-----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, UZYiOcdrfFbW3mYw7LX35Dw5i56qQfTG5PyjwTsE00cdu2RPvR430s/FgY1xJQxj smkOFN9S23uYMTvY1qeB6g== 0000912057-95-009582.txt : 19951119 0000912057-95-009582.hdr.sgml : 19951119 ACCESSION NUMBER: 0000912057-95-009582 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 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: 95589214 BUSINESS ADDRESS: STREET 1: ONE PORTLAND SQ STREET 2: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112 BUSINESS PHONE: 2077618500 MAIL ADDRESS: STREET 1: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112-9540 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1995 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 6, 1995 is: COMMON STOCK, PAR VALUE $.01 PER SHARE 16,944,901 (CLASS) (OUTSTANDING) INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited). Consolidated Balance Sheets -- September 30, 1995 and December 31, 1994. Consolidated Statements of Income -- Three months ended September 30, 1995 and 1994; nine months ended September 30, 1995 and 1994. Consolidated Statements of Changes in Shareholders' Equity -- Nine months ended September 30, 1995 and 1994. Consolidated Statements of Cash Flows -- nine months ended September 30, 1995 and 1994. 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. -2- 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, 1995 1994 ------------- ------------ ASSETS Cash and due from banks........................... $ 95,045 $ 99,741 Federal funds sold................................ 23,220 30,735 Securities available for sale, at market value.... 508,093 429,003 Loans held for sale (market value $65,058 and $11,163, respectively)........................... 64,150 11,092 Loans and leases: Residential real estate mortgages............... 626,606 632,361 Commercial real estate mortgages................ 619,491 595,355 Commercial business loans and leases............ 331,720 265,644 Consumer loans and leases....................... 644,693 604,918 ------------- ------------ 2,222,510 2,098,278 Less: Allowance for loan and lease losses...... 48,834 50,484 ------------- ------------ Net loans and leases.......................... 2,173,676 2,047,794 ------------- ------------ Bank premises and equipment....................... 41,469 35,915 Goodwill and other intangibles.................... 21,744 18,985 Mortgage servicing rights......................... 19,571 17,275 Other real estate and repossessed assets owned.... 8,220 10,730 Deferred income taxes............................. 26,528 30,542 Interest and dividends receivable................. 21,587 18,929 Other assets...................................... 33,910 32,441 ------------- ------------ $3,037,213 $2,783,182 ------------- ------------ ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings................................. $ 316,939 $ 361,657 Money market access accounts.................... 414,008 276,064 Certificates of deposit (including certificates of $100 or more of $93,805 and $81,911, respectively).................................. 1,129,401 1,012,326 NOW accounts.................................... 207,830 195,161 Demand deposits................................. 262,787 218,559 ------------- ------------ Total deposits................................ 2,330,965 2,063,767 ------------- ------------ Federal funds purchased........................... 600 4,404 Securities sold under repurchase agreements....... 116,653 86,631 Borrowings from Federal Home Loan Bank of Boston........................................... 275,948 362,450 Other borrowings.................................. 21,711 7,902 Deferred income taxes............................. 9,490 4,884 Other liabilities................................. 20,252 23,879 ------------- ------------ Total liabilities............................. 2,775,619 2,553,917 ------------- ------------ Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, none issued or outstanding)..................................... -- -- Common stock (par value $0.01 per share, 30,000,000 shares authorized, 17,468,220 shares issued).......................................... 175 175 Paid-in capital................................... 186,900 186,900 Retained earnings................................. 81,998 62,235 Net unrealized gain (loss) on securities available for sale......................................... 710 (9,085) Treasury stock at cost (550,100 shares and 760,327 shares, respectively)............................ (8,189) (10,960) ------------- ------------ Total shareholders' equity........................ 261,594 229,265 ------------- ------------ $3,037,213 $2,783,182 ------------- ------------ ------------- ------------
See accompanying notes to Consolidated Financial Statements. -3- 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, -------------------------- -------------------------- 1995 1994 1995 1994 ------------ ------------ ------------ ------------ Interest and dividend income: Interest and fees on loans and leases................... $ 53,057 $ 43,748 $ 150,237 $ 123,846 Interest on mortgage-backed investments................. 3,262 3,235 9,420 9,185 Interest on other investments........................... 4,762 3,396 12,777 8,852 Dividends on equity securities.......................... 428 380 1,297 1,063 ------------ ------------ ------------ ------------ Total interest and dividend income.................... 61,509 50,759 173,731 142,946 ------------ ------------ ------------ ------------ Interest expense: Interest on deposits.................................... 23,228 17,105 62,371 50,934 Interest on borrowed funds.............................. 5,975 4,838 19,182 12,940 ------------ ------------ ------------ ------------ Total interest expense................................ 29,203 21,943 81,553 63,874 ------------ ------------ ------------ ------------ Net interest income................................... 32,306 28,816 92,178 79,072 Provision for loan losses................................. 630 -- 1,800 1,752 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses... 31,676 28,816 90,378 77,320 ------------ ------------ ------------ ------------ Noninterest income: Customer services....................................... 2,240 1,732 6,120 5,029 Mortgage banking services............................... 3,050 1,743 7,742 6,158 Loan related services................................... 283 223 789 761 Trust and investment advisory services.................. 433 357 1,163 1,177 Net securities gains (losses)........................... 39 2 (106) 354 Net gains on sales of consumer loans.................... -- -- -- 33 Other noninterest income................................ 29 775 97 1,408 ------------ ------------ ------------ ------------ 6,074 4,832 15,805 14,920 ------------ ------------ ------------ ------------ Noninterest expenses: Salaries and employee benefits.......................... 13,022 11,756 35,668 32,358 Occupancy............................................... 1,840 1,838 5,580 5,642 Data processing......................................... 1,778 1,629 5,222 4,490 Deposit and other assessments........................... 212 1,437 2,958 4,335 Equipment............................................... 1,275 1,240 3,461 3,385 Collection and carrying costs of nonperforming assets... 221 964 1,180 3,228 Advertising and marketing............................... 867 871 2,662 2,381 Other noninterest expenses.............................. 4,294 4,425 12,393 11,587 ------------ ------------ ------------ ------------ 23,509 24,160 69,124 67,406 ------------ ------------ ------------ ------------ Income before income tax.................................. 14,241 9,488 37,059 24,834 Applicable income tax..................................... 4,902 1,941 12,536 6,578 ------------ ------------ ------------ ------------ Net income............................................ $ 9,339 $ 7,547 $ 24,523 $ 18,256 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares outstanding....................... 16,881,519 16,742,322 16,445,433 16,700,198 Earnings per share........................................ $ 0.55 $ 0.45 $ 1.49 $ 1.09
See accompanying notes to Consolidated Financial Statements. -4- 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)
NUMBER NET OF SHARES PAR PAID IN RETAINED UNREALIZED TREASURY ISSUED VALUE CAPITAL EARNINGS GAIN (LOSS) STOCK TOTAL ------------ ----------- ----------- ----------- --------------- ----------- ----------- Balances at December 31, 1993.............. 17,468,220 $ 175 $ 186,900 $ 41,780 $ 2,609 $ (12,353) $ 219,111 Treasury stock sold (128,927 shares at an average price of $6.34)................ -- -- -- (860) -- 1,908 1,048 Change in unrealized gains (losses) on securities available for sale, net of tax................... -- -- -- -- (7,950) -- (7,950) Net income............. -- -- -- 18,256 -- 18,256 Cash dividends $0.14... -- -- -- (2,275) -- -- (2,275) ------------ ----- ----------- ----------- ------- ----------- ----------- Balances at September 30, 1994.............. 17,468,220 $ 175 $ 186,900 $ 56,901 $ (5,341) $ (10,445) $ 228,190 ------------ ----- ----------- ----------- ------- ----------- ----------- ------------ ----- ----------- ----------- ------- ----------- ----------- Balances at December 31, 1994.............. 17,468,220 $ 175 $ 186,900 $ 62,235 $ (9,085) $ (10,960) $ 229,265 Treasury stock purchased (646,600 shares at an average price of $12.84)...... -- -- -- -- -- (8,301) (8,301) Treasury stock sold (105,227 shares at an average price of $9.34)................ -- -- -- (387) -- 1,508 1,121 Reissuance of treasury stock pursuant to acquisition (751,600 shares at $15.00)..... -- -- -- -- 1,710 9,564 11,274 Changes in unrealized gains (losses) on securities available for sale, net of tax................... -- -- -- -- 9,795 -- 9,795 Net income............. -- -- -- 24,523 -- -- 24,523 Cash dividends $0.37... -- -- -- (6,083) -- -- (6,083) ------------ ----- ----------- ----------- ------- ----------- ----------- Balances at September 30, 1995.............. 17,468,220 $ 175 $ 186,900 $ 81,998 $ 710 $ (8,189) $ 261,594 ------------ ----- ----------- ----------- ------- ----------- ----------- ------------ ----- ----------- ----------- ------- ----------- -----------
