-----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, KOFmy/OSGVR1Tw/WXn4frFi3OLHaJT3ha+b+pW1BbKrJAz6BJ8gSMyttpJ74PU7V 5xgyMxs1k2D+qtKAgjfRew== 0000950135-99-001504.txt : 19990326 0000950135-99-001504.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950135-99-001504 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES HERITAGE FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000829750 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 010437984 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16947 FILM NUMBER: 99572593 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-K405 1 PEOPLES HERITAGE FINANCIAL GROUP 1 ========================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________. Commission File Number: 0-16947 PEOPLES HERITAGE FINANCIAL GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) MAINE 01-0437984 --------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) P.O. BOX 9540 ONE PORTLAND SQUARE PORTLAND, MAINE 04112-9540 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (207) 761-8500 Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE ---------------------------- Title of Class PREFERRED STOCK PURCHASE RIGHTS ------------------------------- Title of Class Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 19, 1999, the aggregate market value of the 103,021,370 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the 1,048,674 shares held by all directors and executive officers of the Registrant as a group (excluding the effects of unexercised stock options), was $1.9 billion. This figure is based on the last sale price of $18.41 per share of the Registrant's Common Stock on March 19, 1999, as reported in THE WALL STREET JOURNAL on March 22, 1999. Although directors of the Registrant and executive officers of the Registrant and its subsidiaries were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status. Number of shares of Common Stock outstanding as of March 19, 1999: 104,070,044 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: (1) Portions of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated by reference into Part II, Items 5-8 and Part IV, Item 14 of this Form 10-K. (2) Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1999 are incorporated by reference into Part III, Items 10-13 of this Form 10-K. ========================================================== 2 PART I. ITEM 1. BUSINESS THE COMPANY Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank and financial services holding company which is incorporated under the laws of the State of Maine. The Company conducts business from its executive offices in Portland, Maine and, as of December 31, 1998, 188 offices located in Maine, New Hampshire and Massachusetts. At December 31, 1998, the Company had consolidated assets of $10.1 billion and consolidated shareholders' equity of $762 million. Based on total assets at December 31, 1998, the Company is the largest independent bank holding company headquartered in northern New England and the fifth largest independent bank holding company headquartered in New England. The Company offers a broad range of commercial and consumer banking services and products and trust and investment advisory services through three wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New Hampshire ("BNH") and Family Bank, FSB ("Family Bank"). PHB is a Maine-chartered bank which operates offices throughout Maine and, through subsidiaries, engages in mortgage banking, financial planning, insurance brokerage and equipment leasing activities. At December 31, 1998, PHB had consolidated assets of $4.2 billion and consolidated shareholder's equity of $333 million. BNH is a New Hampshire-chartered commercial bank which operates offices throughout New Hampshire. At December 31, 1998, BNH had consolidated assets of $4.3 billion and consolidated shareholder's equity of $328 million. Family Bank is a federally-chartered savings bank which operates offices in Massachusetts and southern New Hampshire. At December 31, 1998, Family Bank had consolidated assets of $1.8 billion and consolidated shareholder's equity of $141 million. Acquisitions have been, and are expected to continue to be, an important part of the expansion of the Company's business. As of December 31, 1998, the Company had completed three acquisitions accounted for under the pooling-of-interests method and seven acquisitions accounted for under the purchase method since January 1, 1994. In addition, on January 1, 1999, the Company completed the acquisition of SIS Bancorp. Inc. ("SIS"), a holding company for SIS Bank, which was concurrently merged into Family Bank, and Glastonbury Bank & Trust Company, a Connecticut chartered bank which conducts business from eight offices in central Connecticut. Approximately 16,255,885 shares of common stock of the Company were issued in connection with this acquisition, which was accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. Unless the context otherwise requires, references herein to the Company include its direct and indirect subsidiaries. 1 3 BUSINESS OF THE COMPANY The principal business of the Company consists of attracting deposits from the general public through its offices and using such deposits to originate loans secured by first mortgage liens on existing single-family (one-to-four units) residential real estate and existing multi-family (over four units) residential and commercial real estate, construction loans, commercial business loans and leases and consumer loans and leases. The Company also provides various mortgage banking services and, as discussed below, various trust and investment advisory services, as well as engages in equipment leasing, financial planning, securities brokerage and insurance brokerage activities. The Company also invests in investment securities and other permitted investments. The Company derives its income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investments, fees received in connection with the sale and servicing of loans, deposit services and for other services and gains on the sale of assets. The Company's principal expenses are interest expense on deposits and borrowings, operating expenses, provisions for loan and lease losses and income tax expense. Funds for activities are provided principally by deposits, advances from the Federal Home Loan Bank ("FHLB") of Boston, securities sold under repurchase agreements, amortization and prepayments of outstanding loans, maturities and sales of investments and other sources. PHB, BNH and Family Bank provide full trust services to their customers. Each of the Company's banking subsidiaries focuses on offering employee benefit trust services in which it will act as trustee, custodian, administrator and/or investment advisor, among other things, for employee benefit plans for corporate, self-employed, municipal and not-for-profit employers throughout the Company's market areas. In addition, the Company's banking subsidiaries serve as trustee of both living trust and trusts under wills and as such hold, account for and manage financial assets, real estate and special assets. Custody, estate settlement and fiduciary tax services, among others, also are offered the Company's banking subsidiaries. At December 31, 1998, the Company had $3.0 billion of assets held by the trust departments of its banking subsidiaries, which are not included in the Company's consolidated balance sheet for financial reporting purposes. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and as such is subject to regulation and examination by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The Company also is registered as a Maine financial institution holding company under Maine law and as such is subject to regulation and examination by the Superintendent of Banking of the State of Maine ("Superintendent"). As a Maine-chartered bank, PHB is subject to regulation and examination by the Superintendent, as a New Hampshire-chartered commercial bank, BNH is subject to regulation and examination by the New Hampshire Bank Commissioner and as a federally-chartered savings bank, Family Bank is subject to regulation and examination by the Office of Thrift Supervision ("OTS"). Each of PHB, BNH and Family Bank is a member of the Bank Insurance Fund ("BIF") administered 2 4 by the Federal Deposit Insurance Corporation ("FDIC") and as a result also is subject to regulation and examination by the FDIC. SUBSIDIARIES At December 31, 1998, the Company's only direct subsidiaries were PHB, Bank of New Hampshire Corporation, a holding company for BNH, Peoples Heritage Merger Corp., a holding company for Family Bank, and Peoples Heritage Capital Trust I (the "Trust"). For additional information on the Trust, see Note 12 to the Consolidated Financial Statements included in Item 8 hereof. Set forth below is a brief description of certain indirect non-banking subsidiaries of the Company. Investments in Real Estate. The Company's banking subsidiaries hold certain investments in real estate. Exclusive of other real estate owned and investments in office properties and facilities, which are discussed under Item 2 hereof, at December 31, 1998 the Company's banking subsidiaries' investments in real estate consisted entirely of interests in limited partnerships formed for the purpose of investing in real estate for lower-income families, elderly housing projects and/or the preservation or restoration of historically or architecturally significant buildings or structures. At December 31, 1998, the Company's banking subsidiaries investments in these limited partnerships had a carrying value of $18.8 million. Equipment Leasing Activities. PHB conducts equipment leasing activities through Peoples Heritage Leasing Corporation, Inc. ("PHLC"). PHLC is headquartered in Portland, Maine and engages in direct equipment leasing activities, primarily involving office equipment, in the Portland, Maine metropolitan area and elsewhere in the States of Maine, New Hampshire and Massachusetts. At December 31, 1998, PHLC had $34.9 million of leases outstanding. Financial Planning and Securities Brokerage Activities. PHB conducts financial planning, investment planning and securities brokerage activities through Heritage Investment Planning Group, Inc. ("HIPG"). PHB also offers through HIPG investments in mutual funds and annuities throughout the Company's market areas. HIPG offers its services to individuals and small businesses from its office located in Portland, Maine and from certain of the Company's other locations in Maine, Massachusetts and New Hampshire. Sales professionals at HIPG are registered representatives of Compulife Investor Services, Inc., a registered broker/dealer, and all securities brokerage activities are conducted through Compulife Investor Services, Inc. The sales professionals receive referrals from the Company's branch offices throughout its market areas. Insurance Brokerage Activities. PHB conducts insurance brokerage activities through MPN Holdings, the holding company for Morse, Payson & Noyes, which the Company acquired in October 1997, the Catalano Insurance Agency, Inc., which the Company acquired in September 1998, and A.D. Davis, Incorporated, which the Company acquired in December 1998. Morse, 3 5 Payson & Noyes is the largest insurance brokerage firm in Maine. Catalano Insurance Agency, Inc. is headquartered in Methuen, Massachusetts, and A.D. Davis, Incorporated is headquartered in North Conway, New Hampshire. During 1998, the Company completed the two acquisitions noted above for an aggregate of 454,864 shares of common stock of the Company and the acquisition of another insurance brokerage agency, which was merged into Morse, Payson & Noyes, for cash. In addition, PHB conducts insurance sales activities through HIPG, which offers limited life insurance and long-term care insurance products in Maine as an agent for Compulife, Inc., in conjunction with the sales of investment and annuities products. COMPETITION The Company encounters strong competition both in the attraction of deposits and in the making of real estate and other loans. Its most direct competition for deposits has historically come from savings institutions, commercial banks and credit unions with offices in the market areas served by the Company. The Company also encounters competition for deposits from money market funds, as well as corporate and government securities. The principal methods used by the Company to attract deposit accounts include the variety of services offered, the competitive interest rates offered and the convenience of office locations, automated teller machines and expanded banking hours. The Company's competition for real estate and other loans comes principally from savings institutions, credit unions, commercial banks, mortgage banking companies, insurance companies and other institutional lenders. The Company competes for loans through interest rates, branch locations, loan maturities, loan fees and the quality of service extended to borrowers and brokers. The Company also experiences significant competition in the offering of trust services through its subsidiary banks, securities services through HIPG and insurance products through HIPG and the Company's insurance brokerage subsidiaries. This competition comes from a sundry of entities, including other financial institutions, securities brokerage firms and insurance companies. In recent years, Maine, New Hampshire and Massachusetts laws have enabled the acquisition of financial institutions in these respective states by financial institutions and financial institution holding companies based outside of these states. As a result, the Company has encountered substantial competition in its market areas, particularly from out-of-state banking organizations that have entered the Maine, New Hampshire and Massachusetts banking markets, and the Company expects to continue to encounter such competition in the future. EMPLOYEES The Company had approximately 3,334 full-time employees as of December 31, 1998. None of these employees is represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel. 4 6 REGULATION OF THE COMPANY The following references to laws and regulations which are applicable to the Company and its banking subsidiaries are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such laws and regulations. BHCA - General. The Company, as a bank holding company, is subject to regulation and supervision by the Federal Reserve Board. Under the BHCA, a bank holding company is required to file annually with the Federal Reserve Board a report of its operations and, with its subsidiaries, is subject to examination by the Federal Reserve Board. BHCA - Activities and Other Limitations. The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. As a result of recent amendments to the BHCA, the Federal Reserve Board generally may approve an application by a bank holding company that is adequately capitalized and adequately managed to acquire control of, or to acquire all or substantially all of the assets of, a bank located in a state other than the home state of such bank holding company, without regard to whether such transaction is prohibited under the law of any state, provided, however, that the Federal Reserve Board may not approve any such application that would have the effect of permitting an out-of-state bank holding company to acquire a bank in a host state that has not been in existence for any minimum period of time, not to exceed five years, specified in the statutory law of the host state. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Capital Requirements. For a description of the capital adequacy guidelines adopted by the Federal Reserve Board to assess the adequacy of capital of bank holding companies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital" included in Item 7 hereof. Affiliated Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank in circumstances when it might not do so absent such policy. The Federal Reserve 5 7 Board takes the position that in implementing this policy it may require bank holding companies to provide such support when the holding company otherwise would not consider itself able to do so. A bank holding company is a legal entity separate and distinct from its subsidiary bank or banks. Normally, the major source of a holding company's revenue is dividends a holding company receives from its subsidiary banks. The right of a bank holding company to participate as a stockholder in any distribution of assets of its subsidiary banks upon their liquidation or reorganization or otherwise is subject to the prior claims of creditors of such subsidiary banks. The subsidiary banks are subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, in the event of a loss suffered by the FDIC in connection with a banking subsidiary of a bank holding company (whether due to a default or the provision of FDIC assistance), other banking subsidiaries of the holding company could be assessed for such loss. Federal laws limit the transfer of funds by a subsidiary bank to its holding company in the form of loans or extensions of credit, investments or purchases of assets. Transfers of this kind are limited to 10% of a bank's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions between a subsidiary bank and its holding company, also must be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies. Limitations of Acquisitions of Common Stock. The federal Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been given 60 days' prior written notice of such proposed acquisition and within that time period the Federal Reserve Board has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to expiration of the disapproval period if the Federal Reserve Board issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of more than 10% of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any "company" would be required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding Common Stock of, or such lesser number of shares as constitute control over, the Company. 6 8 Maine Law. Under Maine law, the prior approval of the Superintendent is required in any case in which (i) any person or company proposes to acquire control of a Maine financial institution or a Maine financial institution holding company and (ii) a Maine financial institution or Maine financial institution holding company proposes to acquire more than 5% of the voting shares of a Maine financial institution or a Maine financial institution holding company. In addition, the prior approval of the Superintendent is required for the acquisition of more than 5% of the voting shares of a financial institution, whose home state is not Maine, by a Maine financial institution or a Maine financial institution holding company. In addition, any person or company which directly or indirectly acquires more than 5% of the voting shares of a Maine financial institution or a Maine financial institution holding company is required within five days of the acquisition to file with the Superintendent a statement containing specified information, including the background and identity of the person or company, the source and amount of funds or other consideration for the purchase and any plans or proposals which the acquiring person may have to liquidate the financial institution or financial institution holding company, to sell its assets or merge it with any company or to make any other major change in its business, corporate structure or management. Any person or company also must file a notice with the Superintendent when there is a material change in ownership. Under Maine law, the acquisition of an aggregate of more than another 5% of the voting shares is a material change. A Maine financial institution holding company may not engage in any activity other than managing or controlling financial institutions or other activities deemed permissible by the Superintendent. The Superintendent has by regulation determined that, with the prior approval of the Superintendent, a financial institution holding company may engage in those activities which are permissible for bank holding companies under the BHCA and those activities which are permissible for savings and loan holding companies under the Home Owners' Loan Act, and additional activities as specified by regulations. New Hampshire Law. New Hampshire law generally prohibits a bank holding company organized under the laws of New Hampshire or doing business in the State of New Hampshire from directly or indirectly acquiring ownership or control of any voting stock of any bank or national bank, if upon such acquisition (i) the bank holding company would have more than twelve bank affiliates in New Hampshire, or (ii) the dollar volume of the total of time, savings and demand deposits in New Hampshire of the bank holding company and all its affiliates would exceed 20% of the dollar volume of the total of time, savings and demand deposits of all banks, national banks and federal savings and loan associations in the State of New Hampshire as determined by the New Hampshire Bank Commissioner. The above-referenced 20% limitation may be waived by the New Hampshire Bank Commissioner and the New Hampshire Attorney General if both determine that it is in the best interests of the State of New Hampshire, provided that under no circumstances shall the total dollar volume of total deposits exceed 30%. 7 9 REGULATION OF BANKING SUBSIDIARIES General. Each of PHB, BNH and Family Bank is subject to extensive regulation and examination by the Superintendent, the New Hampshire Bank Commissioner and the OTS, respectively. Each of the Company's banking subsidiaries also is subject to regulation and examination by the FDIC, which insures the deposits of each of the Company's banking subsidiaries to the maximum extent permitted by law, and certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for loans. The laws and regulations governing the Company's banking subsidiaries generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. Capital Requirements. Each of the Company's banking subsidiaries is subject to regulatory capital requirements of the FDIC (in the case of PHB and BNH) and the OTS (in the case of Family Bank) which are substantially comparable to the regulatory capital requirements of the Federal Reserve Board applicable to bank holding companies such as the Company. At December 31, 1998, the regulatory capital of each of the Company's banking subsidiaries substantially exceeded applicable requirements. Prompt Corrective Action. Section 38 of the Federal Deposit Insurance Act ("FDIA") provides the federal banking regulators with broad power to take "prompt corrective action" to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Under regulations adopted by the federal banking regulators, an institution shall be deemed to be (i) "well capitalized" if it has total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The regulations also provide that a federal banking regulator may, after notice and an opportunity for a hearing, reclassify a "well capitalized" institution as "adequately capitalized" and may require an "adequately capitalized" institution or an "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The 8 10 federal banking regulator may not, however, reclassify a "significantly undercapitalized" institution as "critically undercapitalized." An institution generally must file a written capital restoration plan which meets specified requirements, as well as a performance guaranty by each company that controls the institution, with an appropriate federal banking regulator within 45 days of the date that the institution receives notice or is deemed to have notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Immediately upon becoming undercapitalized, an institution becomes subject to statutory provisions which, among other things, set forth various mandatory and discretionary restrictions on the operations of such an institution. At December 31, 1998, each of the Company's banking subsidiaries had capital levels which qualified it as a "well-capitalized" institution under applicable laws and regulations. FDIC Insurance Premiums. Each of the Company's banking subsidiaries is a member of the BIF administered by the FDIC, although certain deposits of each of these entities acquired in acquisitions are insured by the Savings Association Insurance Fund ("SAIF") administered by the FDIC. As an FDIC-insured institution, each of the Company's banking subsidiaries is required to pay deposit insurance premiums to the FDIC. Effective January 1, 1997, the assessment schedule for both BIF and SAIF ranges from 0 basis points (subject to a $2,000 annual minimum) to 27 basis points. In addition, both BIF-insured institutions and SAIF-insured institutions are assessed amounts in order for a federally-chartered Finance Corporation to make payments on it bonds. Brokered Deposits. The FDIA restricts the use of brokered deposits by certain depository institutions. Under the FDIA and applicable regulations, (i) a "well capitalized insured depository institution" may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an "adequately capitalized insured depository institution" may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an "undercapitalized insured depository institution" may not (x) accept, renew or roll over any brokered deposit or (y) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution's normal market area or in the market area in which such deposits are being solicited. The term "undercapitalized insured depository institution" is defined to mean any insured depository institution that fails to meet the minimum regulatory capital requirement prescribed by its appropriate federal banking agency. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution. The Company's banking subsidiaries had $258 million of brokered deposits outstanding at December 31, 1998. 9 11 Community Investment and Consumer Protection Laws. In connection with its lending activities, each of the Company's banking subsidiaries is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act ("CRA"). The CRA requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a "Community Reinvestment Act Statement" pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator (in the case of the Bank and FNB, the FDIC and the OCC, respectively) must conduct regular CRA examinations of insured financial institutions and assign to them a CRA rating of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In 1998, the CRA rating of the Company's banking subsidiaries was either "outstanding" or "satisfactory." Limitations on Dividends. The Company is a legal entity separate and distinct from its banking and other subsidiaries. The Company's principal source of revenue consists of dividends from its banking subsidiaries. The payment of dividends by the Company's banking subsidiaries is subject to various regulatory requirements. Miscellaneous. The Company's banking subsidiaries are subject to certain restrictions on loans to the Company or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company or its non-bank subsidiaries. The Company's banking subsidiaries also are subject to certain restrictions on most types of transactions with the Company or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms. Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators is substantial and includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. TAXATION Federal Taxation. The Company and its banking subsidiaries are subject to those rules of federal income taxation generally applicable to corporations under the Code. The Company and its banking subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Code, file a consolidated federal income tax return, which has the effect of 10 12 eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income. State Taxation. As a financial institution holding company, the Company is subject to a separate state franchise tax in lieu of state corporate income tax. The amount of the tax is the sum of 1% of Maine net income and $.08 per $1,000 of Maine assets as defined in Maine law. Maine assets are the Company's total end of the year assets as reported to the United States Government on the federal income tax return. Maine net income is the Company's net income or loss as reported by the Company on its consolidated financial statements which is apportioned to Maine under Maine law. The Company is subject to New Hampshire business profits tax based on federal taxable income attributable to New Hampshire apportionments. The tax is essentially computed by excluding from taxable income any interest on U.S. Government obligations, adding back New Hampshire business profits taxes used in computing federal taxable income, and then multiplying the resulting New Hampshire taxable income by 7.0%. The computed tax is offset by a credit for any New Hampshire enterprise tax assessed on the affiliates' compensation, interest and dividends paid. The Company is subject to Massachusetts financial institution excise tax based on federal taxable income primarily attributable to its Massachusetts affiliates. The tax is computed by adding back tax-exempt income excluded from federal taxable income, state income tax/excise taxes deducted from federal taxable income, and then multiplying the resulting Massachusetts taxable income by 10.91%. Certain affiliates chartered in Massachusetts pay taxes at less than statutory rates. ITEM 2. PROPERTIES At December 31, 1998, the Company conducted its business from its headquarters and main office at One Portland Square, Portland, Maine, and, as of December 31, 1998, 188 offices located in Maine, New Hampshire and Massachusetts. For additional information regarding the Company's lease obligations, see Note 14 to the Consolidated Financial Statements included in Item 8 hereof. 11 13 The following table sets forth certain information with respect to the offices of the Company as of December 31, 1998.
Net Book Value of Number of Property and Leasehold State Banking Offices Improvements Deposits - ----------- --------------- ---------------------- ---------- (Dollars in Thousands) PHB 75 $27,168 $2,862,122 BNH 78 28,272 2,896,694 Family Bank 35 14,515 1,222,429 --- ------- ---------- Total 188 $69,955 $6,981,245 === ======= ==========
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information contained under the section captioned "Common Stock Prices" on page 64 of the Company's Annual Report to Stockholders for the year ended December 31, 1998 (the "Annual Report") is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information contained in the table captioned "Selected Five-Year Consolidated Financial and Other Data" on page 13 of the Company's Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 through 31 of the Company's Annual Report is incorporated herein by reference. 12 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management" on pages 27 and 28 of the Company's Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required are contained on pages 32 through 55 of the Company's Annual Report and are incorporated herein by reference. PART III. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to "Election of Directors" on pages 2 through 6 and "Executive Officers who are not Directors" on pages 9 and 10 of the definitive Proxy Statement of the Company, dated March 22, 1999 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to "Compensation of Executive Officers and Transactions with Management" on pages 7 and 8 and 13 through 16 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to "Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management" on pages 11 and 12 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to "Certain Transactions" on pages 19 and 20 of the Proxy Statement. 13 15 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements are incorporated by reference from Item 8 hereof and the Annual Report to Stockholders included herein as Exhibit 13: Consolidated balance sheets at December 31, 1998 and 1997 Consolidated statements of income for each of the years in the three-year period ended December 31, 1998 Consolidated statements of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1998 Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1998 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and related notes thereto. (a)(3) The following exhibits are included as part of this Form 10-K. 14 16
