 66,605 54,019 Data processing 3,847 3,126 11,015 8,895 Occupancy 3,432 2,923 10,315 9,322 Equipment 2,824 2,204 8,582 6,195 Distributions on securities of subsidiary trust 2,297 -0- 6,072 -0- Amortization of goodwill and deposit premiums 1,889 1,249 5,661 3,224 Advertising and marketing 2,290 901 5,378 2,900 Merger expenses -0- -0- -0- 5,105 Other noninterest expenses 7,301 7,465 21,423 20,764 47,212 36,256 135,051 110,424 Income before income tax 28,991 21,492 83,496 57,059 Applicable income tax 10,385 7,300 30,092 20,118 Net income $ 18,606 $14,192 $ 53,404 $ 36,941 Weighted average shares outstanding 27,447,614 25,191,163 27,859,413 25,163,246 Earnings per share $ 0.68 $ 0.56 $ 1.92 $ 1.47 (1) Interest on loans and leases includes interest on loans held for sale. See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Thousands, Except Number of Shares and Per Share Data) (Unaudited) Net Par Paid in Retained Unrealized Treasury Value Capital Earnings Gain (loss) Stock Total Balances at December 31, 1995 $256 $224,267 $134,444 $ 3,763 $( 7,805) $354,925 Treasury stock issued for employee benefit plans (127,407 shares at an average price of $13.43) -- -- (186) -- 1,897 1,711 Change in unrealized gains (losses) on securities available for sale, net of tax -- -- -- (4,467) -- (4,467) Net income -- -- 36,941 -- -- 36,941 Cash dividends $0.48 -- -- (12,099) -- -- (12,099) Balances at September 30, 1996 $256 $224,267 $159,100 $ (704) $ (5,908) $377,011 Balances at December 31, 1996 $286 $271,790 $170,855 $ (582) $ (5,339) $437,010 Treasury stock issued for employee benefit plans (364,829 shares at an average price of $18.67) -- -- (783) -- 7,593 6,810 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 -- -- -- 4,612 -- 4,612 Net income -- -- 53,404 -- -- 53,404 Cash dividends $0.55 -- -- (15,216) -- -- (15,216) Balances at September 30, 1997 $286 $271,790 $208,260 $ 4,030 $(33,295) $451,071 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) Nine Months Ended September 30, 1997 1996 Cash flows from operating activities: Net income $ 53,404 $ 36,941 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses --- 900 Provision for depreciation 5,572 5,442 Amortization of goodwill and other intangibles 5,597 3,200 Net (increase) decrease in net deferred tax assets 3,905 1,816 Net (gains) losses realized from sales of other real estate owned (515) 243 Net (gains) losses realized from sales of securities (51) (503) Net (gains) losses realized from sales of loans held for sale (a component of mortgage banking services) (6,926) (5,150) Net decrease (increase) in mortgage servicing rights (3,662) (6,401) Proceeds from sales of loans held for sale 1,518,254 740,748 Residential loans originated and purchased for sale (1,562,409) (754,366) Net decrease (increase) in interest and dividends receivable and other assets (18,930) (6,674) Net increase (decrease) in other liabilities (27,563) 13,548 Net cash (used) provided by operating activities $ (33,324) $ 29,744 Cash flows from investing activities: Proceeds from sales of securities available for sale $ 58,361 31,385 Proceeds from maturities and principal repayments of securities available for sale 313,885 356,961 Purchases of securities available for sale (494,081) (386,975) Net (increase) decrease in loans and leases (266,027) (401,724) Premiums paid on deposits purchased --- (18,230) Net additions to premises and equipment (1,940) (6,723) Proceeds from sales of other real estate owned 2,357 3,670 Net (increase) decrease in repossessed assets owned 733 (88) Net cash (used) provided by investing activities $ (386,712) $ (421,724) Cash flows from financing activities: Net increase (decrease) in deposits $ 83,266 $ 188,067 Net increase (decrease) in securities sold under repurchase agreements 60,863 1,157 Proceeds from Federal Home Loan Bank of Boston borrowings 618,911 401,998 Payments on Federal Home Loan Bank of Boston borrowings (286,712) (240,506) Net increase (decrease) in other borrowings (8,204) (2,191) Proceeds from issuance of securities of subsidiary trust 98,347 --- Purchase of treasury stock (35,549) --- Sale of treasury stock 6,810 1,711 Cash dividends paid to shareholders (15,216) (12,099) Net cash provided (used) by financing activities $ 522,516 $ 338,137 Increase (decrease) in cash and cash equivalents $ 102,480 $ (53,843) Cash and cash equivalents at beginning of period 359,995 289,191 Cash and cash equivalents at end of period $ 462,475 $ 235,348 Supplemental disclosures of information: Interest paid on deposits and borrowings $ 139,783 $ 108,623 Income taxes paid 30,014 16,334 Income tax refunds 1,913 580 Noncash investing transactions: Loans transferred to other real estate owned 3,497 2,599 Loans originated to finance the sales of other real estate owned 5,846 1,720 Increases (decreases) resulting from the adoption of SFAS No. 115: Securities available for sale 7,255 6,860 Deferred income taxes - liabilities 2,643 2,393 Net unrealized gain (loss) on securities available for sale 4,612 4,467 See accompanying Notes to Consolidated Financial Statements.