See accompanying notes to Consolidated Financial Statements. -5- PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1995 1994 ------------ ------------ Cash flows from operating activities: Net income.......................................................................... $ 24,523 $ 18,256 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses......................................................... 1,800 1,752 Provision for depreciation........................................................ 3,150 3,000 Provision for losses and writedowns of other real estate owned.................... (983) (114) Amortization of goodwill and other intangibles.................................... 1,530 1,961 Amortization of servicing rights.................................................. 2,802 917 Net losses realized from sales of other real estate owned......................... 897 470 Net (gains) losses realized from sales of securities and consumer loans........... 55 (365) Net gains realized from sales of loans held for sale (a component of mortgage banking services)................................................................ (3,052) (1,813) Gains on capitalized servicing.................................................... (2,730) (1,235) Proceeds from sales of loans held for sale........................................ 353,569 203,578 Residential loans originated and purchased for sale............................... (403,575) (162,106) Net decrease in net deferred tax assets........................................... 3,015 1,663 Net increase in interest and dividends receivable and other assets................ (4,127) (4,099) Net increase (decrease) in other liabilities...................................... (3,627) 9,112 ------------ ------------ Net cash provided (used) by operating activities...................................... (26,753) 70,977 ------------ ------------ Cash flows from investing activities: Proceeds from sales of securities available for sale................................ 10,444 17,222 Proceeds from maturities and principal repayments of securities available for sale............................................................................... 75,640 89,846 Purchases of securities available for sale.......................................... (149,829) (133,910) Net (increase) in loans and leases.................................................. (132,642) (108,591) Proceeds from sales of loans........................................................ -0- 557 Purchase of mortgage servicing rights............................................... (2,367) (5,139) Premiums paid on deposits purchased................................................. (4,290) (75) Net additions to premises and equipment............................................. (8,704) (3,424) Proceeds from sales of other real estate owned...................................... 7,255 3,792 Net (increase) decrease in repossessed assets owned................................. 301 3,592 ------------ ------------ Net cash used by investing activities................................................. (204,192) (136,130) ------------ ------------
-6- PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1995 1994 ------------ ------------ Cash flows from financing activities: Net increase (decrease) in deposits................................................. $ 267,198 $ (29,138) Net increase in securities sold under repurchase agreements......................... 30,022 24,662 Advances from Federal Home Loan Bank of Boston borrowings........................... 274,498 215,284 Payments on Federal Home Loan Bank of Boston borrowings............................. (361,000) (168,094) Net increase in other borrowings.................................................... 13,809 8,095 Sale of treasury stock.............................................................. 1,121 1,048 Purchase of treasury stock.......................................................... (8,301) -0- Issuance of treasury stock for acquisition.......................................... 11,274 -0- Cash dividends paid to shareholders................................................. (6,083) (2,275) ------------ ------------ Net cash provided by financing activities............................................. 222,538 49,582 ------------ ------------ Decrease in cash and cash equivalents................................................. (8,407) (15,571) Cash and cash equivalents at beginning of period...................................... 126,072 80,724 ------------ ------------ Cash and cash equivalents at end of period............................................ $ 117,665 $ 65,153 ------------ ------------ ------------ ------------ Supplemental disclosures of information: Interest paid on deposits, advances and borrowings.................................... $ 80,982 $ 63,467 Income taxes paid..................................................................... 5,205 -0- Income tax refunds.................................................................... 2,900 3,716 Noncash investing transactions: Loans transferred to other real estate owned........................................ 9,761 2,755 Loans originated to finance the sales of other real estate owned.................... 4,801 9,908 Increases (decreases) resulting from the adoption of SFAS No. 115: Securities available for sale......................................................... 15,400 (12,664) Deferred income taxes - liabilities................................................... 5,605 (4,700) Net change in unrealized gain (loss) on securities available for sale................. 9,795 (7,964)
-7- PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting primarily 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, 1995 are not necessarily indicative of results that may be expected for any other interim period or the entire year ending December 31, 1995. Certain amounts in prior periods have been reclassified to conform to the current presentation. -8- PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I - ITEM 2 Management's discussion and analysis of financial condition and results of operations. GENERAL Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank holding company which is incorporated under the laws of the State of Maine and headquartered in Portland, Maine. The Company's direct subsidiaries, both of which are wholly-owned, are Peoples Heritage Savings Bank (the "Bank") and First Coastal Banks, Inc. ("First Coastal"), which wholly owns The First National Bank of Portsmouth ("Portsmouth"). The Bank conducts business from its headquarters in Portland, Maine and 60 additional offices located throughout the State of Maine. At September 30, 1995, the Bank had total assets of $2.5 billion and total shareholder's equity of $184.3 million. Portsmouth conducts business from its headquarters in Portsmouth, New Hampshire and 14 additional offices located throughout the eastern half of New Hampshire. At September 30, 1995, Portsmouth had $541.8 million of total assets and $39.3 million of shareholder's equity. On July 1, 1995, Bankcore, Inc. ("Bankcore"), the New Hampshire-based holding company for North Conway Bank, was acquired and North Conway Bank merged into Portsmouth. At the time of acquisition, Bankcore had $132.8 million in total assets and shareholders' equity of $17.8 million. The Bankcore acquisition was treated as a purchase for accounting purposes and, accordingly, the Company's financial statements reflect the acquisition from the time of purchase only. As a result of the transaction, $3.4 million of goodwill was created and is being amortized over 15 years. On June 15, 1995, the Company purchased all the branches and associated deposits, as well as certain loans, of Fleet Bank of Maine located in Aroostook County, Maine. Five of the seven branches purchased were merged with and into existing branches of the Bank. The purchase resulted in the transfer of $46.1 million in deposits and $17.1 million in loans. On July 31, 1994, Mid Maine Savings Bank, F.S.B. ("MMSB"), headquartered in Auburn, Maine, was merged into the Bank, and was accounted for under the pooling-of-interests method. Accordingly, the consolidated financial statements of the Company have been restated to reflect the acquisition at the beginning of each period presented. At July 31, 1994, MMSB had total assets of $170.5 million and total shareholders' equity of $11.4 million. Immediately upon consummation of the merger of MMSB into the Bank, the Bank sold the assets and liabilities relating to MMSB's Hampton (New Hampshire) Division to Portsmouth. -9- RESULTS OF OPERATIONS The Company reported net income of $9.3 million and $24.5 million for the three and nine months ended September 30, 1995, respectively, compared with $7.5 million and $18.3 million for the comparable periods in 1994. The improved results in 1995 were primarily attributable to the improvement in net interest income as a result of both an increase in earning assets and the Company's net interest margin, along with controlled increases in total noninterest expenses. NET INTEREST INCOME. For purposes of the following table and the following discussion, income from interest-earning assets and net interest income are presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned from tax-exempt interest received on qualified tax-exempt securities and on loans to qualifying borrowers to make them equivalent to income and yields earned on fully-taxable securities and loans, assuming tax rates of 35%. In addition, nonaccrual loans have been included in the appropriate average balance loan category, but unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. -10- The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods.
THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30, 1995 1994 ------------------------------------- ------------------------------------- AVERAGE YIELD/(1) AVERAGE YIELD/(1) BALANCE INTEREST RATE BALANCE INTEREST RATE ------------- --------- ----------- ------------- --------- ----------- (DOLLARS IN THOUSANDS) Loans and leases (2): Residential real estate mortgages... $ 705,434 $ 14,071 7.91% $ 605,287 $ 11,772 7.72% Commercial real estate mortgages.... 612,319 15,705 10.18 577,569 12,996 8.93 Commercial loans and leases......... 325,412 8,232 10.04 249,168 6,004 9.56 Consumer loans and leases........... 640,070 15,200 9.42 586,331 13,066 8.84 ------------- --------- ------------- --------- Total loans and leases............ 2,283,235 53,208 9.25 2,018,355 43,838 8.62 ------------- --------- ------------- --------- Investment securities (3)............. 527,687 8,290 6.23 462,617 6,926 5.94 Federal funds sold.................... 18,582 279 5.96 12,089 150 4.91 ------------- --------- ------------- --------- Total earning assets.............. 2,829,504 61,777 8.66 2,493,061 50,914 8.10 ------------- --------- ------------- --------- Nonearning assets..................... 179,790 193,208 ------------- ------------- Total assets...................... $ 3,009,294 $ 2,686,269 ------------- ------------- ------------- ------------- Interest-bearing deposits: Regular savings..................... $ 324,787 2,343 2.86 $ 324,299 2,268 2.77 NOW accounts........................ 206,347 649 1.25 177,856 746 1.66 Money market access accounts........ 397,094 3,988 3.98 303,355 2,020 2.64 Certificates of deposit............. 1,124,253 16,248 5.73 1,036,335 12,071 4.62 ------------- --------- ------------- --------- Total interest-bearing deposits... 2,052,481 23,228 4.49 1,841,845 17,105 3.68 Borrowed funds........................ 407,138 5,975 5.82 389,770 4,838 4.92 ------------- --------- ------------- --------- Total interest-bearing liabilities...................... 2,459,619 29,203 4.71 2,231,615 21,943 3.90 ------------- --------- ------------- --------- Demand accounts....................... 258,848 202,126 Other liabilities (3)................. 37,085 26,852 Shareholders' equity (3).............. 253,742 225,677 ------------- ------------- Total liabilities and shareholders' equity............. $ 3,009,294 $ 2,686,270 ------------- ------------- ------------- ------------- Net earning assets.................... $ 369,885 $ 261,446 ------------- ------------- ------------- ------------- Net interest income (fully-taxable equivalent).......................... 32,574 28,971 Less: fully-taxable equivalent adjustments.......................... (268) (155) --------- --------- Net interest income................... $ 32,306 $ 28,816 --------- --------- --------- --------- Net interest rate spread (fully- taxable equivalent).................. 3.95% 4.20% Net interest margin (fully-taxable equivalent).......................... 4.57% 4.61%
(1) Annualized. (2) Loans and leases includes loans available for sale. (3) Excludes effect of unrealized gains or losses on investment securities. -11- The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods.
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 ------------------------------------- -------------------------------------- AVERAGE YIELD/(1) AVERAGE YIELD/(1) BALANCE INTEREST RATE BALANCE INTEREST RATE ------------- --------- ----------- ------------- --------- ------------ (DOLLARS IN THOUSANDS) Loans and leases (2): Residential real estate mortgages.... $ 667,234 $ 39,990 8.01% $ 625,504 $ 34,120 7.29% Commercial real estate mortgages..... 597,810 44,506 9.95 562,018 36,407 8.67 Commercial loans and leases.......... 295,510 22,473 10.17 241,019 16,470 9.14 Consumer loans and leases............ 620,333 43,722 9.42 554,005 37,038 8.94 ------------- --------- ------------- --------- Total loans and leases............. 2,180,887 150,691 9.24 1,982,546 124,035 8.37 ------------- --------- ------------- --------- Investment securities (3).............. 474,572 22,683 6.39 458,581 18,932 5.52 Federal funds sold..................... 24,052 1,106 6.15 9,995 355 4.49 ------------- --------- ------------- --------- Total earning assets............... 2,679,511 174,480 8.71 2,451,122 143,322 7.82 ------------- --------- ------------- --------- Nonearning assets...................... 181,158 191,970 ------------- ------------- Total assets....................... $ 2,860,669 $ 2,643,092 ------------- ------------- ------------- ------------- Interest-bearing deposits: Regular savings...................... $ 323,695 6,981 2.88 $ 270,797 5,701 2.81 NOW accounts......................... 190,858 1,755 1.23 170,127 2,220 1.74 Money market access accounts......... 343,823 9,734 3.79 325,925 6,709 2.75 Certificates of deposit.............. 1,066,161 43,901 5.51 1,085,401 36,304 4.47 ------------- --------- ------------- --------- Total interest-bearing deposits.... 1,924,537 62,371 4.33 1,852,250 50,934 3.68 Borrowed funds......................... 437,068 19,182 5.87 354,208 12,940 4.88 ------------- --------- ------------- --------- Total interest-bearing liabilities....................... 2,361,605 81,553 4.62 2,206,458 63,874 3.87 ------------- --------- ------------- --------- Demand accounts........................ 220,654 184,091 Other liabilities (3).................. 34,286 30,159 Shareholders' equity (3)............... 244,124 222,384 ------------- ------------- Total liabilities and shareholders' equity............................ $ 2,860,669 $ 2,643,092 ------------- ------------- ------------- ------------- Net earning assets..................... $ 317,906 $ 244,664 ------------- ------------- ------------- ------------- Net interest income (fully-taxable equivalent)........................... 92,927 79,448 Less: fully-taxable equivalent adjustments........................... (749) (376) --------- --------- Net interest income.................... $ 92,178 $ 79,072 --------- --------- --------- --------- Net interest rate spread (fully-taxable equivalent)........................... 4.09% 3.95% Net interest margin (fully-taxable equivalent)........................... 4.64% 4.33%
(1) Annualized. (2) Loans and leases includes loans available for sale. (3) Excludes effect of unrealized gains or losses on investment securities. -12- Net interest income on a fully-taxable equivalent basis increased by $3.5 million and $13.1 million for the three and nine months ended September 30, 1995, respectively, compared with the same periods in 1994. The increase in net interest income for the nine months ended September 30, 1995 was attributable to both an increase in net earning assets and an increase in the net interest margin. The increase in net interest income for the three months ended September 30, 1995 was primarily attributable to an increase in net earning assets which was offset in part by a slight decrease in the net interest margin. The weighted average yield on loans increased to 9.25% from 8.62% and the average outstanding balances increased by $264.8 million, or 13.1%, for the three months ended September 30, 1995 as compared with the same period in 1994. For the nine months ended September 30, 1995, the weighted average yield on loans increased to 9.24% from 8.37%, and the average outstanding balance increased $198.3 million, or 10.0%, as compared with the same period in 1994. The increases in the weighted average yield on loans and leases were attributable to the upward repricing of adjustable and variable rate loans as a result of rising interest rates during the latter half of 1994, the decrease in the level of loans classified as nonperforming and the increase in higher yielding commercial business loans. Interest expense on deposits increased by $6.1 million and $11.4 million, or 35.8% and 22.5%, for the three and nine months ended September 30, 1995, respectively, as compared with the same respective periods in 1994. The most significant impact on the increase in interest expense on deposits was an increase in the weighted average rate paid, which increased from 3.68% and 3.68% for the three and nine months ended September 30, 1994, respectively, to 4.49% and 4.33% for the three and nine months ended September 30, 1995, respectively. In particular, the Company has paid higher rates on certificates of deposit in 1995 as compared with 1994 as a result of lower costing certificates maturing and being repriced in a more competitive and higher interest rate environment. In addition, the Company has seen a change in the mix of its deposits, with lower yielding regular savings deposits being replaced by higher costing money market access account balances. Total average interest-bearing deposit balances outstanding increased by $210.6 million or 11.4% for the three months ended September 30, 1995, as compared with the same period in 1994, and increased $72.3 million, or 3.9%, for the nine months ended September 30, 1995, as compared with the same period in 1994. Interest expense on borrowed funds increased by $1.1 million and $6.2 million, or 23.5% and 48.2%, for the three and nine months ended September 30, 1995, respectively, as compared with the same respective periods in 1994. The increases in interest expense