EXHIBIT NO. EXHIBIT LOCATION - ----------- ------- -------- 3(a)(1) Amended and Restated Articles of Incorporation of (1) the Company 3(a)(2) Amendment to the Articles of Incorporation of the (2) Company 3(b) Bylaws of the Company 4(a) Specimen Common Stock certificate (3) 4(b) Form of Indenture between the Company and Mellon Bank, N.A., as trustee (4) 4(c) Form of Debenture due 2000 (4) 4(d) Amended and Restated Declaration of Trust relating to (5) Peoples Heritage Capital Trust I, dated as of January 31, 1997, between the Company and the trustees named therein 4(e) Form of Common Securities and form of Capital (5) Securities of Peoples Heritage Capital Trust I (included as Exhibits to the Amended and Restated Declaration included as Exhibit 4(d)) 4(f) Indenture, dated as of January 31, 1997, between the (5) Company and The Bank of New York, as trustee, relating to Junior Subordinated Deferrable Interest Debentures due 2027 of the Company 4(g) Form of Junior Subordinated Deferrable Interest (5) Debentures due 2027 of the Company (included as Exhibit A to the Indenture included as Exhibit 4(f)) 4(h) Series A Capital Securities Guarantee Agreement, (6) dated as of January 31, 1997, relating to the Series A Capital Securities of Peoples Heritage Capital Trust I 4(i) Common Securities Guarantee Agreement, dated as of (6) January 31, 1997, relating to the Common Securities of Peoples Heritage Capital Trust I 10(a) Amended and Restated Severance Agreement between the (7) Company and William J. Ryan
15 17
EXHIBIT NO. EXHIBIT LOCATION - ----------- ------- -------- 10(b) Amended and Restated Severance Agreement between the (7) Company and Peter J. Verrill 10(c) Form of Severance Agreement between the Company and (6) each of R. Scott Bacon, David D. Hindle, John W. Fridlington, Carol L. Mitchell and Wendy Suehrstedt 10(d) Form of Amendment to Severance Agreement between the (8) Company and each of R. Scott Bacon and David D. Hindle 10(e) Supplemental Retirement Agreement among the Company, (9) its subsidiaries and William J. Ryan 10(f) Supplemental Retirement Agreement among the Company, (9) its subsidiaries and Peter J. Verrill 10(g) Supplemental Retirement among the Company, its (10) subsidiaries and John W. Fridlington 10(h) Form of Supplemental Retirement Agreement among the (8) Company, its subsidiaries and each of R. Scott Bacon, Carol L. Mitchell and Wendy Suehrstedt 10(i) Senior Officers' Deferred Compensation Plan, as (11) amended 10(j) Directors' Deferred Compensation Plan, as amended (11) 10(k) 1986 Stock Option and Stock Appreciation Rights Plan, (1)(12) as amended 10(l) 1986 Employee Stock Purchase Plan, as amended (1)(12) 10(m) Amended and Restated Restricted Stock Plan for Non- (6) Employee Directors 10(n) Amended and Restated 1995 Stock Option Plan for Non- (13) Employee Directors 10(o)(1) Amended and Restated Thrift Incentive Plan (6) 10(o)(2) First Amendment to Amended and Restated Thrift (6) Incentive Plan 10(p)(1) Profit Sharing Employee Stock Ownership Plan (14) 10(p)(2) First Amendment to Profit Sharing Employee Stock (7) Ownership Plan
16 18
EXHIBIT NO. EXHIBIT LOCATION - ----------- ------- -------- 10(p)(3) Second Amendment to Profit Sharing Employee Stock (7) Ownership Plan 10(q) 1996 Equity Incentive Plan, as amended (15) 10(r) Bank of New Hampshire Corporation Executive Excess (16) Benefit Plan for Paul R. Shea 10(s) Supplemental Executive Retirement Plan agreement (17) between The Family Mutual Savings Bank and David D. Hindle 10(t) Split Dollar Insurance Agreement between The Family (18) Mutual Savings Bank and David D. Hindle 10(u) Employment Agreement between the Company and F. (19) William Marshall, Jr. 10(v) Form of Severance Agreement between the Company and (20) Christopher W. Bramley 10(w) Stockholders Rights Agreement, dated September 12, (21) 1989, between the Company and American Stock Transfer & Trust Company, as Rights Agent 13 Annual Report to Stockholders for 1998 21 Subsidiaries of the Company 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
- ---------------------------- (1) Incorporated by reference to the Agreement and Plan of Merger, dated as of October 27, 1997, between the Company and CFX Corporation, which is included as Exhibit A to the Prospectus/Proxy Statement included in the Form S-4 Registration Statement (No. 333-23991) filed by the Company with the Securities and Exchange Commission ("SEC") on December 31, 1997. (2) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 23, 1998. (3) Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-20243) filed by the Company with the SEC on February 22, 1988. 17 19 (4) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on February 28, 1995. (5) Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 333-23991) filed by the Company with the SEC on March 26, 1997. (6) Exhibit is incorporated by reference to the Company's Form 10-K report for the year ended December 31, 1996, filed with the SEC on March 31, 1997. (7) Exhibit is incorporated by reference to the Company's Form 10-K report for the year ended December 31, 1995, filed with the SEC on March 29, 1996. (8) Exhibit is incorporated by reference to the Company's Form 10-K report for the year ended December 31, 1997, filed with the SEC on March 27, 1998. (9) Exhibit is incorporated by reference to the Company's Form 10-K report for the year ended December 31, 1990, filed with the SEC on March 23, 1991. (10) Exhibit is incorporated by reference to the Company's Form 10-K report for the year ended December 31, 1994, filed with the SEC on March 30, 1995. (11) Exhibit is incorporated by reference to the Company's Form 10-K report for the year ended December 31, 1993, filed with the SEC on March 17, 1994. (12) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is incorporated by reference to the proxy statement filed by the Company with the SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is incorporated by reference to the proxy statement filed by the Company with the SEC on March 24, 1993. (13) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 21, 1997. (14) Exhibit is incorporated by reference to the Form S-1 Registration Statement (No. 33-53236) filed by the Company with the SEC on November 23, 1992. (15) Exhibit is incorporated by reference to the Form 10-Q report filed by the Company with the SEC on November 16, 1998. (16) Exhibit is incorporated by reference to the Form 10-K report filed by Bank of New Hampshire Corporation (File No. 0-9517) for the year ended December 31, 1994. (17) Exhibit is incorporated by reference to the Form 10-K report filed by Family Bancorp (File No. 0-17252) for the year ended December 31, 1993. 18 20 (18) Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-18613) filed by Family Bancorp. (19) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on January 4, 1999. (20) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on April 22, 1998. (21) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on September 13, 1989. The Company's management contracts or compensatory plans or arrangements consist of Exhibit Nos. 10(a)-(v). (b) Not applicable. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders which are required to be included herein. 19 21 SIGNATURES Pursuant to the requirements of Section 13 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. By: /s/ William J. Ryan Date: March 22, 1999 ------------------------------------------- William J. Ryan Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /s/ Robert P. Bahre Date: March 22, 1999 - -------------------------------------------------- Robert P. Bahre Director /s/ P. Kevin Condron Date: March 22, 1999 - -------------------------------------------------- P. Kevin Condron Director /s/ Everett W. Gray Date: March 22, 1999 - -------------------------------------------------- Everett W. Gray Director /s/ Andrew W. Greene Date: March 22, 1999 - -------------------------------------------------- Andrew W. Greene Director 20 22 /s/ Katherine M. Greenleaf Date: March 22, 1999 - -------------------------------------------------- Katherine M. Greenleaf Director /s/ Douglas S. Hatfield Date: March 22, 1999 - -------------------------------------------------- Douglas S. Hatfield Director /s/ David D. Hindle Date: March 22, 1999 - -------------------------------------------------- David D. Hindle Director /s/ Dana S. Levenson Date: March 22, 1999 - -------------------------------------------------- Dana S. Levenson Director /s/ Robert A. Marden, Sr. Date: March 22, 1999 - -------------------------------------------------- Robert A. Marden, Sr. Vice Chairman /s/ Philip A. Mason Date: March 22, 1999 - -------------------------------------------------- Philip A. Mason Director Date: - -------------------------------------------------- John M. Naughton Director /s/ Malcolm W. Philbrook, Jr. Date: March 22, 1999 - -------------------------------------------------- Malcolm W. Philbrook, Jr. Director 21 23 /s/ Pamela P. Plumb Date: March 22, 1999 - -------------------------------------------------- Pamela P. Plumb Vice Chairman Date: - -------------------------------------------------- Seth A. Resnicoff Director /s/ William J. Ryan Date: March 22, 1999 - -------------------------------------------------- William J. Ryan Chairman, President and Chief Executive Officer (principal executive officer) /s/ Curtis M. Scribner Date: March 22, 1999 - -------------------------------------------------- Curtis M. Scribner Director /s/ Paul R. Shea Date: March 22, 1999 - -------------------------------------------------- Paul R. Shea Director /s/ John E. Veasey Date: March 22, 1999 - -------------------------------------------------- John E. Veasey Director /s/ Peter J. Verrill Date: March 22, 1999 - -------------------------------------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer (principal financial and accounting officer) 22 EX-3.B 2 BY-LAWS OF THE COMPANY 1 EXHIBIT 3(b) BYLAWS OF PEOPLES HERITAGE FINANCIAL GROUP, INC. (AMENDED AS OF JANUARY 26, 1999) ARTICLE I OFFICES SECTION 1. Registered and Other Offices. The registered office of Peoples Heritage Financial Group, Inc. (hereinafter called the "Corporation") in the State of Maine shall be at One Portland Square, City of Portland, County of Cumberland. The Corporation may also have an office or offices and keep the books and records of the Corporation, in accordance with the laws of the State of Maine, at such other place or places either within or without the State of Maine as the Board of Directors of the Corporation (hereinafter called the "Board") may from time to time determine or the business may require. The principal office of the Corporation shall be located at One Portland Square, Portland, Maine. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the Corporation at One Portland Square, Portland, Maine, or at such other place within or without the State of Maine as may from time to time be fixed by the Board. SECTION 2. Annual Meetings. The annual meeting of stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held either (i) at 10:00 A.M. on the fourth Tuesday of April of each year, if not a legal holiday, and if a legal holiday then on the next succeeding day not a legal holiday, or (ii) at such other time as the Board shall designate. SECTION 3. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, may be called at any time by the Chairman of the Board, the President or a majority of the Board and shall be called by the Chairman of the Board, the President or the Clerk upon the written request of the holders of not less than 50% of the issued and outstanding capital stock of the Corporation entitled to vote on the matter for which the meeting is called, voting together as a single class; provided, however, that special meetings of stockholders also may be called in the manner specified in the Maine Business Corporation Act. 2 SECTION 4. Notices of Meetings. Except as may otherwise be required by law, notice of each meeting of stockholders, annual or special, shall be in writing and shall state the place where it is to be held, the date and hour of the meeting, and, in the case of a special meeting or when otherwise required by law, the purpose or purposes thereof, and a copy thereof shall be served either personally, by mail or any other means permitted by law upon each stockholder of record entitled to vote at such meeting, not less than 10 nor more than 60 days before the meeting. If mailed, it shall be directed to such stockholder at his address as it appears on the records of the Corporation. Attendance of a stockholder at a meeting, in person or by proxy, shall of itself constitute waiver of notice and call, and of any defects therein, except when the stockholder attends the meeting for the express and sole purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or that insufficient notice thereof was given. Notice of any adjourned meeting of stockholders need not be given except as otherwise provided in this Article II. SECTION 5. Quorum. Except as otherwise required by law, at each meeting of stockholders of the Corporation the holders of shares sufficient to cast a majority of the votes represented by all voting shares of the Corporation issued and outstanding and entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum. Stockholders present at a duly called or held meeting at which a quorum was once present may continue to do business at the meeting or any adjournment thereof, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 6. Adjournments. Whether or not a quorum is present at any annual or special meeting of stockholders, a majority in interest of those present in person or by proxy and entitled to vote may adjourn the meeting from time to time to another time or place, at which time, if a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless the adjournment is for more than 30 days or a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 7. Organization. Each meeting of the stockholders shall be presided over by the Chairman of the Board, or in his absence by the President, or if neither the Chairman nor the President is present, by an Executive or Senior Vice President. The Clerk, or in his absence a temporary Clerk, shall act as secretary of each meeting of the stockholders. In the absence of the Clerk and any temporary Clerk, the chairman of the meeting may appoint any person present to act as secretary of the meeting. The chairman of any meeting of the stockholders, unless prescribed by law or regulation or unless the Chairman of the Board has otherwise determined, shall determine the order of the business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussions as seem to him in order. 2 3 SECTION 8. Proposals. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Clerk of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days prior to the anniversary date of the immediately preceding annual meeting. A stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything herein to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Article II, Section 8. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article II, Section 8, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. This provision is not a limitation on any other applicable laws and regulations. At a special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a special meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board or such other person or persons as are authorized to call special meetings of stockholders of the Corporation pursuant to Article II, Section 3 of these Bylaws. SECTION 9. Voting List. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least 10 days before each meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list shall be in written or other form which may be translated to readable form. The requirement of a list may be satisfied by a card index showing the required information and alphabetically arranged; and the list may be classified by classes and series of stock held. If the Corporation maintains its stockholder records by means of electronic data processing equipment, such list may be printed or prepared on microfilm, provided that the Corporation shall provide the means of reducing or projecting such list to readable form so as to permit inspection by any stockholder in accordance with these Bylaws. The list of stockholders shall be subject to inspection by any stockholder at any time during usual business hours, for a period of not less than 10 days prior to such meeting. The list also shall be produced and kept open at the time and place of the meeting and subject to the inspection of any stockholder during such meeting. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders. 3 4 SECTION 10. Voting. At each meeting of the stockholders, every stockholder of record of the Corporation entitled to vote at such meeting shall be entitled to vote the common or other shares of voting stock standing in his name on the books of the Corporation and entitled to be voted at such meeting: (i) at the time fixed pursuant to Article VIII of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or (ii) if no such record date shall have been fixed, then at the close of business on the next day preceding the day on which notice of such meeting is given, or (iii) if notice of such meeting shall have been waived, then at the close of business on the day next preceding the day on which such meeting is held. Each share of Common Stock shall be entitled to one vote per share, and there shall be no cumulative voting in elections of directors. Except as permitted by law, shares of its own stock belonging to the Corporation shall not be voted directly or indirectly. Every stockholder entitled to vote at any meeting of stockholders may cast such vote in person or by proxy appointed by an instrument in writing, signed by such stockholder or his duly authorized attorney delivered to the secretary of the meeting; provided, however, that no proxy shall be voted after 11 months from its date, unless the proxy expressly and conspicuously provides for a longer duration. At all meetings of the stockholders all matters, except elections of directors and where other provision is made by law or by the Amended and Restated Articles of Incorporation of the Corporation, as amended (hereinafter called the "Articles of Incorporation"), or by these Bylaws, shall be decided by a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote thereon, provided that a quorum is present. Directors are to be elected by a plurality of votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. If, at any meeting of stockholders, due to a vacancy or vacancies or otherwise, directors of more than one class of the Board are to be elected, each class of directors to be elected at the meeting shall be elected in a separate election by a plurality vote. SECTION 11. Inspectors. For each meeting of stockholders, the Board shall appoint one or more inspectors of election. If for any meeting the inspector(s) appointed by the Board shall be unable to act or the Board shall fail to appoint such inspector(s), inspector(s) may be appointed at the meeting by the chairman thereof. No director or candidate for the office of director shall act as an inspector for the election of directors; and inspectors need not be stockholders. The inspector(s) appointed to act at any meeting of the stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspector(s) at such meeting with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them. The inspector(s) shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; they shall receive votes, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, determine and announce the 4 5 results, and otherwise see that the vote or election is conducted with fairness to all stockholders. Upon request of the person presiding at the meeting or of any stockholder entitled or claiming to be entitled to vote thereat, the inspector(s) shall report in writing on any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by the inspector(s) shall be prima facie evidence of the facts stated therein and of the vote as certified by them. SECTION 12. Informal Action. Any action required to be taken at a meeting of the stockholders, or any other action which may be taken at a meeting of the stockholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the stockholders entitled to vote with respect to the subject matter thereof and filed with the Clerk of the Corporation as part of the corporate records. ARTICLE III DIRECTORS SECTION 1. General Powers and Number. The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders. The number of directors of the Corporation shall be determined as provided in the Articles of Incorporation. SECTION 2. Classification and Term. The Board shall be divided into three classes as nearly equal in number as the then total number of directors constituting the Board permits, with the term of office of one class expiring each year. At each annual meeting of stockholders, directors selected to succeed those whose terms are expiring shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders and when their respective successors are elected and qualified. SECTION 3. Qualifications and Compensation. (a) No person may be elected as a director who, at the time of his election, is over 72 years of age; provided that if any director shall reach 72 years of age during his term of office as director, such director shall serve as director only until the next annual meeting of stockholders of the Corporation next following his attainment of age 72. (b) Members of the Board of the Corporation may receive a fee for the services rendered as a director, including a fixed sum and expenses for attendance at each meeting of the Board or committees thereof. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 5 6 SECTION 4. Nominations of Directors. Subject to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board or a committee appointed by the Board or by any stockholder entitled to vote generally in an election of directors. However, any stockholder entitled to vote generally in an election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid to the Clerk of the Corporation not later than (i) 90 days prior to the anniversary date of the immediately preceding annual meeting, and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. SECTION 5. Quorum. At any meeting of the Board, a majority of the directors then holding office shall constitute a quorum for the transaction of business except where otherwise provided by law, the Articles of Incorporation or these Bylaws. In the absence of a quorum, a majority of the directors present may adjourn the meeting to some future time not more than 30 days later. SECTION 6. Voting. At all meetings of the Board, each director present shall have one vote. At all meetings of the Board, all questions, the manner of deciding which is not otherwise specifically regulated by law, the Articles of Incorporation or these Bylaws, shall be determined by a majority of the directors present at the meeting. SECTION 7. Place of Meeting. The Board may hold its meetings at such place or places within or without the State of Maine as the Board from time to time may determine or as shall be specified or fixed in the respective notices or waivers of notice thereof. SECTION 8. Annual Meeting. The Board shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual election of directors, on the same day and at the same place at which such election is held or at such other time or place as shall be specified in a notice given as hereinafter provided for special meetings of the Board or in a consent and waiver of notice thereof signed by all directors. 6 7 SECTION 9. Regular Meetings. Regular meetings of the Board shall be held at such times and places as the Board may from time to time determine by resolution. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at said place at the same hour on the next succeeding business day not a legal holiday. Notice of regular meetings need not be given. SECTION 10. Special Meetings; Notice. Special meetings of the Board shall be held whenever called by a majority of the Board, the Chairman of the Board or the President. Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least three days before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph, cable or wireless, or be delivered personally or by telephone not later than the day before the day on which the meeting is to be held. Except as otherwise expressly required by law or these Bylaws, the purpose of any special meeting shall not be required to be stated in the notice thereof. Notice of any meeting of the Board shall not be required to be given to any director who signs a waiver of notice, either before or after the meeting, or who shall be present at such meeting, unless the director states his objection to the transaction of that item of business, on the ground of insufficiency of notice thereof, when the item of business is first brought before the meeting, and refrains from voting on or votes against such item of business. SECTION 11. Telephonic Meetings. The Board may hold a meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Notice of such meeting, if any, shall be given as provided in Section 10 and shall give each director the telephone number at which, or other manner in which, he will be called. SECTION 12. Organization. At each meeting of the Board, the Chairman of the Board or in his absence the President, or in his absence a director chosen by a majority of the directors present, shall act as chairman of such meeting and preside thereat. The Clerk, or in the absence of the Clerk any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof. At all meetings of the Board, business shall be transacted in the order and in the manner determined by the chairman of the meeting, subject to the approval of the Board. SECTION 13. Informal Action. Any action required to be taken at a meeting of the directors or any action which may be taken at a meeting of the directors or of a committee of the directors, may be taken without a meeting if all of the directors, or all of the members of the committee, as the case may be, sign written consents setting forth the action taken or to be taken, at any time before or after the intended effective date of such action. Such consents shall be filed with the minutes of directors' meetings or committee meetings, as the case may be, and shall have the same effect as a unanimous vote. SECTION 14. Resignation. Any director may resign at any time by giving written notice to the Chairman or to the Clerk of the Corporation. Such resignation shall take effect upon receipt of such notice or any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 7 8 SECTION 15. Removal of Directors. At a duly constituted meeting of stockholders called expressly for the purpose, any director may be removed with or without cause by a vote of the holders of at least 67% of the shares then entitled to vote in an election of directors, voting as a single class; provided, however, that any director also may be removed for cause in the manner specified in the Maine Business Corporation Act. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the Articles of Incorporation of the Corporation and any resolutions adopted pursuant thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. SECTION 16. Vacancies. Any vacancies occurring in the Board by reason of an increase in the number of directors may be filled by the Board, and any directors so chosen shall hold office until the next election of directors by the stockholders. Any other vacancy in the Board, whether by reason of death, resignation, removal or otherwise, may be filled by the remaining directors, or by a sole remaining director, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders and vacancies created with respect to any directorship of the directors so elected may be filled in the manner specified by the resolution or resolutions of the Board establishing such Preferred Stock. SECTION 17. Liability. A director shall not be held personally liable for monetary damages for failure to discharge any duty as a director unless the director is found not to have acted honestly or in the reasonable belief that the action was in or not opposed to the best interests of the Corporation or its stockholders. No amendment, modification or repeal of this Article III, Section 17 shall be inconsistent with applicable law or adversely affect the rights provided hereby with respect to any claim, issue or matter in any action, suit or proceeding that is based in any respect on any action or omission, or alleged action or omission, prior to such amendment, modification or repeal. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SECTION 1. Executive Committee. (a) The Board may appoint from the Board an Executive Committee of not less than two members, and may delegate to such committee, except as otherwise provided by law or the Articles of Incorporation, the powers of the Board in the management of the business and affairs of the Corporation in the intervals between meetings of the Board in all cases in which specific directions 8 9 shall not have been given by the Board, as well as the power to authorize the seal of the Corporation to be affixed to all papers which may require it. (b) Meetings of the Executive Committee shall be held at such times and places as the Chairman of the Executive Committee may determine. The Executive Committee, by a vote of a majority of its members, may appoint a Chairman and fix its rules of procedure, determine its manner of acting and specify what notice, if any, of meetings shall be given, except as the Board shall by resolution otherwise provide. (c) The Executive Committee shall keep minutes of all business transacted by it. All completed action by the Executive Committee shall be reported to the Board at its meeting next succeeding such action or at its meeting held in the month following the taking of such action, and shall be subject to revision or alteration by the Board. SECTION 2. Audit Committee. The Board shall designate not less than two members of the Board who are not employed by the Corporation to constitute an Audit Committee, which shall receive and evaluate internal and independent auditor's reports, monitor the Corporation's adherence in accounting and financial reporting to generally accepted accounting principles and perform such other duties as may be delegated to it by the Board. Meetings of the Audit Committee shall be held at such times and places as the Chairman of the Audit Committee may determine. The Audit Committee, by a vote of a majority of its members, may appoint a Chairman and fix its rules of procedure, determine its manner of acting and specify what notice, if any, of meetings shall be given, except as the Board shall by resolution otherwise provide. SECTION 3. Other Committees. The Board may, by resolutions passed by a majority of the Board, designate members of the Board to constitute other committees which shall in each case consist of two or more directors, and shall have and may execute such powers as may be determined and specified in the respective resolutions appointing them. A majority of all the members of any such committee may appoint a Chairman and fix its rules of procedure, determine its manner of acting and fix the time and place, whether within or without the State of Maine, of its meetings and specify what notice thereof, if any, shall be given, unless the Board shall otherwise by resolution provide. A majority of the Board shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time. ARTICLE V OFFICERS SECTION 1. Titles. The principal officers of the Corporation shall be a Chairman of the Board, a President and a Treasurer. Other officers may be appointed in accordance with the provisions of this Article V and any two or more offices may be held by the same person. Officers 9 10 of the Corporation shall furnish to the Board a bond in such amount as the Board shall deem necessary, and shall, upon taking office, take and subscribe to an oath as provided under Maine law. SECTION 2. Election, Term of Office and Qualifications. The principal officers shall be elected annually by the Board. Each officer, except as may be appointed in accordance with the provisions of this Article V, shall hold office until his successor shall have been chosen and shall qualify or until his death or until he shall have resigned or until he shall have been removed in the manner hereinafter provided. SECTION 3. Appointive Officers. The Board may from time to time appoint or delegate the appointment of such other officers and assistant officers and agents as it may deem necessary. Such officers shall hold office for such period, have such authority and perform such duties, subject to the control of the Board, as are in these Bylaws provided or as the Chief Executive Officer designated by the Board or the Board may from time to