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 nine months ended September 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. SUMMARY The Company reported net income of $18.6 million, or $.68 per share, for the third quarter of 1997. This compares with $14.2 million, or $.56 per share, for the third quarter of 1996 and $17.8 million, or $.64 per share, for the second quarter of 1997. Third quarter return on equity was 16.70%, which compared to 15.21% in the third quarter of 1996 and 16.35% in the second quarter of 1997. The third quarter return on assets was 1.30%, unchanged from the second quarter, which compared to 1.29% for the same period in 1996. Net earnings for the quarter, when compared to the same period last year, increased 31% due to increased net interest income of 29% and noninterest income of 45%. These increases were generated both internally and through acquisitions. Related expenses rose commensurate with revenues. The Company's efficiency ratio, which measures overhead as a percent of revenue, improved slightly from 59.58% in the third quarter of 1996 to 58.94% in the third quarter of 1997. Cash earnings per share, which is calculated using earnings before the amortization of goodwill and core deposit premiums, improved slightly from $.61 per share in 1996 to $.75 per share in 1997. (See Table 1.) Compared to the second 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. The Company earned net income of $53.4 million during the nine months ended September 30, 1997, as compared to $36.9 million during the same period in 1996, which represented $1.92 and $1.47 per share, respectively. Return on equity and return on assets were 16.20% and 1.30% during the nine months ended September 30, 1997, as compared to 13.52% and 1.16% for the nine months ended September 30, 1996, respectively. Cash earnings per share was $2.12 and $1.60 for the nine months ended September 30, 1997 and 1996, respectively. Selected quarterly data is provided in Table 1.
TABLE 1 - Selected Quarterly Data 1997 1996 (Dollars in Thousands) Third Second First Fourth Third Second First Net interest income $ 61,963 $ 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 61,963 59,925 57,713 50,659 47,944 46,381 44,689 Noninterest income (excluding securities transactions) 14,192 12,372 12,331 9,975 9,805 9,196 8,965 Securities gains 48 --- 3 4 (1) --- 504 Noninterest expenses (excluding SAIF assessment and merger charges) 47,212 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 28,991 27,692 26,813 22,989 21,492 15,991 19,576 Income tax expense 10,385 9,904 9,803 7,450 7,300 5,848 6,970 Net income $ 18,606 $ 17,788 $ 17,010 $ 15,539 $ 14,192 $ 10,143 $ 12,606 Earnings per share $ 0.68 $ 0.64 $ 0.60 $ 0.63 $ 0.56 $ 0.40 $ 0.50 Cash earnings per share $ 0.75 $ 0.71 $ 0.67 $ 0.69 $ 0.61 $ 0.45 $ 0.54 Return on average assets (1) 1.30% 1.30% 1.28% 1.32% 1.29% 0.93% 1.24% Return on average equity (1) 16.70% 16.35% 15.55% 16.83% 15.21% 11.20% 14.06% Efficiency ratio (2) 58.94% 58.56% 59.57% 62.09% 59.58% 62.85% 63.08% (1) Annualized. (2) Excludes securities transactions, a one-time assessment to recapitalize the Savings Association Insurance Fund ("SAIF"), 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 Third Average Yield/(1) Balance Interest Rate (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,396,461 $ 27,455 7.86% Commercial real estate mortgages 992,632 24,078 9.62 Commercial loans and leases 531,187 12,700 9.64 Consumer loans and leases 1,146,586 27,384 9.48 Total loans and leases 4,066,866 91,617 8.96 Securities available for sale (3) 1,171,323 18,833 6.41 Federal funds sold 11,249 194 6.90 Total earning assets 5,249,438 110,644 8.39 Nonearning assets 428,694 Total assets $5,678,132 Interest-bearing deposits: Regular savings $ 743,465 5,020 2.68 NOW and money market accounts 1,013,670 6,502 2.54 Certificates of deposit 1,818,595 24,927 5.44 Total interest-bearing deposits 3,575,730 36,449 4.04 Borrowed funds 882,057 11,956 5.38 Total interest-bearing liabilities 4,457,787 48,405 4.31 Demand deposits 619,933 Other liabilities (3) 60,400 Securities of subsidiary trust 100,000 Shareholders' equity (3) 440,012 Total liabilities and shareholders' equity $5,678,132 Net earning assets $ 791,651 Net interest income (fully-taxable equivalent) 62,239 Less: fully-taxable equivalent adjustments (276) Net interest income $ 61,963 Net interest rate spread (fully-taxable equivalent) 4.08% Net interest margin (fully-taxable equivalent) 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) 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 Third quarter average loans and leases of $4.1 billion rose $832.2 million from a year earlier and $205.1 million from the second quarter. The acquisition of Family during the fourth quarter of 1996 added $469.8 million of loans. Internal growth 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 77.5% during the third quarter of 1997 due primarily to the 54.4% loans to earning assets ratio of Family at the time of acquisition. The Company is gradually increasing the percentage of average loans to average earning assets as the Family acquisition is assimilated. The ratio increased from 76.3% as of June 30, 1997 to 77.5% at September 30, 1997. Average residential real estate loans (which includes loans held for sale) of $1.4 billion grew 6.6% from the second quarter of 1997 and 24.9% from the third quarter of 1996. The Company originates residential real estate loans for sale to investors in the secondary mortgage market and for its own portfolio. During the third quarter, originations were $856.5 million, of which $714.3 million represented correspondent production. This compares to $295.0 million and $205.4 million, respectively, in the third quarter of 1996 and $437.6 million and $324.0 million, respectively, in the second quarter. Mortgage originations, particularly refinancings, are highly dependent upon interest rates. At September 30, 1997, 38% of portfolio loans were fixed rate and 62% 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 $531.2 million grew 24.0% from the third quarter of 1996 and 4.1% from the second quarter of 1997. Excluding $49.1 million of Family loans added during the fourth quarter, average outstanding commercial loans increased 12.6% from the third quarter of 1996. The growth in commercial loans is consistent with the Company's focus on lending to small and medium size business customers within its geographic markets. The average yield on commercial loans during the third quarter of 1997 of 9.64% was slightly higher than the third quarter 1996 yield of 9.51%. Average commercial real estate loans of $992.6 million grew 21% from last year and 1.9% from the second quarter. Excluding $151.2 million of Family loans added during the fourth quarter, average outstanding commercial real estate loans increased 2.5% from the third quarter of 1996. The average yield on commercial real estate loans declined slightly from 9.75% during the third quarter of 1996 to 9.62% during the third quarter of 1997 reflecting increased competition. Average consumer loans of $1.1 billion grew 32.2% from the third quarter of 1996 and 7.4% from the second quarter of 1997. Excluding $79.1 million of Family loans added during the fourth quarter, average outstanding consumer loans increased 23.1% from the third 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 9.36% during the third quarter of 1996 to 9.48% during the third quarter of 1997. Securities Available for Sale and Other Earning Assets The Company's $1.2 billion securities portfolio at September 30, 1997 consisted primarily of U. S. Treasury securities and AAA or equivalent rated mortgage-backed securities. Average securities increased 46.4% from last year and decreased 1.6% from the second quarter. Excluding $356.2 million of Family securities added during the fourth quarter, average outstanding securities increased 1.9%. The average securities yield was 6.41% for the third quarter of 1997, as compared to 6.30% for the third quarter of 1996 and 6.42% for the second 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 September 30, 1997, the available-for-sale