on borrowed funds were attributable to both an increase in average outstanding borrowings in 1995 as well as an increase in the weighted average rate paid. The Company's net interest rate spread decreased from 4.20% for the three months ended September 30, 1994 to 3.95% for the three months ended September 30, 1995 and increased from 3.95% for the nine months ended September 30, 1994 to 4.09% for the nine months ended September 30, 1995. The decrease in the net interest rate spread for the three months ended September 30, 1995 as compared with the same period in 1994 was attributable to increased rates on interest-bearing liabilities exceeding increased rates on earning assets. The increase in the net interest rate spread for the nine months ended September 30, 1995 as compared with the same period in 1994 was attributable to increased rates on earning assets exceeding the increase in rates paid on interest-bearing liabilities. -13- The Company's net interest margin decreased from 4.61% for the three months ended September 30, 1994 to 4.57% for the three months ended September 30, 1995. The decrease in the net interest margin for the three months ended September 30, 1995 as compared with the same period in 1994 was attributable to the decrease in the net interest rate spread, the effects of which were more than offset by an increase in the level of net earning assets. The net interest margin increased from 4.33% for the nine months ended September 30, 1994 to 4.64% for the nine months ended September 30, 1995. The increase in the net interest margin for the nine months ended September 30, 1995 as compared with the same period in 1994 was attributable both to the increased net interest rate spread and to higher levels of net earning assets. PROVISION FOR LOAN LOSSES. The provision for loan losses of $630 thousand and $1.8 million for the three and nine months ended September 30, 1995 increased $630 thousand and $48 thousand compared to the same respective periods in 1994. The provisions resulted from management's ongoing evaluation of the adequacy of the allowance for loan losses after taking into account recent trends in nonperforming loans, delinquent loans and net loan chargeoffs, as well as other asset quality factors. See "Financial Condition - -- Nonperforming Assets" below. Although management utilizes its best judgment in providing for possible losses, there can be no assurance that the Company will not have to increase its provisions for possible loan and lease losses in the future as a result of changing markets for real estate and economic conditions in the Company's primary market area, future changes in nonperforming assets or for other reasons, which would affect the Company's results of operations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan and lease losses. Such agencies may require the Company to recognize changes to the allowance for loan and lease losses based on their judgments about information available to them at the time of the examination. The Company was most recently examined by the Federal Reserve Board as of December 31, 1994; the Bank was most recently examined by the FDIC and the Maine Bureau of Banking as of December 31, 1994; and Portsmouth was most recently examined by the Comptroller of the Currency as of December 31, 1994. -14- NONINTEREST INCOME Noninterest income increased $1.2 million, or 25.7%, and $885 thousand, or 5.9%, for the three and nine months ended September 30, 1995, respectively, as compared to the same periods in 1994. The following table shows the composition of net gains (losses) on the sales of securities for the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 1995 1994 1995 1994 -------- -------- -------- --------- (In Thousands) Securities losses $ -0- $ -0- $ (174) $ -0- Securities gains 39 2 68 354 ------ ------ ------ ------ $ 39 $ 2 $ (106) $ 354 ------ ------ ------ ------ ------ ------ ------ ------
Included in securities gains during the nine months ended September 30, 1994 is a $296 thousand recovery on a security previously written down to zero. The following table sets forth certain information relating to mortgage banking services income for the periods indicated:
At or for the At or for the Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ----------- (In Thousands) Residential mortgages serviced for investors at end of period $2,391,742 $1,932,368 $2,391,742 $1,932,368 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Residential mortgage sales income (loss) $ 1,052 $ (41) $ 2,612 $ 1,813 Gain on sale of residential mortgage servicing rights 440 -0- 440 -0- Residential mortgage servicing income 1,558 1,784 4,690 4,345 ---------- ---------- ---------- ---------- Total $ 3,050 $ 1,743 $ 7,742 $ 6,158 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The Company's portfolio of mortgages serviced for investors increased by $459 million, or 23.8%, net of amortization and prepayments, from September 30, 1994 to September 30, 1995. The Company's portfolio of mortgages serviced for others continues to increase as a result of its strategy to originate and sell primarily fixed rate residential mortgages to the secondary market while retaining the rights to service these loans for the investors purchasing them. In addition, the outstanding amount of residential mortgages serviced for investors is impacted, from time to time, by the purchase and sale of mortgage servicing rights for portfolios of residential mortgage loans. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights"--An Amendment of FASB Statement No. 65," which changes the method of accounting for certain mortgage banking activities. The Company elected early adoption of SFAS No. 122 and as a result capitalized $908 thousand and $1.6 million of originated mortgage servicing rights during the three months and nine months ended September 30, 1995, respectively. Income related to the capitalization of originated mortgage servicing rights is included in residential mortgage sales income. -15- Residential mortgage sales income was $1.1 million for the three months ended September 30, 1995 compared with a $41 thousand loss for the same period in 1994 and $2.6 million for the nine months ended September 30, 1995 compared with $1.8 million for the same period in 1994. A significant portion of the increase in residential mortgage sales income in 1995 was related to the adoption of SFAS No. 122 as noted above. Excluding the income related to the Company's adoption of SFAS No. 122, residential mortgage sales income would have increased $185 thousand for the three months ended September 30, 1995 as compared with the same period in 1994 and would have decreased $831 thousand for the nine months ended September 30, 1995, compared with the same period in 1994. The decrease in mortgage sales income, excluding the income related to SFAS No. 122, for the nine months period ending September 30, 1995 compared with 1994 was attributable in part to a more competitive market for retail and correspondent originations resulting in lower gains on sales of residential mortgages and an increase in the amount of costs directly allocated to retail mortgage originations. The $41 thousand loss for the three months ended September 30, 1994 reflected a rising interest rate environment which resulted in a significantly decreased level of refinancing activity and a more competitive environment for purchased mortgage originations. The generation of mortgage sales income and the recognition of net gains on the sales of securities and nonresidential mortgage loans are dependent on market and economic conditions and, accordingly, there can be no assurance that the income and net gains reported in prior periods can be achieved in the future or that there will not be significant inter- period variations in the results from such activities. The Company recorded a $440 thousand gain on the sale of residential mortgage servicing rights during the three months ended September 30, 1995. The sale of mortgage servicing rights was associated with $107.5 million of residential mortgages serviced for others. Residential mortgage servicing income decreased $226 thousand, or 12.7%, for the three months ended September 30, 1995 compared with the same period in 1994, and increased $345 thousand, or 7.9%, for the nine months ended September 30, 1995, as compared with the same period in 1994. Mortgage servicing income during 1995 was negatively impacted by the Company's adoption of SFAS No. 122, which has effectively accelerated mortgage servicing income into the current period as a component of residential mortgage sales income and increased the amount of capitalized mortgage servicing rights. The mortgage servicing rights that have been created as a result of the implementation of SFAS No. 122 are amortized and recorded as an offset to mortgage servicing income. In conjunction with the adoption of SFAS No. 122, the Company elected to accelerate the amortization of capitalized mortgage servicing rights and excess servicing fees related to numerous pools of loans with small outstanding balances which, from an ongoing operational standpoint, were inefficient to amortize on a monthly basis. The cumulative impact of accelerating amortization of capitalized