time prescribe. The Chief Executive Officer shall have authority to appoint and remove appointive officers, agents and employees and to prescribe their powers and duties and may authorize any other officer or officers to do so. SECTION 4. The Chairman of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and the Board, and the Chairman shall perform such duties as the Board may from time to time prescribe. SECTION 5. The President. In the absence or inability to act of the Chairman of the Board, the President shall, when present, act as ex officio chairman and shall preside at all meetings of the Board and the stockholders. Unless the Chairman of the Board is designated by the Board as the Corporation's Chief Executive Officer, the President shall be the Chief Executive Officer of the Corporation and shall have general charge of the business affairs and property of the Corporation. He shall have such other powers and perform such duties as may from time to time be assigned to him by the Board or as may be prescribed by these Bylaws. SECTION 6. The Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation, and shall deposit all such funds in the name of the Corporation in such banks or other depositories as shall be selected or authorized to be selected by the Board; shall render or cause to be rendered a statement of the condition of the finances of the Corporation at all regular meetings of the Board, and a full financial report at the annual meeting of stockholders, if called upon so to do; shall receive and give receipt for moneys due and payable to the Corporation from any source whatsoever; and, in general, shall perform or cause to be performed all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board or as may be prescribed in these Bylaws. SECTION 7. The Clerk. In addition to the foregoing officers, the Board shall appoint a Clerk of the Corporation, who shall be a resident of the State of Maine. The Clerk shall perform the functions required by law, shall not be deemed an officer of the Corporation as a result of serving in such capacity and shall not be liable in that capacity for any liabilities of the Corporation, 10 11 including without limitation debts, claims, taxes, fines or penalties. The Clerk shall keep, at the registered office of the Corporation or at another office of the Corporation to which he has ready access, in a book kept for such purpose, the records of all stockholders' meetings, including records of all votes and minutes of such meetings. He may keep the stock transfer book and shall keep on file a list of stockholders entitled to vote at each meeting and the most recent list of stockholders. He may certify all votes, resolutions and actions of the stockholders and of the Board. He shall attend the meetings of the directors and the stockholders and record the proceedings in books kept for that purpose; and, in his absence, a temporary Clerk shall be appointed and shall record such meetings. He may give or cause to be given notice of all stockholders' and directors' meetings. He shall have custody of the corporate seal and he shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. SECTION 8. Resignation. Any officer may resign at any time by giving written notice to the President or the Clerk. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and unless otherwise specified therein the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. Removal. Except as otherwise required by law, any officer elected or appointed directly by the Board may only be removed, either with or without cause, at any time by the vote of the majority of the Board at any meeting of the Board called for that purpose. Any officer otherwise appointed pursuant to this Article V may be removed, either with or without cause, by the Board, the Executive Committee or the Chief Executive Officer. SECTION 10. Vacancies. A vacancy in any office because of death, resignation, removal or other causes shall be filled for the unexpired portion of the term in the manner prescribed by these Bylaws for regular election or appointment to such office. ARTICLE VI INDEMNIFICATION SECTION 1. Indemnification. Without limitation, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise, against expenses, including attorney's fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the full extent permitted by the Maine Business Corporation Act, provided that the Corporation shall not be liable for any amount which may be due to any person in connection 11 12 with a settlement of any action, suit or proceeding effected without its prior written consent or any action, suit or proceeding initiated by an indemnified person without its prior written consent, other than an action, suit or proceeding seeking indemnification from the Corporation. SECTION 2. Expenses. Expenses incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt by the Corporation of a written undertaking by or on behalf of the director, officer, employee, agent, trustee, partner or fiduciary to repay such amount under the circumstances specified in the Maine Business Corporation Act and which otherwise meets the requirements of such Act. Such undertaking shall be an unlimited general obligation of the person seeking the advance, but need not be secured and may be accepted by the Corporation without reference to financial ability to make the repayment. SECTION 3. Other Rights and Remedies. The indemnification and entitlement to advances of expenses provided by this Article VI shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in that person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, agent, trustee, partner or fiduciary and shall inure to the benefit of the heirs, executors and administrators of such a person. A right to indemnification hereunder may be enforced by a separate action against the Corporation, if an order for indemnification has not been entered by a court in any action, suit or proceeding in respect to which indemnification is sought. SECTION 4. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise, against any liability asserted against that person and incurred by that person in any such capacity, or arising out of that person's status as such, whether or not the Corporation would have the power to indemnify that person against such liability under this Article VI. SECTION 5. Other. For purposes of this Article VI, references to the "Corporation" shall include, in addition to the surviving corporation or new corporation, any participating corporation in a consolidation or merger. SECTION 6. Modification. The duties of the Corporation to indemnify and to advance expenses to any person provided in this Article VI shall be in the nature of a contract between the Corporation and each such person, and no amendment or repeal of any provision of this Article VI shall alter, to the detriment of such person, the right of such person to the advancement of expenses or indemnification related to a claim based on an act or omission, or alleged act or omission, which took place prior to such amendment or repeal. 12 13 ARTICLE VII CONTRACTS, CHECKS, BANK ACCOUNTS, ETC. SECTION 1. Execution of Contracts. The Board may authorize any officer, employee or agent, in the name and on behalf of the Corporation, to enter into any contract or execute and satisfy any instrument, and any such authority may be general or confined to specific instances, or otherwise limited. SECTION 2. Loans. The President, or any officer, employee or agent authorized by the President or by the Board, may effect loans and advances at any time for the Corporation from any bank, trust company or other institutions or from any firm, corporation or individual and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and when authorized so to do may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances. Such authority conferred by the Board or the President may be general or confined to specific instances, or otherwise limited. SECTION 3. Checks, Drafts, Etc. All checks, drafts and other orders for the payment of money out of funds of the Corporation and all notes or other evidences of the Corporation shall be signed on behalf of the Corporation in such a manner as shall from time to time be determined by resolution of the Board. SECTION 4. Deposits. The funds of the Corporation not otherwise employed shall be deposited from time to time to the order of the Corporation in such banks, trust companies or other depositories as the Board may select or as may be selected by an officer, employee or agent of the Corporation to whom such power may from time to time be delegated by the Board. SECTION 5. General and Special Bank Accounts. The Board or the President or any other officer designated by the Board or appointed by the President and authorized by the Board or the President may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as may be selected by the President or any other officer or officers or agent or agents to whom power in that respect shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE VIII CAPITAL STOCK SECTION 1. Certificates of Stock. Every holder of shares of stock shall be entitled to have a certificate, in such form as the Board shall prescribe, certifying the number and class of shares of stock of the Corporation owned by him. Each such certificate shall be signed in the name of the 13 14 Corporation by the Chairman of the Board, the President or an Executive or Senior Vice President or a Vice President, and the Treasurer or an Assistant Treasurer or the Clerk. Signatures of such officers may be facsimiles to the extent permitted by the Maine Business Corporation Act. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who shall have signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by certificates for stock of the Corporation, the number of shares represented by such certificates, respectively, and the respective dates thereof, and, in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled and a new certificate or certificates shall not be issued in exchange for any existing certificates until such existing certificate shall have been so canceled, except in cases otherwise provided for in this Article VIII. SECTION 2. Transfer of Shares. Each transfer of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Clerk of the Corporation, or with a transfer agent appointed as in this Article VIII provided, upon the payment of any taxes thereon and the surrender of the certificate or certificates for such shares properly endorsed. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided that whenever any transfer of shares shall be made for collateral security and not absolutely, such fact, if known to the Corporation or to any such agent, shall be so expressed in the entry of transfer if requested by both the transferor and the transferee. SECTION 3. Date for Determining Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder of any shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board may, in its discretion, and after the expiration of such period of time as it may determine to be advisable, cause to be issued to him a new certificate or certificates for shares of stock, upon the surrender of the mutilated certificate, or in case of loss or destruction of the certificate, upon proof satisfactory to the Board of such loss or destruction, and the Board may, in its discretion, require the owner of the lost, destroyed or mutilated certificate, or his legal 14 15 representatives, to give the Corporation a bond, in such sum and with such surety or sureties as it may direct, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, destruction or mutilation of any such certificate or the issuance of such new certificate. SECTION 5. Examination of Books by Stockholders or Bondholders. The Board shall, subject to any applicable laws, have the power to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and documents of the Corporation, or any of them, shall be open to the inspection of the stockholders or bondholders of the Corporation; and no stockholder or bondholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by any such law, unless and until authorized so to do by resolution of the Board or of the stockholders of the Corporation. SECTION 6. Stockholders to be Registered. Only those persons whose names are registered on the transfer books of the Corporation shall be entitled to be treated by the Corporation as holders of the stock listed in their respective names. The Corporation shall not be required to recognize any other equitable or legal claim to or interest in any shares on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of Maine. ARTICLE IX WAIVER OF NOTICE Whenever any notice is required to be given by these Bylaws or Articles of Incorporation, or by statute, the person entitled thereto may in person, or in the case of a stockholder by his attorney thereunto duly authorized, waive such notice in writing, whether before or after the meeting, or other matter in respect of which such notice is to be given, and in such event such notice need not be given to such person and such waiver shall be equivalent to such notice, and any action to be taken after such notice or after the lapse of a prescribed period of time may be taken without such notice and without the lapse of any period of time. ARTICLE X SEAL The seal of the Corporation shall be in the form of a circle and shall bear the name of the Corporation and the year of its incorporation. 15 16 ARTICLE XI FISCAL YEAR The fiscal year of the Corporation shall begin on the first day of January and end on the last day of December in each year. ARTICLE XII EMERGENCY PREPAREDNESS In the event of an emergency in the conduct of the business of the Corporation resulting from an attack on the continental United States or any nuclear or atomic disaster: A. The officers and employees of the Corporation shall continue to conduct the business of the Corporation under such guidance from the Board as may be available, except as to matters which by statute require specific approval of the Board, and subject to any directive of duly constituted authority during the emergency. B. In the absence or disability of any officer, or upon the refusal of any officer to act, the Board may delegate for the time being that officer's powers and duties to any other officer or director. C. In the event of an emergency so severe as to prevent the conduct and management of the business of the Corporation by the Board and the officers as contemplated by these Bylaws, any two or more available directors shall constitute an interim Executive Committee for the full conduct and management of the business of the Corporation, subject to such regulations as the Board may from time to time adopt for emergency preparedness, until such time as the interim Executive Committee determines that the Corporation can resume the conduct and management of the business of the Corporation in the manner contemplated by these Bylaws. D. If, as a consequence of an emergency, the Chief Executive Officer of the Corporation cannot be located or is unable to assume and continue his normal executive duties, then his powers and duties shall, without further action of the Board, be assumed by one of the following officers in the seniority set forth: (1) President (unless he is serving as Chief Executive Officer); (2) Executive Vice President; (3) Senior Vice Presidents (in order of seniority); and (4) Treasurer. 