portfolio had a $6.2 million gross unrealized gain, compared to a gross unrealized loss of $1.2 million at September 30, 1996 and a $400 thousand gross unrealized gain at June 30, 1997. The increase in market value was due to a decrease in market interest rates and improved market conditions in the third quarter. DEPOSITS AND OTHER FUNDING SOURCES Deposits Average deposits of $4.2 billion increased 25.1% from the third quarter of last year and 1.3% from the second quarter. Excluding $774.6 million of Family deposits added during the fourth quarter, average deposits increased 2% from the third quarter of 1996. At September 30, 1997, the ratio of loans to deposits was 92%, up from 89% at June 30, 1997 and 87% at December 31, 1996. This was primarily the result of the utilization of excess liquidity at 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 23.5% from last year and 2.3% from the second quarter. Excluding $250.5 million of Family transaction deposits added during the fourth quarter, average outstanding transaction deposits increased 4.5% from the third 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 2.59% during the third quarter of 1996 to 2.54% during the third quarter of 1997 due to an increase in lower yielding NOW accounts. Average savings and time deposit balances of $2.6 billion increased 26.2% from last year and increased 1% from the second quarter. Excluding $523.9 million of Family deposits added during the fourth quarter, average savings and time deposits increased less than 1%. The average rate paid on savings and time deposits has remained relatively flat on a year-to-year basis. Other Funding Sources The Company's primary source of funding, other than deposits and securities sold under repurchase agreements, is the Federal Home Loan Bank ("FHLB"). Average FHLB borrowings for the third quarter were $595.4 million, compared with $399.9 million for the third quarter of last year and $491.9 million for the second quarter. FHLB borrowings increased because growth in earning assets, particularly mortgage loans held for sale, 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 September 30, 1997, FHLB borrowings amounted to $802.3 million. The Company's estimated additional borrowing capacity with the FHLB at September 30, 1997 was $342 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 within a twelve-month period. 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 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 $25 thousand and are included in other assets. Amortization of the CMT floors reduced mortgage banking income by $41 thousand, $330 thousand, and $46 thousand in the third quarter of 1997, the third quarter of 1996, and the second quarter of 1997, respectively. NET INTEREST INCOME The Company's taxable-equivalent net interest income, which represented 81% of net interest income and noninterest income, was $62.2 million in the third quarter, up 29% from the third quarter of 1996 and 3% from the second 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 third quarter of 1996 to the third quarter of 1997 in tax equivalent net interest income by category due to rate and volume. The third quarter of 1997 net interest margin was 4.73% compared to 4.73% in the third quarter of 1996 and 4.76% in the second quarter of 1997.
TABLE 3 - Rate Volume Analysis Three Months Ended September 30, 1997 vs. Three Months Ended September 30, 1996 Quarterly change from previous year due to: Total Volume Rate (1) Change (Dollars in Thousands) Interest income: Loans and leases $18,805 $ (78) $18,727 Investment securities 5,899 266 6,165 Federal funds sold (56) 64 8 Total interest income 24,648 252 24,900 Interest expense: Deposits Regular savings 982 (51) 931 NOW and money market accounts 1,005 (110) 895 Certificates of deposit 5,389 (243) 5,146 Total deposits 7,376 (404) 6,972 Borrowed funds 3,754 118 3,872 Total interest expense 11,130 (286) 10,844 Net interest income (fully taxable equivalent) $13,518 $ 538 $14,056 (1) Includes changes in interest income and expense not due solely to volume or rate changes.