mortgage servicing rights and excess servicing fees associated with small pools of loans with small outstanding balances and the amortization expense related to adoption of SFAS No. 122 during the three and nine months ended September 30, 1995 were $81 thousand and $358 thousand, respectively. In order to mitigate the prepayment risk associated with mortgage servicing rights and protect economic value, the Company purchased a $30 million (notional amount) constant maturity treasury floor (CMT) for $555 thousand. The cost of the CMT is being amortized over five years using the straight line method of amortization and is recorded at the lower of amortized cost or market value. The CMT's value is related to movements in market interest rates to which it is indexed (the 10 year Constant Maturity Treasury Daily Yield) and -16- the remaining term of the CMT. The CMT's value is inversely related to movements in market interest rates. As interest rates decline, the value of the CMT increases. Market interest rate movements also influence the behavior of borrowers, which impacts the value of mortgage servicing rights as a result of an increase or decrease in mortgage loan prepayment speeds. The value of mortgage servicing rights, generally, increases as market interest rates increase and declines as rates decrease. While not accorded hedge accounting treatment due to the uncertainty of strict correlation, in the event that interest rates fall any resulting increase in the value of the CMT is intended to offset, in part, the prospective impairment to mortgage servicing rights. The CMT is included in other assets on the Company's balance sheet at September 30, 1995 at amortized cost of $501 thousand (market value approximates amortized cost). Other categories of noninterest income include customer services income, which increased $1.1 million, or 21.7%, loan related services income, which increased $28 thousand, or 3.7%, and trust and investment advisory services, which decreased $14 thousand,or 1.2%, for the nine months ended September 30, 1995 as compared with the same period in 1994. The changes in these categories of noninterest income resulted primarily from the related volume of customer transactions. Other noninterest income decreased $1.3 million for the nine months ended September 30, 1995, compared with the same period in 1994, primarily as a result of $1.3 million in interest income accrued and received on federal income tax receivables during 1994. NONINTEREST EXPENSES Total noninterest expenses decreased $651 thousand, or 2.7%, and increased $1.7 million, or 2.6%, for the three and nine months ended September 30, 1995, respectively, compared to the same respective periods in 1994. Salaries and employee benefits increased $1.3 million, or 10.8%, and $3.3 million, or 10.2%, for the three and nine months ended September 30, 1995, respectively, as compared to the same periods in 1994. These increases were principally the result of normal salary and wage increases, the addition of five branches and associated employee costs related to the Bankcore acquisition, staff additions related to start-up costs associated with the establishment of a trust department at the Bank, expanded telephone banking services, implementation of supermarket banking and expanded operations staff to support new deposit products. Deposit and other assessments expenses decreased $1.2 million, or 85.2%, and $1.4 million, or 31.8%, for the three and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. These decreases were attributable to the reduction in deposit insurance premiums from $0.23 per $100 of deposits to $0.04 per $100 of deposits beginning in June, 1995 paid by the Bank and Portsmouth to the Bank Insurance Fund ("BIF") which is administered by the FDIC. See Item 5 below, however. Collection and carrying costs of nonperforming assets decreased $743 thousand, or 77.1%, and $2.0 million, or 63.4%, for the three and nine months ended September 30, 1995, respectively, compared to the same respective periods in 1994. The decrease in collection and carrying expenses reflects the lower level of nonperforming assets at the Company in recent periods. Data processing expenses increased $149 thousand, or 9.1%, and $732 thousand, or 16.3%, for the three and nine months ended September 30, 1995, respectively, compared with the same respective periods in 1994. The investment in expanded -17- operational capabilities to support new product offerings and improve customer service, as well as a higher level of transactions related to the larger mortgage servicing portfolio, were the primary factors behind the increase in data processing expenses in 1995. Advertising and marketing expense increased $281 thousand, or 11.8%, for the nine months ended September 30, 1995 as compared to the same period in 1994. The increase in advertising and marketing expense reflected the Company's business strategy to improve the visibility of its products and services, communicate its improved financial condition and take advantage of the opportunity created by the confusion and related consumer dissatisfaction caused by the major changes that have occurred and are anticipated to occur in the structure of the banking industries in Maine and New Hampshire. Other categories of noninterest expenses include net occupancy expense, which decreased $62 thousand for the nine months ended September 30, 1995 compared to the same period in 1994, and equipment expense, which increased $76 thousand for the nine months ended September 30, 1995 compared to the same period in 1994. Other noninterest expenses decreased $131 thousand, or 3.0%, and increased $806 thousand, or 7.0%, for the three and nine months ended September 30, 1995, respectively, compared with the same respective periods in 1994. The following table sets forth information relating to other noninterest expenses during the periods indicated:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 1995 1994 1995 1994 -------- --------- --------- ---------- (In Thousands) Postage and Freight $ 413 $ 316 $ 1,324 $ 1,032 Office Supplies 524 367 1,404 1,227 Amortization of goodwill 479 515 1,332 1,267 Telephone 436 360 1,220 999 Other 2,442 2,867 7,113 7,062 ------- ------- ------- ------- $ 4,294 $ 4,425 $12,393 $11,587 ------- ------- ------- ------- ------- ------- ------- -------
INCOME TAX EXPENSE Income tax expense was $4.9 million and $1.9 million for the three months ended September 30, 1995 and 1994, respectively, which amounted to effective income tax rates of 34.4% and 20.5%, respectively. Income tax expense was $12.5 million and $6.6 million for the nine months ended September 30, 1995 and 1994, respectively, which amounted to effective income tax rates of 33.8% and 26.5%, respectively. The lower effective income tax rates for the three and nine months ending September 30, 1994 as compared with the same periods in 1995 are primarily attributable to the recording of a one-time $1.7 million tax benefit from the recognition of net deferred tax assets related to the merger of MMSB. -18- FINANCIAL CONDITION Set forth below is a discussion of the material changes in the Company's financial condition from December 31, 1994 to September 30, 1995. SECURITIES AVAILABLE FOR SALE Securities available for sale increased $79.1 million, or 18.4%. Securities available for sale are reported at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity. At September 30, 1995, $710 thousand of net unrealized gain (net of related taxes) was included in shareholders' equity. A summary of the carrying values of securities available for sale follows:
September 30, December 31, 1995 1994 ------------- ------------ (In Thousands) U.S. Government obligations and obligations of U.S. Government agencies and corporations $265,283 $219,220 Other bonds and notes 30,471 13,792 Mortgage-backed securities 188,154 172,465 -------- -------- Total debt securities 483,908 405,477 Equity securities 24,185 23,526 -------- -------- Total securities available for sale $508,093 $429,003 -------- -------- -------- --------