16 17 The officer so assuming the powers and duties of the Chief Executive Officer shall continue to serve until the majority of the available directors certify in writing that either he is unable to serve longer in that capacity or an officer senior to him is available to assume the powers and duties of the Chief Executive Officer. E. If, as a consequence of an emergency, the Treasurer of the Corporation cannot be located or is unable to assume and continue his normal duties, then the powers and duties of the Treasurer shall, without further action of the Board, be assumed by one of the following officers in the seniority set forth: (1) President (unless he is serving as Chief Executive Officer); (2) Executive Vice President; (3) Senior Vice Presidents (in order of seniority); and (4) Assistant Treasurer. The officer so assuming the powers and duties of the Treasurer shall continue to serve until the majority of the available directors certify in writing that either he is unable to serve longer in that capacity or an officer senior to him is available to assume the powers and duties of the Treasurer. Anyone dealing with the Corporation may accept a certificate of two or more officers that a specified individual is the acting Treasurer hereunder and rely upon that certificate to remain in full force and effect until modified or cancelled by a certificate of change signed by three officers of the Corporation. F. If during such emergency, or as a consequence thereof, the business of the Corporation cannot be conducted and managed at its main office or at a duly authorized branch office, its business may be conducted and managed at such temporary location or locations as may be designated by the Board or by its interim Executive Committee for which provision is made above; and the business of the Corporation shall be returned from the temporary location or locations to the main office of the Corporation and its duly authorized branch offices as soon as practicable. ARTICLE XIII AMENDMENTS These Bylaws (including, without limitation, this Article XIII) may be altered, amended or repealed or new Bylaws may be adopted only by the Board. 17 18 ARTICLE XIV USE OF PRONOUNS Use of the masculine gender in these Bylaws shall be considered to represent either masculine or feminine gender whenever appropriate. 18 EX-13 3 ANNUAL REPORT TO STOCKHOLDERS 1 Peoples Heritage Financial Group, Inc. 1998 Annual Report [GRAPHIC OMITTED] ------------------------ Take a Closer Look 2 THE WAY WE SEE COMMUNITY BANKING There is more to Peoples Heritage than meets the eye. Our focused strategy gives our customers the best of both worlds; the personalized service of a community bank combined with all the resources of one of New England's largest banking networks. By staying true to our vision in 1998, we achieved our fifth consecutive record earnings year while expanding our market share, our reach into new markets, and our depth of services. TABLE OF CONTENTS Financial Highlights 1 Letter to Shareholders 2 Markets 4 Performance 6 Strategy 8 Services 10 Vision 12 Selected 5-year Consolidated Financial and Other Data 13 Management's Discussion and Analysis 14 Financial Statements 32 Corporate Directory 57 PEOPLES HERITAGE FINANCIAL GROUP, INC. Peoples Heritage Financial Group, Inc. is a $12 billion multi-state banking and financial services holding company headquartered in Portland, Maine. At December 31, 1998, the Company's subsidiaries included Peoples Heritage Bank, Bank of New Hampshire, and Family Bank and total assets were $10 billion. On January 1, 1999, the Company acquired SIS Bancorp, the $2 billion parent company of SIS Bank and Glastonbury Bank & Trust Company. PEOPLES HERITAGE BANK 75 branches throughout ME. No. 1 market position. 20% market share. $4.2 billion in assets. BANK OF NEW HAMPSHIRE 78 branches throughout NH. No. 1 market position. 22% market share. $4.3 billion in assets. Family/SIS Bank* 56 branches throughout MA, 4 in southern NH. Strong local market position. $3.4 billion in assets. GLASTONBURY BANK & TRUST COMPANY* 8 branches in north-central CT. $250 million in assets. *Reflects SIS Bancorp acquisition completed 1/99. [Cover Photo: Pemaquid lighthouse, Maine] 3 SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 % Change 1996 1995 ============================================================================================================================ FOR THE YEAR - ---------------------------------------------------------------------------------------------------------------------------- Operating net income (1)(2) $ 125,232 $ 104,419 20% $ 83,786 $ 69,718 Net income 100,590 92,335 9 76,033 66,040 Net interest income 365,429 344,476 6 279,295 251,897 Non-interest income 98,978 79,783 24 57,423 46,656 (excluding securities transactions) - ---------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE - ---------------------------------------------------------------------------------------------------------------------------- Earnings per share: Operating diluted (1)(2) $ 1.40 $ 1.17 20% $ 1.01 $ 0.85 Basic 1.14 1.06 8 0.94 0.82 Diluted 1.12 1.04 8 0.92 0.80 Dividends per share 0.44 0.38 16 0.34 0.29 Book value per share at year end 8.70 8.23 6 7.71 7.24 - ---------------------------------------------------------------------------------------------------------------------------- KEY PERFORMANCE RATIOS - ---------------------------------------------------------------------------------------------------------------------------- Excluding special charges: Return on average assets (2) 1.28% 1.25% 2% 1.27% 1.19% Return on average equity (2)(3) 17.06 15.17 12 13.99 12.71 Return on average assets 1.03 1.09 (6) 1.15 1.13 Return on average equity (3) 13.70 13.27 3 12.69 12.04 - ---------------------------------------------------------------------------------------------------------------------------- AT YEAR END - ---------------------------------------------------------------------------------------------------------------------------- Total Assets $10,102,459 $9,668,242 4% $7,767,655 $6,168,281 Loans and leases, net 6,098,487 6,434,238 (5) 5,161,179 4,024,307 Deposits 6,981,245 6,747,419 3 5,936,430 4,834,969 Shareholders' equity 761,924 720,783 6 676,847 586,500 - ----------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------- 1994 =============================================================== FOR THE YEAR - --------------------------------------------------------------- Operating net income (1)(2) $ 51,528 Net income 50,785 Net interest income 223,737 Non-interest income 41,625 (excluding securities transactions) - --------------------------------------------------------------- PER COMMON SHARE - --------------------------------------------------------------- Earnings per share: Operating diluted (1)(2) $ 0.64 Basic 0.64 Diluted 0.63 Dividends per share 0.18 Book value per share at year end 6.45 - --------------------------------------------------------------- KEY PERFORMANCE RATIOS - --------------------------------------------------------------- Excluding special charges: Return on average assets (2) 0.93 Return on average equity (2)(3) 10.12 Return on average assets 0.92 Return on average equity (3) 9.97 - --------------------------------------------------------------- AT YEAR END - --------------------------------------------------------------- Total Assets $5,673,436 Loans and leases, net 3,740,024 Deposits 4,426,847 Shareholders' equity 515,423 - ---------------------------------------------------------------
(1) Earnings before special charges. (2) Special charges consist of merger related and other restructuring charges which on an after-tax basis were $24,642, $12,084, $7,753, $3,678 and $743 for 1998, 1997, 1996, 1995 and 1994, respectively. (3) Excludes effect of unrealized gains or losses on securities. PERFORMANCE AT A GLANCE Look closely at our five consecutive record earnings years and you will see a bank with a disciplined acquisitions strategy and strong market share enabling us to achieve growth with profitability, year after year. In 1998, Peoples Heritage exceeded $100 million in net income for the first time. On an operating basis, exclusive of merger-related charges, 1998 earnings rose 20%, to $125.2 million, or $1.40 per diluted share, over 1997 operating earnings of $104.4 million, or $1.17 per diluted share. [GRAPH OMITTED] [PICTURE OMITTED] 1 4 Dear Shareholders: In 1998 we achieved record earnings for our fifth consecutive year. Along the way, we became one of the five largest banks in New England with the fourth largest deposit market share. We also expanded our geographic reach, and as of January 1, 1999, more than doubled our assets to $12 billion. While building New England's leading community banking franchise, we are building important momentum. With our focused strategy, we have continued to enter new markets through profitable acquisitions while increasing market share in our current markets. For example, after 1997's acquisition of Atlantic Bancorp, we not only became number one in market share in Maine, but number one in the state's largest market, Greater Portland. In addition, we added insurance to our growing roster of services, by acquiring Maine's largest independent insurance agency, Morse, Payson & Noyes Insurance. In 1998, we continued our expansion across New England with the acquisition of CFX Corporation which took Peoples from a $6 billion bank to a $10 billion bank. Bringing CFX into the Peoples fold vaulted our New Hampshire Bank, Bank of New Hampshire, to the number one market position in the state and expanded the market area of our Massachusetts bank, Family Bank, farther westward. This year, with the success of Morse, Payson & Noyes Insurance adding $13 million in fee income to our 1998 bottom line, we acquired two additional insurance companies -- A.D. Davis Insurance in New Hampshire and Catalano Insurance in Massachusetts. Both acquisitions complement the market coverage of our area banks and give us our first insurance presence in each of those two states. On January 1, 1999 we completed the acquisition of SIS Bancorp which includes SIS Bank in Massachusetts and Glastonbury Bank & Trust Company in Connecticut. The acquisition brought us to $12 billion in assets. It nearly doubled our size in Massachusetts, giving us the eighth largest market share, extended our reach into the western part of the state, and introduced us to the Connecticut market. With our proven acquisition expertise and operational discipline, we are continuing to expand our business. Yet we remain unwavering in our customer-focused approach to community banking. Even as we continue to acquire more banks in a wider area, we typically let these local banks run as they have with the same customer contact people in place and the same management structure. We create new efficiencies by consolidating operations. As a result, in all of our markets we are now able offer an unusual combination: the advantage of personal, community banking with the strength and depth of an increasingly sophisticated financial services network. From our customers' viewpoint, it is the best of both worlds. I know that is one of the reasons why I was approached earlier this year by the head of Maine's largest independent department store chain with 28 locations. He wanted localized, personal service, but had not realized we had the sophistication of services to handle his payroll, inventory, the complexity of his accounts and his multiple locations making deposits. Now he is a customer. Commercial loans, including C&I and Commercial real estate, now comprise our largest lending category. Our growing success extends to other areas of our business as well. In Public Finance, we started with a minimal presence in Maine just three years ago and are now the leader in the state as we take our business approach into New Hampshire and Massachusetts. And the story is much the same for home equity lending, home mortgages, indirect auto lending, trust and investment services, and more -- as we apply our proven business techniques in our new markets with positive results. As New England's leading community banking franchise, we are continuing to break ground as we look for new ways to build on our success and replicate our positive results in each new market. I believe that our ability to expand through profitable acquisitions, and our commitment to localized community banking, will enable us to continue to serve our customers, and our shareholders, in the years ahead. Sincerely yours, /s/ William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer [PICTURE OMITTED] 2 5 "With our proven acquisition expertise and operational discipline, we are continuing to expand our business. Yet we remain unwavering in our customer-focused approach to community banking." [PICTURE OMITTED] 3 6 MARKETS [GRAPH OMITTED] [GRAPH OMITTED] EXPANDING ACROSS NEW ENGLAND -- Our acquisitions and growth in 1998 solidified our position as the largest and most profitable New England community banking franchise. We now have the number one market share in New Hampshire, complementing our number one market share in Maine -- and we entered Connecticut for the first time. Expanding our breadth of services in 1998, we acquired insurance agencies in Massachusetts and New Hampshire. Along with Maine's largest insurance agency, these latest acquisitions will enable us to offer a broader array of services to our customers. NO. 1 IN MAINE -- In addition to our number one market share in Maine through Peoples Heritage Bank, we now have the number one market share in the two largest communities in the state, Greater Portland and Lewiston-Auburn. NO. 1 IN NEW HAMPSHIRE -- In 1998, the acquisition of CFX Corporation lifted us from number three to the number one market share in New Hampshire. We acquired A.D. Davis Insurance, enabling us to offer new insurance products and services to our New Hampshire customers. GROWING IN MASSACHUSETTS -- In keeping with our strategy of acquiring well-managed quality companies in attractive markets, the 1998 agreement to purchase SIS Bancorp, Inc. was completed January 1, 1999. The acquisition extended our reach into western Massachusetts, complementing our northeastern and central Massachusetts banking franchise, Family Bank. It added almost $2 billion in assets, nearly doubled our size in Massachusetts, and lifted us from tenth to the eighth largest deposit market share in the state. In addition, we acquired Catalano Insurance with a coverage area similar to Family Bank which will enable us to link new insurance products and services to our growing distribution system. ENTERING CONNECTICUT -- The 1998 agreement to purchase SIS Bancorp, Inc., also introduced us to the Connecticut market for the first time. SIS Bancorp includes SIS Bank in the Springfield, Massachusetts area and Glastonbury Bank & Trust Company with offices in north-central Connecticut. SIS Bancorp not only provided a compelling strategic fit, but is expected to increase our earnings growth while enabling us to bring new business lines to SIS Bancorp's Massachusetts and Connecticut markets including indirect auto lending, public finance, trust and insurance. Focusing on our markets [PICTURE OMITTED] 4 7 [PICTURE OMITTED] Camden, Maine Focusing on our markets 5 8 PERFORMANCE [GRAPH OMITTED] [GRAPH OMITTED] RECORD EARNINGS -- Peoples Heritage Financial Group achieved record annual net earnings for the fifth consecutive year. Earnings reached $100.6 million, or $1.12 per diluted share. That's up 9% from 1997's annual record net earnings of $92.3 million, or $1.04 per diluted share. On an operating basis, exclusive of merger-related charges, 1998 earnings soared 20% to $125.2 million over operating earnings of $104.4 million in 1997. INCREASED LOW COST DEPOSITS -- In 1998, we opened tens of thousands of new checking accounts, achieving an increase of 16% in low cost demand deposits. The increase was a result of both our acquisitions and the tremendous success of our "Simply Free" checking product which was well received in all our markets. We also increased our larger-balance commercial checking account deposits by expanding relationships with our growing number of commercial loan customers. INCREASED FEE INCOME -- A strong contributor to our financial performance in 1998, fee income rose 27% in 1998 over 1997. Most notably, trust and investment services income increased by 33% and insurance commissions added $13 million to fee income in 1998. While we have significantly increased our fee income, we have not done it at the expense of customer satisfaction and do not charge our customers for the use of our tellers, our PhoneBank, or any ATM in our four-state banking network. EFFICIENCY RATIO -- We continued to improve our efficiency ratio, despite the fact that we are a community bank with over 220 branches spread throughout a four state region from the Canadian border to the Hartford, Connecticut area. On an operating basis, our efficiency ratio reached 56% in the fourth quarter of 1998, down from over 70% four years ago in 1994. Clearly, our acquisitions continue to make a positive contribution to our efficiency. TOTAL ASSETS -- While growing New England's leading community bank, we more than doubled our assets to $12 billion from late 1997 to early 