NONINTEREST INCOME Third quarter noninterest income of $14.2 million increased 45% from the third quarter of 1996 and 15% when compared with the second quarter of 1997. The annual increase was attributable to both the Family acquisition during the fourth quarter of 1996 and internal initiatives to increase noninterest income. The increase in noninterest income from the last quarter was largely due to a $1.5 million increase in mortgage banking income. Customer services income of $5.8 million increased 46% from the third quarter of last year and 1.3% from the second quarter of 1997. Excluding Family, customer services revenue increased 10% from the third 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 $5.0 million increased 50% from last year and increased 41% from the second quarter due to an $802 thousand gain on the sale of mortgage servicing rights and a $524 thousand increase in mortgage sales income. 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 $37.0 million at September 30, 1997, which was 38% higher than a year earlier and 7% higher than on June 30, 1997. The Company has generally sold servicing rights related to correspondent production and retained servicing rights related to retail production. See Table 4 for details.
TABLE 4 - Mortgage Banking At or for the Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, 1997 1997 1997 1996 1996 1996 1996 (Dollars in Thousands) Residential mortgages serviced for investors at end of period $3,388,310 $2,905,274 $3,346,804 $3,227,659 $2,953,213 $2,819,545 $2,701,552 Residential mortgage sales income $ 2,141 $ 1,617 $ 1,113 $ 1,722 $ 1,419 $ 1,550 $ 1,332 Residential mortgage servicing income, net 2,045 1,925 1,865 1,132 1,247 1,621 1,832 Gain on sale of mortgage servicing 802 --- 1,253 236 649 --- 200 Total $ 4,988 $ 3,542 $ 4,231 $ 3,090 $ 3,315 $ 3,171 $ 3,364
Trust and investment advisory services income of $2.4 million increased 22% from the third quarter of 1996 and 3.4% from the second quarter of 1997 due primarily to increases in assets under management. Assets under management amounted to $1.8 billion, $1.3 billion and $1.2 billion at September 30, 1997, June 30, 1997, and December 31, 1996, respectively. The Company recorded a $48 thousand gain on sales of securities available for sale in the third quarter of 1997 as compared to $1 thousand loss in the third quarter of 1996. NONINTEREST EXPENSE Noninterest expense of $47.2 million increased 30% from the third quarter of 1996 and 5.8% from the second quarter of 1997. The year-to-year increase was 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 has increased, the Company's efficiency ratio, which excludes distributions on the Trust Capital Securities among other things (see Table 1), has decreased to 58.94% during the third quarter of 1997 from 59.58% during the third quarter of 1996 as compared with 58.56% during the second quarter of 1997. The lower efficiency ratio from 1996, although up slightly from the second quarter, reflects efficiencies created by the acquisition and assimilation of both Bank of New Hampshire and Family. Salaries and benefits expense of $23.3 million increased 27% from last year and 6% from the second quarter. In addition to Family, the increases were attributable to increased performance-based compensation. Third quarter full-time equivalent employees were 2,381, compared to 1,980 for the same period last year and 2,400 for the second quarter. Data processing expense increased 23% from the third quarter of last year and 10% from the second quarter. The increase in expenses was attributable to the implementation of system upgrades to accommodate increased volumes. Occupancy expense increased 17% from the third quarter of last year and 12% from the second quarter of 1997. Included as a reduction to occupancy expense during the second quarter is a net gain on the sale of the former operations center of Bank of New Hampshire of $503 thousand. Excluding the net gain in the second quarter, occupancy expense decreased 4%. The year-to-year increase was primarily related to Family but also reflects the cost associated with new supermarket branches. Equipment expense increased 28% from the third quarter of last year and was the same as the second 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. Amortization of goodwill and deposit premiums during the third quarter of 1997 increased 51% from the third quarter of 1996 and was flat when compared with the second 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 154% from the third quarter of 1996 and was 46% higher than the second quarter. The increases were related to the addition of Family, the timing of certain promotional campaigns and the Company's efforts to promote its products and services in an increasingly competitive market for financial services. The breakdown of other noninterest expenses is included in Table 5, which follows.