LOANS HELD FOR SALE Loans held for sale, all of which were residential mortgage loans, increased $53.1 million. The outstanding dollar amount of loans held for sale can vary greatly from period to period as a result of mortgage origination levels, timing and delivery of loan sales, changes in market interest rates and asset liability management strategies. The change in loans held for sale from December 31, 1994 to September 30, 1995 was primarily attributable to the higher level of fixed rate mortgage originations in the months preceding September 30, 1995 as compared with December 31, 1994. At September 30, 1995 and December 31, 1994, loans held for sale had a weighted average rate of 7.42% and 7.71%, respectively. -19- LOANS AND LEASES Total loans and leases held for investment increased $124.2 million, or 5.9%, for the nine months ended September 30, 1995. The increase was attributable to $78.0 million of loans acquired through the Bankcore acquisition and $16.5 million in loans in connection with an acquisition of branch offices in Aroostook County, Maine, as discussed above, as well as increases in commercial business loan originations. Sales of residential real estate loans substantially offset residential loan originations. The following table sets forth total loans and leases originated or purchased and sold, repaid or otherwise reduced, by loan type, for the periods indicated including loans held for sale:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 1995 1994 1995 1994 --------- --------- ---------- --------- (In Thousands) Originations and purchases: Residential real estate loans $231,947 $130,761 $ 408,273 $311,356 Commercial real estate loans 31,240 63,330 81,119 120,742 Commercial business loans and leases 110,207 79,417 285,434 199,957 Consumer loans 77,728 89,067 197,745 219,520 --------- --------- ---------- -------- 451,122 362,575 972,571 851,575 --------- --------- ---------- -------- Loans acquired through acquisitions 77,994 -0- 94,452 -0- --------- --------- ---------- -------- Total originations, purchases and acquisitions 529,116 362,575 1,067,023 851,575 --------- --------- ---------- -------- Sales and principal reductions: Sales 189,873 34,422 350,517 202,344 Principal reductions 200,951 263,057 539,216 574,138 --------- --------- ---------- -------- Total sales and principal reductions 390,824 297,479 889,733 776,482 --------- --------- ---------- -------- Increase in loans held for sale and loans and leases $138,292 $ 65,096 $ 177,290 $ 75,093 --------- --------- ---------- -------- --------- --------- ---------- --------
Residential real estate loan originations increased $101.2 million for the three months ended September 30, 1995 as compared with the same period in 1994 and increased $96.9 million for the nine months ended September 30, 1995 as compared with the same period in 1994. The increase in residential loan originations during the three months ended September 30, 1995 reflected a lower interest rate environment and a substantial increase in loans originated through the Bank's correspondent network. Commercial real estate loan originations decreased $32.1 million and $39.6 million for the three and nine months ended September 30, 1995, respectively, as compared with the same respective periods in 1994. The decrease in commercial real estate loan originations reflects the Bank's strategy to reduce its relative exposure to commercial real estate loans in favor of other types of loans. The increase in the balance of commercial real estate loans from December 31, 1994 to September 30, 1995 was attributable to the Company's acquisitions during the period. Commercial business loan and lease originations increased $30.8 million and $85.5 million for the three and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. The increase in -20- commercial business loans and lease originations is consistent with the Company's strategy to focus on lending to sound small business customers within its geographic market as well as an increase in tax exempt loans to municipalities. Originations of consumer loans continue to include a significant amount of consumer loans accounted for approximately 24.7% of the total originations of consumer loans during the nine months ended September 30, 1995 and amounted to $304.5 million or 47.2% of the Company's consumer loan portfolio at September 30, 1995. NONPERFORMING ASSETS The following table sets forth information regarding nonperforming assets at the dates indicated:
September 30, June 30, March 31, December 31, 1995 1995 1995 1994 ---- ---- ---- ---- (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $ 5,231 $ 4,517 $ 4,040 $ 1,799 Accruing loans which are 90 days overdue 2.013 2,833 2,174 2,883 ------- ------- ------- ------- Total 7,244 7,350 6,214 4,682 ------- ------- ------- ------- Commercial real estate mortgages: Nonaccrual loans 16,106 15,327 22,336 20,413 Troubled debt restructurings 3,946 4,870 6,113 5,704 ------- ------- ------- ------- Total 20,052 20,197 28,449 26,117 ------- ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 5,940 6,620 5,589 6,270 Troubled debt restructurings 1,953 2,098 1,455 2,013 ------- ------- ------- ------- Total 7,893 8,718 7,044 8,283 ------- ------- ------- ------- Consumer loans and leases: Nonaccrual loans 3,190 2,963 2,840 2,727 Accruing loans which are 90 days overdue 343 112 303 468 ------- ------- ------- ------- Total 3,533 3,075 3,143 3,195 ------- ------- ------- ------- Total nonperforming loans: Nonaccrual loans 30,467 29,427 34,805 31,209 Accruing loans which are 90 days overdue 2,356 2,945 2,477 3,351 Troubled debt restructurings 5,899 6,968 7,568 7,717 ------- ------- ------- ------- Total nonperforming loans 38,722 39,340 44,850 42,277 ------- ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 6,589 8,555 4,173 6,651 In-substance foreclosures, net of related reserves -0- -0- -0- 2,096 Repossessions, net of related reserves 1,629 1,591 1,930 1,983 ------- ------- ------- ------- Total other nonperforming assets 8,218 10,146 6,103 10,730 ------- ------- ------- ------- Total nonperforming assets $46,940 $49,486 $50,953 $53,007 ------- ------- ------- ------- ------- ------- ------- ------- Total nonperforming loans as a percentage of total loans (1) 1.74% 1.86% 2.12% 2.01% Total nonperforming assets as a percentage of total assets 1.55% 1.73% 1.82% 1.90% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 2.10% 2.33% 2.40% 2.51%
(1) Exclusive of loans held for sale. It is the policy of the Company to place all commercial real estate loans and commercial business loans which are 90 days or more past due, unless secured by -21- sufficient cash or other assets immediately convertible to cash, on nonaccrual status. All such loans 90 days or more past due, whether on nonaccrual status or not are considered as nonperforming loans. Residential real estate loans and consumer loans are placed on nonaccrual and nonperforming status generally when they are 90 days or more past due or when in management's judgment the collectibility of interest and/or principal is doubtful. It is also the policy of the Company to place on nonaccrual and nonperforming status loans currently performing in accordance with their terms but which in management's judgment are likely to present future principal and/or interest repayment problems and thus ultimately could be classified as nonperforming. At September 30, 1995, $17.4 million of commercial real estate and commercial business loans and leases, or 62.3% of total nonperforming commercial real estate and commercial business loans, were on nonaccrual status and thus disclosed as nonperforming loans even though they were less than 90 days past due. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These statements require changes in both the disclosure and impairment measurement of nonperforming loans. Certain loans which had previously been reported as nonperforming and certain in-substance foreclosures are currently required to be disclosed as impaired loans. At adoption, the Company reclassified $2.2 million of in-substance foreclosures and related reserves of $96 thousand to loans and the allowance for loan losses, respectively. Prior year balances were not reclassified as management deemed the amounts to be immaterial. Restructured accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure these loans may be removed from impaired loan status provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. Restructured, accruing loans entered into prior to the adoption of these statements are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms. Commercial business and commercial real estate loans are considered impaired when it is probable that the Company will not be able to collect all amounts due according to the original contractual terms of the loan agreement. The amount of impairment for impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. The Company recognizes income on impaired loans also classified as nonperforming on a cash basis when the ability to collect the principal balance is not in doubt. At September 30, 1995, total impaired loans were $28.2 million, of which $24.9 million had related allowances of $6.3 million. During the three months ended September 30, 1995, the income recognized related to impaired loans was $351 thousand and the average balance of outstanding impaired loans was $31.3 million. During the nine months ended September 30, 1995, the income recognized related to impaired loans was $883 thousand and the average balance of outstanding impaired loans was $30.1 million. Real estate acquired by the Company as a result of foreclosure or by deed- in-lieu of foreclosure generally is classified as other real estate owned until it is sold. When property is acquired, it is recorded at the lower of carrying or -22- fair value less estimated selling costs at the date of acquisition or classification and any writedown resulting therefrom is charged to the allowance for loan losses. Interest accrual ceases on the date of acquisition and all costs incurred from that date in maintaining the property and subsequent reductions in value are expensed. Nonperforming assets at September 30, 1995 included $6.6 million of other real estate owned and $1.6 million of repossessed assets, in each case net of related reserves. The following table summarizes the gross activity in other real estate owned for the nine months ended September 30, 1995.