1999. SOLID MARGINS -- With margins under pressure in 1998 from declining interest rates and the acquisition of institutions with lower margins, we still achieved a net interest margin of 4.11% -- a solid performance, even by commercial bank standards. We increase the margins of acquired companies by introducing a broader array of lending products and expertise. LOAN GROWTH -- As a result of our market share growth, successful acquisitions and marketing initiatives, we increased loans in key areas. Consumer loans rose 12% and commercial business loans were up 8% in 1998. STRONG DIVIDEND -- We maintained a strong quarterly dividend throughout 1998 and remain committed to returning 30% or more of net income to our shareholders in the form of dividends. Following the fourth quarter of 1998, we increased our quarterly dividend by 4.5%. RETURN ON EQUITY -- A key measurement of a company's performance is return on average equity (ROE). On an operating basis, our ROE reached 17.15% in the fourth quarter of 1998. RETURN ON ASSETS -- Our operating return on average assets (ROA) for 1998 reached a level of 1.28%, as compared to 1.25% for 1997. Both our ROA and ROE levels compare well with returns of some of the country's leading banking companies. STRONG ASSET QUALITY -- Nonperforming loans continued to decrease as a percentage of total loans and total assets. We have a strong system of checks and balances to ensure continued asset quality strength. [PICTURE OMITTED] A CLOSER LOOK AT THE NUMBERS 6 9 [PICTURE OMITTED] Coos County, New Hampshire A CLOSER LOOK AT THE NUMBERS 7 10 STRATEGY [GRAPH OMITTED] [GRAPH OMITTED] OUR BRAND OF COMMUNITY BANKING -- With our continued growth, we're now able to combine our customer-driven community banking approach with an array of increasingly sophisticated banking services not typically found at a community bank. For our retail customers we now offer two dozen supermarket branches, 250 ATMs, and a phone bank that handles a million calls a month for our banks in four states. For commercial customers we provide sophisticated computer-linked banking and cash management services, while retaining unparalleled personal attention. It's a way of doing business that is yielding positive results with each new community we enter. MERGER EXPERTISE -- Peoples Heritage has earned a proven track record in rapidly achieving profitability and cost efficiencies through smart, strategic acquisitions. By acquiring well-managed, quality companies in attractive markets, we have been able to apply our proven integration skills and merger expertise with consistent success. In just the past four years, we have executed 11 profitable acquisitions, significantly enhancing the value of our franchise. And in 1998, we once again achieved growth with profitability in all our markets. OPERATIONAL EFFICIENCIES -- A key to our merger expertise is our ability to rapidly achieve operational efficiencies, whether by consolidating locations or merging back office operations. We consistently achieve cost savings in the 25% range while retaining customer contact people in our markets. In fact, our cost savings from the acquisition of CFX Corporation exceeded our 25% estimate. A PATTERN OF SUCCESS -- Through our successful acquisitions, we have been able to apply our proven business techniques from existing markets to our new markets with positive results. Whether it's home equity lending, home mortgages, auto lending, public finance, or trust and investments, our pattern of growth has yielded significant success. OUR MARKET NICHE -- Peoples Heritage occupies a unique niche in our markets. While we offer the personalized service of a community bank, we offer sophisticated services other community banks can't match. And while we now compete head to head with the largest banks for commercial business, our local roots and community-based approach set us apart. Not too big. Not too small. For customers in our market areas, it's a niche that many feel is just right. INVESTED IN OUR COMMUNITIES -- Being a community bank, we are a part of the community. To us, that means being a responsible, involved neighbor. Through public service, volunteer efforts, and an extensive contribution and sponsorship program we give back to our communities. As an example, in Maine we converted an old mill building through a revitalization effort that we expect to have a significant impact on the economic and social well-being of the area. SHAREHOLDER VALUE -- By demonstrating our ability to make sound acquisitions while continuing to generate solid earnings, we expect to continue to create value for our shareholders. As an example, we expect shareholders to benefit from both EPS accretion and ROE improvement during our first year of combined operation with SIS Bancorp. To further enhance shareholder value, in 1998 we announced a stock split of two shares for one to return our stock price to a comfortable level for individual investors. CUSTOMER SERVICE TASK FORCE -- With our rapid growth over the past five years, it is critical to ensure that customer service remains a top priority. In 1998, Dave Hindle retired as CEO of Family Bank and was appointed head of Peoples' Customer Service Task Force. As someone who has focused on customer service throughout his long and successful banking career, Dave's stature and experience speak to our commitment to our customers. Y2K COMPLIANCE -- To protect our customers' accounts and ensure a smooth flow of business, our comprehensive Y2K program is ensuring the readiness of the Company and its affiliate banks. As of the close of 1998, final updates and testing of all systems were nearing completion. [PICTURE OMITTED] UP CLOSE ON OUR STRATEGY 8 11 [PICTURE OMITTED] Boot Mill Canal, Lowell, Massachusetts UP CLOSE ON OUR STRATEGY 9 12 SERVICES [GRAPH OMITTED] [GRAPH OMITTED] MORE BRANCHES -- As part of our commitment to make banking more convenient for our customers, we increased our branch network to over 220 offices. MORTGAGE LENDING -- As a community bank, we continue to lead the way in providing home mortgages. With the acquisition of CFX Corporation, Peoples Heritage became the number one mortgage originator in New Hampshire, complementing our growing lead as the number one mortgage originator in Maine. To strengthen our ability to provide our customers with the best service and enhance profitability, in 1999 we announced plans to exit our less-profitable correspondent mortgage lending business and re-focus our efforts on originations in our own markets. CONSUMER LENDING -- Leveraging our position as the number one home mortgage originator in Maine and New Hampshire, we also increased our growth in home equity lending in 1998. Peoples Heritage became the number one indirect auto lender in both Maine and New Hampshire, while making inroads into Massachusetts. COMMERCIAL LENDING -- With an increase of 8% in commercial lending, Peoples Heritage is now the largest originator of small and mid-size commercial loans in Maine and New Hampshire. In Maine, Peoples Heritage was recognized for the second consecutive year as the Finance Authority of Maine's "Bank of the Year" for our small business lending, and recognized by the U.S. Small Business Administration as one of the state's top SBA lenders. Our expertise in commercial lending also includes flexible services such as asset-based lending to credit- worthy businesses. INSURANCE -- As a leading home mortgage provider, indirect auto lender and small and mid-size commercial lender throughout our banking network, it's a natural extension to offer our customers insurance services for their homes, autos, and businesses. Accordingly, our 1997 acquisition of Morse, Payson & Noyes Insurance in Maine has already yielded impressive results. And in 1998, we extended insurance services in two more states with the acquisitions of Catalano Insurance in Massachusetts and A.D. Davis Insurance in New Hampshire. Our plan is to initiate insurance marketing programs that will offer the customers of Family Bank and Bank of New Hampshire a broader array of services and increase our profitability as a full-service financial services provider. TRUST SERVICES -- In 1998, our combined Trust Departments in Maine, New Hampshire and Massachusetts reached nearly $5 billion in trust assets under management. In addition, trust income swelled by 30 percent in 1998. INVESTMENT PLANNING SERVICES -- One more way we provide our customers with one-stop shopping for financial services is through our Heritage Investment Planning Services group. Through Heritage, our customers can buy annuities, stocks, bonds, and mutual funds. So our customers need only one source for the broadest possible array of financial services. PUBLIC FINANCE -- In 1998, our Public Finance department grew to the number one market share in Maine and we expanded our success in Massachusetts and New Hampshire. LEASING -- For many of our commercial and Public Finance customers, our leasing division means real savings and added convenience. CASH MANAGEMENT SERVICES -- We understand that a bank's ability to offer sophisticated cash management services and information reporting plays an important role in a financial officer's decision to select a banking partner. That's why our cash management services help keep our customers' business capital working by accelerating the collection of funds, tracking and controlling the disbursement of funds, and managing and investing funds to maximize cash flow and investment income. PRIVATE BANKING -- For customers requiring specialized banking services to manage their personal and professional finances, our Private Banking division provides a full complement of solutions to meet all their needs. PHONEBANK -- An important component of our growing service delivery network, our PhoneBank now handles a million calls a month for our banks in four states. EXPANDED ATM NETWORK -- Our ATM network grew to 250 ATMs across four states, including more ATMs in filling stations, supermarkets and shopping centers. MORE SUPERMARKET BRANCHES -- As another convenience for our customers, we now have two dozen supermarket branches offering weekend, evening and Sunday hours. NEW WEB SITES -- In 1998, we launched new investor relations and consumer information Web sites on the Internet. The new Web sites allow us to post a wide range of up-to-the-minute information for fast and easy access. Peoples Heritage Financial Group's Web site (www.phbk.com) features comprehensive investor relations and corporate information on the bank holding company. The Peoples Heritage Bank site (www.peoplesheritage.com) provides commercial and retail customers with access to information on the bank's consumer products and commercial services, as will similar sites for our New Hampshire and Massachusetts banks. [PICTURE OMITTED] OUR COMMUNITY BANKING FOCUS 10 13 [PICTURE OMITTED] Hancock, New Hampshire OUR COMMUNITY BANKING FOCUS 11 14 VISION At Peoples Heritage, we understand and appreciate that we've grown to become New England's leading community banking franchise by putting our customers first. Even as we continue to grow and acquire banks in new markets, our commitment will not change. What has changed, however, is our ability to serve our customers with a broader array of services -- backed by the strength, resources and lending power of our multi-state banking system. And as our size and services have grown, so have our opportunities. Looking ahead, we believe that we can continue to attract new business, and strengthen our existing relationships, by providing our customers with a wide range of banking and financial services. To that end, we will continue to seek sound, strategic acquisitions and introduce services that are consistent with our community banking approach. In all our activities and endeavors, we will seek to enhance shareholder value. [PICTURE OMITTED] TAKING THE LONG VIEW 12 15
Peoples Heritage Financial Group, Inc. and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) - ----------------------------------------------------------------------------------------------------------------------------- RESULTS FOR THE YEAR 1998 1997 % Change 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 365,429 $ 344,476 6% $ 279,295 $ 251,897 $ 223,737 Provision for loan and lease losses 13,423 4,548 195 5,185 8,044 6,996 Non-interest income (excluding securities transactions) 98,978 79,783 24 57,423 46,656 41,625 Securities transactions 5,817 2,697 116 3,287 2,499 401 Non-interest expense (excluding special charges) 274,545 261,965 5 209,716 188,573 186,287 Special charges (1) 35,374 18,591 90 9,627 4,958 559 Net income 100,590 92,335 9 76,033 66,040 50,785 - ----------------------------------------------------------------------------------------------------------------------------- SHARE DATA (2) - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.14 $ 1.06 8% $ 0.94 $ 0.82 $ 0.64 Diluted 1.12 1.04 8 0.92 0.80 0.63 Excluding special charges: Diluted earnings per share (1) 1.40 1.17 20 1.01 0.85 0.64 Diluted cash earnings per share (1)(3) 1.53 1.27 20 1.06 0.88 0.67 Dividends per share 0.44 0.38 16 0.34 0.29 0.18 Book value per share at year end 8.70 8.23 6 7.71 7.24 6.45 Tangible book value per share at year end 7.28 6.79 7 6.78 6.84 6.08 Stock price: High 26.75 23.81 12 14.32 11.44 7.57 Low 12.81 12.94 (1) 9.50 5.88 5.07 Close 20.00 23.00 (13) 14.00 11.38 6.00 Weighted average shares outstanding: Basic 88,092,605 87,449,885 1 81,263,004 80,314,906 79,751,952 Diluted 89,452,863 89,180,826 -- 82,729,714 82,105,692 80,863,602 - ----------------------------------------------------------------------------------------------------------------------------- KEY PERFORMANCE RATIOS - ----------------------------------------------------------------------------------------------------------------------------- Return on average assets 1.03% 1.09% (6)% 1.15% 1.13% 0.92% Return on average equity (4) 13.70 13.27 3 12.69 12.04 9.97 Net interest margin (4)(5) 4.11 4.45 (8) 4.56 4.64 4.40 Average equity to average assets (4) 7.45 8.23 (10) 9.05 9.35 9.19 Efficiency ratio (6) 57.17 59.78 (4) 62.28 63.16 70.20 Tier 1 leverage capital ratio 7.54 7.51 -- 8.56 9.14 8.93 Dividend payout ratio 38.60 35.85 8 38.75 35.69 28.49 Excluding special charges: (1) Return on average assets (1) 1.28 1.25 2 1.27 1.19 0.93 Return on average equity (1)(4) 17.06 15.17 12 13.99 12.71 10.12 - ----------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES - ----------------------------------------------------------------------------------------------------------------------------- Assets $ 9,795,920 $ 8,439,645 16% $ 6,618,692 $ 5,864,498 $ 5,542,649 Loans and leases 7,078,368 5,923,445 19 4,692,204 3,986,530 3,661,200 Earning assets 8,934,037 7,776,991 15 6,171,913 5,479,306 5,124,291 Deposits 6,879,935 6,138,887 12 5,094,826 4,604,675 4,387,601 Shareholders' equity 729,447 694,580 5 599,015 548,331 509,136 - ----------------------------------------------------------------------------------------------------------------------------- AT YEAR END - ----------------------------------------------------------------------------------------------------------------------------- Assets $10,102,459 $ 9,668,242 4% $ 7,767,655 $ 6,168,281 $ 5,673,436 Loans and leases 6,098,487 6,434,238 (5) 5,161,179 4,024,307 3,740,024 Debt and equity securities 2,334,575 1,830,942 28 1,564,647 1,307,767 1,305,269 Deposits 6,981,245 6,747,419 3 5,936,430 4,834,969 4,426,847 Borrowings 2,166,329 1,982,190 9 1,042,312 674,694 670,829 Shareholders' equity 761,924 720,783 6 676,847 586,500 515,423 Common shares outstanding (thousands) 87,546 87,585 -- 87,760 81,022 79,960 Nonperforming assets (7) 63,345 69,427 (9) 62,266 67,394 89,295 - -----------------------------------------------------------------------------------------------------------------------------