TABLE 5 - Other Noninterest Expenses 1997 1997 1997 1996 1996 1996 1996 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter (Dollars in Thousands) Miscellaneous loan costs $ 945 $1,231 $ 912 $1,078 $ 778 $ 978 $ 394 Telephone 1,015 1,018 1,005 1,215 921 838 677 Postage and freight 925 1,004 1,070 765 625 673 815 Office supplies 843 876 824 1,009 755 677 677 Deposits and other assessments 398 378 372 111 2,270 (1) 324 345 Collection and carrying costs of non-performing assets 275 9 213 189 502 378 504 Other 2,900 2,860 2,350 2,206 1,814 3,361 2,458 $7,301 $7,376 $6,746 $6,573 $7,665 $7,229 $5,870 (1) Third quarter 1996 includes a $1.9 million SAIF assessment.
TAXES The third quarter effective tax rate of 36% compares to 34% in the third quarter of 1996 and 36% in the second quarter. The increase from 1996 was primarily due to non-deductible goodwill from the Family purchase. ASSET QUALITY As shown in Table 6, nonperforming assets were $45.7 million at September 30, 1997, which represented 0.75% of total assets. This compares to $45.9 million or 1.03% at September 30, 1996 and $46.2 million or 0.83% at June 30, 1997. 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 Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, 1997 1997 1997 1996 1996 1996 1996 (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $ 6,474 $ 5,406 $ 5,053 $ 3,867 $ 3,901 $ 5,032 $ 6,089 Commercial real estate loans: Nonaccrual loans 16,147 16,785 15,854 15,270 16,233 15,628 16,917 Troubled debt restructurings 1,121 1,356 1,473 1,581 1,691 1,878 1,793 Total 17,268 18,141 17,327 16,851 17,924 17,506 18,710 Commercial business loans and leases: Nonaccrual loans 8,390 7,732 6,875 8,016 7,688 7,567 5,631 Troubled debt restructurings 118 193 199 579 614 1,114 1,349 Total 8,508 7,925 7,074 8,595 8,302 8,681 6,980 Consumer loans and leases; Nonaccrual loans 6,548 6,564 6,439 5,097 4,505 4,368 4,099 Total nonperforming loans: Nonaccrual loans 37,559 36,487 34,221 32,250 32,327 32,595 32,736 Troubled debt restructurings 1,239 1,549 1,672 2,160 2,305 2,992 3,142 Total 38,798 38,036 35,893 34,410 34,632 35,587 35,878 Other nonperforming assets: Other real estate owned, net of related reserves 5,057 5,652 7,390 10,000 9,674 10,033 11,089 Repossessions, net of related reserves 1,837 2,564 1,964 1,818 1,572 1,316 1,865 Total other nonperforming assets 6,894 8,216 9,354 11,818 11,246 11,349 12,954 Total nonperforming assets $45,692 $46,252 $45,247 $46,228 $45,878 $46,936 $48,832 Accruing loans which are 90 days overdue $ 6,324 $ 4,894 $ 5,820 $ 8,038 $ 5,123 $ 2,840 $ 5,090 Total nonperforming loans as a percentage of total loans (1) 0.99% 1.01% 0.98% 0.94% 1.09% 1.14% 1.19% Total nonperforming assets as a percentage of total assets 0.75% 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 1.16% 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 accounted for 30% of the total loan portfolio at September 30, 1997 as compared with 32% at September 30 and 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 September 30, 1997, 0.55% of the Company's residential loans were non- performing, as compared with 0.38% at September 30, 1996 and .33% at December 31, 1996. The Company's commercial real estate loan portfolio accounted for 26% of the total loan portfolio at September 30, 1997 and 1996 and at December 31, 1996. It is the intention of the Company to maintain commercial real estate loans as a percentage of the overall loan portfolio at the same or lower levels in the future. At September 30, 1997, 1.73% of the Company's commercial real estate loans were non-performing, as compared with 2.20% at September 30, 1996 and 1.75% at December 31, 1996. The Company's commercial business loan portfolio accounted for 13% of the total loan portfolio at September 30, 1997 as compared with 14% at September 30, 1996 and 13% at December 31, 1996. It is the intention of the Company to increase commercial business loans as a percentage of 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 businesses located within its geographic market area. At September 30, 1997, 1.65% of the Company's commercial business loans were non-performing, as compared with 1.93% at September 30, 1996 and 1.80% at December 31, 1996. The Company's consumer loan portfolio accounted for 31% of the total loan portfolio at September 30, 1997, as compared with 28% at September 30, 1996 and December 31, 1996. It is the intention of the Company to increase consumer loans as a percentage of the overall loan portfolio. The Company has a diversified consumer loan portfolio comprised of 34% home equity loans, 24% automobile loans, 16% mobile home loans, 9% student loans and 17% of other loan types, including approximately 1% of credit card loans. At September 30, 1997, 0.54% of the Company's consumer loans were non- performing, as compared with 0.50% at September 30, 1996 and 0.49% at December 31, 1996. Net Charge-offs As shown in Table 7, third quarter net charge-offs were $1.8 million or 18 basis points of average loans and leases outstanding. This compares to $2.0 million or 25 basis points for the third quarter of 1996 and $1.8 million or 19 basis points for the second quarter of 1997.