(In Thousands) Balance at beginning of period $ 6,658 Property acquired through foreclosure or acceptance of a deed-in-lieu of foreclosure 9,855 Property acquired through purchase acquisition 2,910 Sales and rental proceeds (13,190) Writedowns and provisions for losses (credit to operations) (356) -------- Balance at end of period $ 6,589 -------- --------
POTENTIAL NONPERFORMING ASSETS At September 30, 1995, the Company had classified a total of $81.7 million of commercial real estate loans and commercial business loans and leases as substandard or lower on its risk rating system, as compared to $99.9 million at December 31, 1994. Included in this amount was the Company's $27.9 million of nonperforming commercial business and commercial real estate loans. In the opinion of management, the remaining $53.8 million of commercial real estate loans and commercial business loans and leases classified as substandard or lower at September 30, 1995 evidence one or more weaknesses or potential weaknesses and, depending on the regional economy and other factors, may become nonperforming assets in future periods. These loans are net of any previously established specific reserves which have resulted in chargeoffs, but not general reserves which have been established based on the Company's internal rating of such loans and evaluation of the adequacy of its allowance for loan losses. -23- ALLOWANCE FOR LOAN LOSSES The following table sets forth information regarding activity in the allowance for loan losses for the three and nine months ended September 30, 1995 and 1994, as well as certain related ratios:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- (Dollars in Thousands) Average loans and leases outstanding during the period $2,283,235 $2,018,355 $2,180,887 $1,982,546 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance at beginning of period $ 45,832 $ 53,306 $ 50,484 $ 52,804 Chargeoffs: Residential real estate 420 588 944 1,432 Commercial real estate 699 1,336 6,614 3,490 Commercial business loans and leases 368 459 1,453 2,381 Consumer 644 376 1,694 1,159 ---------- ---------- ---------- ---------- Total loans charged off 2,131 2,759 10,705 8,462 ---------- ---------- ---------- ---------- Recoveries: Residential real estate 47 175 120 397 Commercial real estate 1,666 1,168 3,132 3,198 Commercial business loans and leases 473 630 1,458 2,591 Consumer 3 107 231 347 ---------- ---------- ---------- ---------- Total loans recovered 2,189 2,080 4,941 6,533 ---------- ---------- ---------- ----------- Net chargeoffs (recoveries) (58) 679 5,764 1,929 Additions charged to operating expenses 630 -0- 1,800 1,752 Additions due to purchase acquisition 2,314 -0- 2,314 -0- ---------- ---------- ---------- ----------- Allowance at end of period $ 48,834 $ 52,627 $ 48,834 $ 52,627 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- Ratio of net chargeoffs to average loans and leases outstanding during the period - annualized (1) (0.01)% 0.13% 0.35% 0.10% Ratio of allowance to total loans and leases at end of period (2) 2.20% 2.60% 2.20% 2.60% Ratio of allowance to nonperforming loans at end of period 126.11% 124.50% 126.11% 124.50%
(1) Average loans and leases include portfolio loans and loans held for sale. (2) Excludes loans held for sale. -24- The following table sets forth the manner in which the Company's total allowance for loan losses was allocated by type of loan at the dates indicated:
September 30, 1995 December 31, 1994 -------------------------- --------------------------- Percent of Total Percent of Total Amount Loans by Category Amount Loans by Category -------- ----------------- ------- ----------------- (Dollars in Thousands) Residential real estate loans $ 3,315 0.53% $ 3,078 0.49% Commercial real estate loans 28,322 4.57 30,545 5.13 Commercial business loans and leases 8,410 2.54 8,219 3.09 Consumer Loans 8,787 1.36 8,642 1.43 ------- ------- $48,834 2.20 $50,484 2.91 ------- ------- ------- -------
DEPOSITS AND BORROWINGS Total deposits increased by $267.2 million, or 12.9%, during the nine months ended September 30, 1995. This increase resulted from an increase in money market accounts of $137.9 million, or 50.0%, an increase in certificates of deposit of $117.1 million, or 11.6%, a combined increase in NOW and demand deposits of $56.9 million, or 13.8%, and a decrease in regular savings of $44.7 million, or 12.4%. The changes in deposit balances reflect the Company's current strategy to emphasize relationship banking, cash management services, core deposits and the deposit mix of acquisitions completed in 1995. The Bank introduced a new money market account in December 1994 which has attracted new customer deposits as well as resulted in the transfer of customer funds from regular savings accounts during the first nine months of 1995. The new money market account is only available to relationship customers of the Company who are required to maintain minimum overall balances and a transaction account. The increase in deposits during the nine months ended September 30, 1995 was in part attributable to the purchase of $46.1 million in deposits in Northern Maine and $110.8 million of deposits acquired in the Bankcore transaction, as described above. Total borrowings decreased by $46.5 million, or 10.1%, for the nine months ended September 30, 1995. The decrease in total borrowings was primarily attributable to an $86.5 million decrease in Federal Home Loan Bank borrowings offset in part by a $30.0 million increase in securities sold under repurchase agreements and a net increase in other borrowings (including Federal funds purchased) of $10.0 million. Included in other borrowings are the five-year debentures which were issued in conjunction with the Bankcore acquisition on July 1, 1995, which had an outstanding balance of $8.3 million at September 30, 1995. The decrease in total borrowings reflects the Company's efforts to replace higher-costing borrowings with lower-costing core deposits. The Company maintains the ability to access Federal Home Loan Bank borrowings if market conditions or business strategy warrants. At September 30, 1995, the Company estimates its additional available borrowing capacity from the Federal Home Loan Bank to be approximately $323.3 million. SHAREHOLDERS' EQUITY Total shareholders' equity increased by $32.3 million during the nine months ended September 30, 1995. This increase was the result of $24.5 million of net income, a $9.8 million net unrealized gain (net of tax effect) in the market value of securities available for sale, $1.1 million of treasury stock sales related to various employee benefit plans of the Company, and $11.3 million related to the issuance of treasury stock in conjunction with the Bankcore -25- acquisition, the effects of which were offset in part by $8.3 million in treasury stock purchases and cash dividends of $6.1 million. As authorized by the Board of Directors, the Company initiated a share repurchase program on December 20, 1994 and repurchased 751,600 shares of its common stock at a total cost of $9.6 million. A total of 646,600 of these shares, with a total cost of $8.3 million, were purchased during the three months ended March 31, 1995. No additional shares were repurchased during the six months ended September 30, 1995. The Company currently does not anticipate repurchasing any additional shares. REGULATORY CAPITAL REQUIREMENTS At September 30, 1995 the Company and each of its subsidiaries were in compliance with all applicable regulatory capital requirements. The following table sets forth the minimum regulatory capital requirements and the actual capital ratios of the Company and its two banking subsidiaries at September 30, 1995:
Actual ------------------------------ Required The The Minimums Bank Portsmouth Company -------- ----- ---------- ------- Risk-based capital ratios: Tier I 4% 10.84% 10.37% 11.82% Total 8 12.10 11.63 13.09 Tier I leverage capital ratios 3 (1) 7.45 6.39 8.07
(1) The federal banking agencies have indicated that the most highly-rated institutions which meet certain criteria will be subject to a 3% requirement and all other institutions will be required to maintain an additional 1% to 2% of capital. The federal banking agencies have not specified any requirements in this regard with respect to the Company and its subsidiaries. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity increased slightly during the nine months ended September 30, 1995. Net cash, short term and marketable assets amounted to $497.0 million, or 21.0% of net deposits and short term liabilities at September 30, 1995. This compares to a ratio of 20.0% at December 31, 1994. Liquidity is considered adequate by the Company to meet anticipated cash needs in the foreseeable future. ASSET AND LIABILITY MANAGEMENT The Company analyzes the future impact on net interest income as a result of changing interest rates based on budget projections, including anticipated business activity, anticipated changes in interest rates and other variables which are adjusted periodically to reflect the interest rate environment and other factors. Based on this analysis and the information and assumptions in effect at September 30, 1995, management of the Company estimates that a 100 to 200 basis point gradual change in interest rates would not significantly affect the Company's annualized net interest income. This assessment is primarily based on management's ability to exert some control with respect to the extent and timing of the change in rates paid on the Company's interest-bearing liabilities and, therefore, to manage the effects of a negative or positive gap position on net interest income. The Company's methods for analyzing the effects of changes in interest rates on its operations incorporate assumptions concerning, among other things, the amortization and prepayment of assets and liabilities. Management believes -26- that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. PROSPECTIVE BRANCH, DEPOSIT AND LOAN ACQUISITION IN NEW HAMPSHIRE Portsmouth has entered into an agreement with Shawmut Bank NH ("Shawmut") dated as of September 29, 1995 and amended as of October 31, 1995 to acquire five branches of Shawmut that are being divested as part of the planned merger of Fleet Financial Group, Inc. and Shawmut National Corporation. The purchase is expected to be completed during the first quarter of 1996 and will result in the transfer of approximately $250 million in loans to the Company and its assumption of approximately $172 million in deposits. PROSPECTIVE ACQUISITION OF BANK OF NEW HAMPSHIRE CORPORATION On October 25, 1995, the Company, First Coastal and Bank of New Hampshire Corporation ("BNHC") entered into an Agreement and Plan of Merger (the "Agreement"), pursuant to which, among other things, First Coastal will merge into BNHC (the "Merger"). Simultaneous with the Merger, each share of common stock of BNHC will be converted into and represent the right to receive two shares of common stock of the Company. As of November 1, 1995, BNHC had 4,064,156 shares of common stock outstanding. As part of the Agreement, BNHC gave the Company an option to purchase 19.9% of its outstanding common stock under certain circumstances and the Company gave BNHC an option to purchase 9.9% of its outstanding common stock under certain circumstances. At September 30, 1995, BNHC had total assets of $962.3 million and total shareholders' equity of $82.8 million. Consummation of the Merger is subject to, among other things, the receipt of all necessary regulatory and shareholder approvals and other customary conditions. -27- PART II - OTHER INFORMATION Item 1. Legal Proceedings: The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition and results of operations of the Company. Item 2. Changes in securities - not applicable. Item 3. Defaults upon senior securities - not applicable. Item 4. Submission of matters to a vote of security holders - not applicable. Item 5. Other Information. In October 1995, the U.S. Senate and the U.S. House of Representatives approved bills which would, among other things, recapitalize the Savings Association Insurance Fund ("SAIF") administered by the FDIC by a one- time assessment on the deposits of all SAIF-insured institutions and provide for an eventual merger of the SAIF and the BIF. The deposit assessment rate will be determined by the FDIC and set at a level which will be sufficient to recapitalize the SAIF to the designated statutory reserve ratio. Currently, it is anticipated that the assessment rate will be approximately $.85 for every $100.00 of assessable deposits as of March 31, 1995 and that the one-time assessment will be due January 1, 1996. Each of the foregoing bills contains provisions which provide certain relief for institutions, such as the Bank and Portsmouth, which are members of the BIF but have acquired SAIF-insured deposits as a result of acquisitions of savings institutions in transactions effected pursuant to Section 5(d)(3) of the Federal Deposit Insurance Act (FDIA"). Such institutions do not pay SAIF assessments based on the actual amount of the SAIF deposits acquired, as adjusted to reflect increases or decreases in such deposits subsequent to the date of acquisition, but on the actual amount of the SAIF deposits acquired as adjusted by a growth attribution rule set forth in Section 5(d)(3) of the FDIA.. The bill passed by the U.S. House of Representatives provides that the assessment rate determined for all SAIF-insured institutions may be adjusted by the FDIC, after consideration of specified factors, for BIF-insured institutions which have acquired SAIF-insured deposits pursuant to Section 5(d)(3) of the FDIA, provided that any such adjustment may be not less than two thirds of the general assessment rate for SAIF-insured institutions. The bill passed by the U.S. Senate provides that the amount of any deposits which are treated as insured by SAIF under Section 5(d)(3) of the FDIA shall be reduced by ten percent if the adjusted attributable amount of SAIF deposits of the BIF member is less than fifty percent of the total deposits of that member as of June 30, 1995 (which is the case for both the Bank and Portsmouth). The Company currently is unable to predict the likelihood of legislation effecting the foregoing changes, although a consensus among legislators, regulators and bankers appears to be developing in this regard. At March 31, 1995, the adjusted attributable amount of SAIF deposits of the Company's banking subsidiaries amounted to $352.4 million, or 17.0%, of the Company's total deposits. If an assessment of $.85 per $100.00 of assessable deposits was effected on these deposits (and assuming no downward adjustment on the assessment rate for institutions such as the Bank and Portsmouth), the one-time assessment which would be payable by the Company's banking subsidiaries would aggregate approximately $3.0 million on a pre-tax basis. -28- Item 6. Exhibits and reports on Form 8-K. On November 3, 1995 the Company filed a report on Form 8-K regarding the signing of a definitive agreement to Bank of New Hampshire Corporation and the agreement to acquire branch offices from Shawmut Bank NH. -29- 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 8, 1995 By: /s/ William J. Ryan -------------------- ------------------------------ William J. Ryan Chairman, President and Chief Executive Officer Date November 8, 1995 By: /s/ Peter J. Verrill ------------------- ----------------------------- Peter J. Verrill Executive Vice President and Chief Financial Officer (principal financial and accounting officer) -35- EX-27 2 EXHIBIT 27
9 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 95,045 0 23,220 0 508,093 0 0 2,286,660 48,834 3,037,213 2,330,965 117,253 327,101 0 187,075 0 0 74,519 3,037,213 150,237 23,494 0 173,731 62,371 81,553 92,178 1,800 (106) 69,124 37,059 24,523 0 0 24,523 1.49 1.49 4.64 30,467 2,356 5,899 81,700 45,832 2,131 2,189 48,834 48,834 0 0
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