TABLE 7 - Allowance for Loan and Lease Losses 1997 1997 1997 1996 1996 1996 1996 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter (Dollars in Thousands) Average loans and leases outstanding during the period (1) $4,066,866 $3,861,741 $3,799,500 $3,438,872 $3,234,629 $3,202,162 $2,959,218 Allowance at beginning of period $ 64,783 $ 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 247 425 516 582 495 1,163 434 Commercial real estate mortgages 188 214 261 5,064 1,658 1,158 888 Commercial business loans and leases 1,452 1,021 323 1,211 249 679 855 Consumer loans and leases 2,684 1,522 1,568 1,182 722 1,092 741 Total loans charged off 4,571 3,182 2,668 8,039 3,124 4,092 2,918 Recoveries: Residential real estate mortgages 78 113 90 97 93 248 62 Commercial real estate mortgages 1,296 448 890 5,721 591 1,169 2,060 Commercial business loans and leases 982 563 574 780 245 92 420 Consumer loans and leases 393 240 227 211 204 254 174 Total loans recovered 2,749 1,364 1,781 6,809 1,133 1,763 2,716 Net charge-offs 1,822 1,818 887 1,230 1,991 2,329 202 Additions charged to operating expenses --- --- --- --- --- 450 450 Allowance at end of period $ 62,961 $ 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) 0.18% 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) 1.61% 1.73% 1.82% 1.85% 1.94% 2.04% 2.17% Ratio of allowance to non- performing loans at end of period 162% 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 in 1997. There was also no provision for the third quarter of 1996. At September 30, 1997, the allowance for loan and lease losses amounted to $63.0 million or 1.61% of loans, as compared to 1.94% at September 30, 1996 and 1.85% at December 31, 1996. The ratio of the allowance for loan and lease losses to nonperforming loans was 162% at September 30, 1997, as compared to 178% at September 30, 1996 and 196% 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. Based on anticipated growth in assets, it is likely that the Company will resume recording a provision for loan losses in 1998. 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 securitizations and other non-relationship funding sources, such as FHLB borrowings, senior or subordinated debt, commercial paper and wholesale purchased funds. Management believes that the high proportion of residential and installment consumer loans in the Company's loan portfolio provides it with an additional amount of contingent liquidity through the conventional securitization programs that exist today. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. CAPITAL At September 30, 1997, shareholders' equity totaled $451 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 a $.19 per share dividend during the third quarter, representing a 28% dividend payout ratio. See attached Table 8 for information regarding the Company's rate of internal capital generation. During the nine months ended September 30, 1997, the Company had repurchased $35.5 million of its common stock, representing 1,111,800 shares. Effective October 28, 1997, the Company's board of directors rescinded its stock repurchase authorization. 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, and in certain cases state, regulatory capital requirements. At September 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 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Return on assets (1) 1.30% 1.30% 1.28% 1.32% 1.29% 0.93% 1.24% Average equity to assets 7.75% 8.03% 8.24% 7.82% 8.48% 8.32% 8.76% Return on average equity (1) 16.70% 16.35% 15.55% 16.83% 15.21% 11.20% 14.06% Total dividend payout ratio (1) 28% 28% 30% 29% 30% 42% 33% Earnings retention rate 72% 72% 70% 71% 70% 58% 67% Internal capital generation rate 12.03% 11.75% 10.89% 12.02% 10.59% 6.44% 9.37% Cash return on average tangible equity (1) 21.68% 21.47% 20.54% 21.10% 18.42% 14.11% 16.48% (1) Annualized.
TABLE 9 - Regulatory Capital Requirements For Capital Actual Adequacy Purposes Excess Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of September 30, 1997 Total capital (to risk weighted assets) $528,499 14.26% $296,542 8.00% $231,957 6.26% Tier 1 capital (to risk weighted assets) $481,959 13.00% $149,271 4.00% $333,688 9.00% Tier 1 leverage capital ratio (to average assets) $481,959 8.62% $223,726 4.00% $258,233 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 October 1, 1997, the Company completed its purchase of Atlantic Bancorp, the parent company of Atlantic Bank, N.A., for an aggregate purchase price of $70.8 million. The acquisition, which was accounted for as a purchase, included $462.9 million in assets. On October 10, 1997, the Company acquired all of the outstanding stock of MPN Holdings ("MPN"). MPN is the holding company of Morse, Payson & Noyes Insurance. The transaction, which was accounted for as a purchase, was effected through an exchange of MPN stock for 222,839 shares of the Company's common stock. On October 27, 1997, the Company entered into an Agreement and Plan of Merger (the "Agreement") with CFX Corporation. The Agreement provides, among other things, (i) the merger of CFX Corporation with and into the company (the "Merger") and (ii) the conversion of common stock of CFX Corporation outstanding immediately prior to the Merger (subject to certain exceptions) into the right to receive .667 newly- issued shares of the Company's common stock plus cash in lieu of any fractional share interest, or approximately 16 million shares of newly issued Company stock. Consummation of the Merger is subject to a number of conditions, including, but not limited to, (i) the approval of the Agreement and the Merger by the shareholders of both the Company and CFX Corporation and (ii) the receipt of required regulatory approvals. For additional information, reference is made to the Current Reports on Form 8-K filed by the Company on October 27 and November 3, 1997. IMPACT OF NEW ACCOUNTING STANDARDS In February, 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 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 than 3% less than the basic earnings per share. Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which will be effective for financial statements for periods ending after December 15, 1997. The Company's disclosures currently comply with the provisions of this statement. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting comprehensive income, which is defined as all changes to equity except investments by and distributions to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. This statement will be effective for 1998 financial statements. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments. An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. This statement requires a company to disclose certain income statement and balance sheet information by operating segment, as well as provide a reconciliation of operating segment information to the company's consolidated balances. This statement will be effective for 1998 annual financial statements. For the purpose of SFAS No. 131, the Company has one operating segment. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of section 21A of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward- looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U. S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Part II - Other Information Item 1. Legal Proceedings: Like some of the larger financial institutions across the country, Peoples Heritage Bank, the Company's Maine-based banking subsidiary, has been served with a class action suit challenging the validity of its mortgage escrow practices. The plaintiff, James Greenwood, filed suit on August 29, 1997 in the United States District Court for the Northern District of New York. The suit seeks an unspecified amount of damages on behalf of the plaintiff and a purported class of similarly situated persons. Management currently is conducting a full assessment of the action and, based on its review to date, believes that the action will not be material to the financial condition of the Company. Management currently believes the action to be without merit and intends to vigorously defend the action. Other than as set forth above, 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) Reports on Form 8-K - not applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEOPLES HERITAGE FINANCIAL GROUP, INC. Date November 13, 1997 By: William J. Ryan Chairman, President and Chief Executive Officer Date November 13, 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 November 13, 1997 By: William J. Ryan Chairman, President and Chief Executive Officer /s/ Peter J. Verrill Date November 13, 1997 By: Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer) EX-27 2
9 9-MOS DEC-31-1997 SEP-30-1997 421,489 0 137,000 0 1,174,210 0 0 3,918,449 62,961 6,056,083 4,268,555 1,171,841 64,616 0 286 100,000 0 450,785 6,056,083 261,571 54,318 1,862 317,751 107,409 30,741 179,601 0 51 135,051 83,496 83,496 0 0 53,404 1.92 1.92 4.74 37,559 6,324 1,239 0 64,783 4,571 2,749 62,961 62,961 0 0
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