(1) Special charges consist of merger related and other restructuring charges, which on an after-tax basis were $24,642, $12,084, $7,753, $3,678 and $743 for 1998, 1997, 1996, 1995 and 1994, respectively. See Note 9 to the Consolidated Financial Statements. (2) Where appropriate amounts have been adjusted for a two-for-one split of the common stock in May 1998. (3) Earnings before amortization of goodwill and core deposit premiums. (4) Excludes effect of unrealized gains or losses on securities. (5) Net interest income divided by average interest-earning assets, calculated on a fully-taxable equivalent basis. (6) Excludes distribution on securities of subsidiary trust, special charges and securities transactions. (7) Nonperforming assets consist of nonperforming loans, other real estate owned and repossessed assets, net of related reserves where appropriate. 13 16 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis which follows focuses on the factors affecting the Company's results of operations during 1998, 1997 and 1996 and financial condition at December 31, 1998 and 1997. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 1998 have been reclassified to conform to the 1998 presentation. GENERAL Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank holding company which conducts business from its headquarters in Portland, Maine and, as of December 31, 1998, 188 offices located in Maine, New Hampshire and Massachusetts. The Company is the largest bank holding company headquartered in northern New England and the fifth largest bank holding company headquartered in New England. The Company offers a broad range of commercial and consumer banking services and products as well as trust, investment advisory and insurance brokerage services through three wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New Hampshire ("BNH") and Family Bank, FSB ("Family"). PHB is a Maine-chartered bank which operates offices throughout Maine and, through subsidiaries, engages in mortgage banking, financial planning, insurance brokerage and equipment leasing activities. At December 31, 1998, PHB had consolidated assets of $4.2 billion and consolidated shareholder's equity of $333 million. BNH is a New Hampshire-chartered commercial bank which operates offices throughout New Hampshire. At December 31, 1998, BNH had consolidated assets of $4.3 billion and consolidated shareholder's equity of $328 million. Family is a federally-chartered savings bank which operates offices in Massachusetts and southern New Hampshire. At December 31, 1998, Family had consolidated assets of $1.8 billion and consolidated shareholder's equity of $141 million. Each of PHB, BNH and Family is a member of the Bank Insurance Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). Business Strategy The principal business of the Company consists of attracting deposits from the general public and using such deposits and other sources of funds to originate residential mortgage loans, commercial business loans and leases, commercial real estate loans and a variety of consumer loans. In addition to keeping loans for its own portfolio, the Company sells loans in the secondary market. The Company also invests in mortgage-backed securities and securities issued by the United States Government and agencies thereof, as well as other securities. In addition, the Company engages in trust, investment advisory and insurance brokerage activities and services residential mortgage loans for investors. The Company's goal is to sustain profitable, controlled growth by focusing on increasing loan and deposit market share in Maine, New Hampshire and Massachusetts, developing new financial products, services and delivery channels, closely managing yields on earning assets and rates on interest-bearing liabilities, increasing noninterest income through, among other things, expanded trust, investment advisory, insurance brokerage services and mortgage banking operations and controlling the growth of noninterest expenses. It is also part of the business strategy of the Company to supplement internal growth with targeted acquisitions of other banking or thrift institutions in New England. During the period covered by this discussion, the Company engaged in numerous merger and acquisition related activities. For further information, see Note 2 to the Consolidated Financial Statements and "Acquisitions" below. The Company regularly evaluates potential acquisitions and as a general rule announces acquisitions only after a definitive agreement has been reached. The Company generally does not as a matter of policy make any specific projections as to future earnings nor does it endorse any projections regarding future performance that may be made by others. Economic Conditions in Northern New England The Company believes that Maine, New Hampshire, Massachusetts and New England in general have witnessed steady economic growth since 1992. There can be no assurance that this will continue to be the case, however, and the economies and real estate markets in the Company's primary market areas will continue to be significant determinants of the quality of the Company's assets in future periods and, thus, its results of operations. Acquisitions On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"). Approximately 16,255,885 shares of common stock of the Company (the "Common Stock") were issued in connection with this acquisition, which was accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. The accompanying discussion and financial statements do not include SIS. During 1998, the Company completed the acquisition of three insurance agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. The Company recorded $9.3 million of goodwill in connection with these purchases. The acquired agencies are being integrated into the Company's existing insurance agency operations. On April 10, 1998, the Company completed the acquisition of CFX Corporation ("CFX"). Approximately 32,796,280 shares of Common Stock were issued in connection with this transaction. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The acquisition of CFX was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. In the fourth quarter of 1997, the Company purchased Atlantic Bancorp ("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million and total shareholders' equity of $37.7 million. The Company recorded $34.7 million of goodwill with this transaction. During the same period, the Company also acquired all of the outstanding stock of MPN Holdings ("MPN"), the holding company of Morse, Payson & Noyes Insurance. The transaction was effected through the exchange of MPN stock for 445,678 shares of Common Stock and resulted in $7.8 million of goodwill. Both acquisitions 14 17 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. On December 6, 1996, the Company completed the acquisition of Family Bancorp, the holding company for Family. Approximately 10,960,670 shares of Common Stock were issued in connection with this transaction, including 5,000,000 shares of treasury stock. Family had total assets of $925.8 million and total shareholders' equity of $73.3 million. This transaction was accounted for as a purchase, and accordingly, the financial statements reflect it from the date of acquisition. The Company recorded $34.2 million of goodwill in connection with this purchase. On April 2, 1996, the Company completed the acquisition of Bank of New Hampshire Corporation ("BNHC"), the holding company for BNH. Approximately 16,256,660 shares of Common Stock were issued in connection with this transaction. At December 31, 1995, BNHC had total consolidated assets of $977.8 million and total consolidated shareholders' equity of $84.5 million. The acquisition of BNHC was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions (collectively, "special charges"). On a pre-tax basis special charges amounted to $35.4 million, $18.6 million and $9.6 million in 1998, 1997 and 1996, respectively. For additional information, see "Results of Operations - Special Charges" and Note 9 to the Consolidated Financial Statements. RESULTS OF OPERATIONS Overview The Company reported net income of $101 million or $1.12 per diluted share in 1998, compared to $92 million or $1.04 per diluted share in 1997. Return on average equity was 13.70%, compared to 13.27% in 1997. Excluding special charges, the Company earned $1.40 per diluted share in 1998 compared to $1.17 per diluted share during 1997. Return on average equity excluding special charges was 17.06% in 1998 compared to 15.17% in 1997. The improved results were attributable to the successful assimilation of recent acquisitions, as well as strong loan and deposit growth, which contributed to substantial increases in net interest income, which on a fully-taxable equivalent basis amounted to $367 million and $346 million for the years ended 1998 and 1997, respectively. Total revenues increased 11% during 1998 as a result of increases in both net interest income and noninterest income. Net interest income increased 6% during 1998, as compared to 1997. The increase was attributable to a 15% increase in average interest-earning assets, offset in part by a decrease in net interest margin from 4.45% in 1997 to 4.11% in 1998. The decline in net interest margin was attributable to decreases in yields on loans and leases and, to a lesser extent, increases in funding costs. Noninterest income increased 27% during 1998, primarily as a result of increases in income from customer services and insurance commissions. Noninterest expenses, excluding distributions on the securities of a subsidiary trust and special charges, increased 5% during 1998 compared to an 11% increase in total revenues. The increase in noninterest expenses primarily resulted from increased salaries and employee benefits related to purchase acquisitions in the fourth quarter of 1997, increased data processing expenses, due in part to Year 2000 efforts, as well as additional amortization of goodwill and other intangibles resulting from recent acquisitions using the purchase accounting method. Net Interest Income The Company's taxable-equivalent net interest income increased 6% during 1998, to $367 million compared to $346 million in 1997. Increased levels of average earning assets, principally loans and leases, increased net interest income by $48 million while lower net interest margins decreased net interest income by $25 million. Average levels of loans and leases increased by $1.2 billion, or 19.5%, in 1998 compared to 1997, and all loan categories experienced double digit growth. Excluding loans acquired through purchase acquisitions and required loan divestitures, average loans and leases increased by 16% in 1998. The net interest margin declined to 4.11% in 1998 from 4.45% during 1997, which partially offset the positive effects of loan growth. Information on average balances, yields and rates for the past three years can be found in Table 1. Table 2 shows the changes from 1997 in tax equivalent net interest income by category due to changes in rate and volume. 15 18 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 1 - Three Year Average Balance Sheets - -------------------------------------------------------------------------------- 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. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of the Company's equity securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE YIELD/ Average Yield/ Average Yield/ (Dollars in Thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases (1) $7,078,368 $ 599,127 8.45% $5,923,445 $522,367 8.82% $4,692,204 $418,465 8.92% Securities available for sale(2) 1,768,727 110,735 6.26 1,785,962 117,897 6.60 1,359,525 86,640 6.37 Federal funds sold and other short-term investments 86,942 4,970 5.72 67,584 3,293 4.87 120,184 6,280 5.23 ---------- ---------- ---------- -------- ---------- ------- Total earning assets 8,934,037 714,832 8.02 7,776,991 643,557 8.28 6,171,913 511,385 8.29 ---------- -------- ------- Nonearning assets 861,883 662,654 446,779 ---------- ---------- ---------- Total assets $9,795,920 $8,439,645 $6,618,692 ========== ========== ========== Interest-bearing deposits: Regular savings and money market accounts 2,643,047 65,760 2.49 $2,450,692 62,283 2.54 $2,158,226 55,539 2.57 Certificates of deposit 2,889,790 158,713 5.49 2,705,971 148,205 5.48 2,247,634 124,849 5.56 Brokered deposits 283,499 16,534 5.83 155,281 9,324 6.00 64,389 93,689 5.73 ---------- ---------- ---------- -------- ---------- -------- Total interest-bearing deposits 5,816,336 241,007 4.14 5,311,944 219,812 4.14 4,470,249 184,077 4.12 Borrowed funds 1,966,309 106,520 5.42 1,407,391 77,463 5.50 865,581 46,105 5.33 ---------- ---------- ---------- -------- ---------- -------- Total interest-bearing liabilities 7,782,645 347,527 4.47 6,719,335 297,275 4.42 5,335,830 230,182 4.31 ---------- ---------- --------- -------- ---------- ------- Demand deposit accounts 1,063,599 826,943 624,577 Other liabilities (2) 120,229 111,299 59,270 Securities of subsidiary trust 100,000 87,488 -- Shareholders' equity (2) 729,447 694,580 599,015 ---------- --------- ---------- Total liabilities and shareholders' equity $9,795,920 $8,439,645 $6,618,692 ========== ========== ========== Net earning assets $1,151,392 $1,057,656 $ 836,083 ========== ========== ========== Net interest income (fully-taxable equivalent) 367,305 346,282 281,203 Less: fully-taxable equivalent adjustments (1,876) (1,806) (1,908) -------- -------- -------- Net interest income $365,429 $344,476 $279,295 ======== ======== ======== Net interest rate spread (fully-taxable equivalent) 3.55% 3.86% 3.98% ==== ==== ==== Net interest margin (fully-taxable equivalent) 4.11% 4.45% 4.56% ==== ==== ==== - ------------------------------------------------------------------------------------------------------------------------------------
(1) Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income. (2) Excludes effect of unrealized gains or losses on securities available for sale. 16 19 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 2 - Changes in Net Interest Income - -------------------------------------------------------------------------------- The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate) and (3) changes in rate/volume (change in rate multiplied by change in volume).
- ---------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 vs 1997 Year Ended December 31, 1997 vs 1996 Increase (Decrease) Due To Increase (Decrease) Due To - ---------------------------------------------------------------------------------------------------------------------------- Rate/ Rate/ (Dollars in Thousands) Rate Volume Volume Total Rate Volume Volume Total - ---------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans and leases (1) $(21,917) $101,864 $(3,187) $76,760 $(4,677) $109,806 $(1,227) $103,902 Securities available for sale (6,072) (1,138) 48 (7,162) 3,107 27,176 974 31,257 Federal funds sold and other short-term investments 574 943 160 1,677 (424) (2,749) 186 (2,987) -------- -------- ------- ------- ------- -------- ------- -------- Total earning assets (27,415) 101,669 (2,979) 71,275 (1,994) 134,233 (67) 132,172 -------- -------- ------- ------- ------- -------- ------- -------- Interest-bearing liabilities: Deposits: Regular savings and money market access accounts (1,225) 4,886 (183) 3,478 (689) 7,526 (93) 6,744 Certificates of deposit 271 10,073 165 10,509 (1,798) 25,484 (330) 23,356 Brokered deposits (264) 7,693 (220) 7,209 174 5,208 253 5,635 -------- -------- ------- ------- ------- -------- ------- -------- Total interest-bearing deposits (1,218) 22,652 (238) 21,196 (2,313) 38,218 (170) 35,735 Borrowed funds (1,126) 30,740 (558) 29,056 1,537 28,859 962 31,358 -------- -------- ------- ------- ------- -------- ------- -------- Total interest-bearing liabilities (2,344) 53,392 (796) 50,252 (776) 67,077 792 67,093 -------- -------- ------- ------- ------- -------- ------- -------- Net interest income $(25,071) $ 48,277 $(2,183) $21,023 $(1,218) $ 67,156 $ (859) $ 65,079 ======== ======== ======= ======= ======= ======== ======= ======== - ----------------------------------------------------------------------------------------------------------------------------
(1) Loans and leases include portfolio loans and loans held for sale and nonperforming loans. Provision and Allowance for Loan and Lease Losses The Company recorded a provision for loan and lease losses in 1998 of $13.4 million, as compared to a $4.5 million provision in 1997. The provision for loan losses was increased in 1998 in light of significant loan growth in commercial and consumer loans, a $5.8 million increase in net charge-offs from 1997 to 1998, and the Company's estimate of future potential losses. The allowance for loan and lease losses represented 1.42% of portfolio loans outstanding at December 31, 1998, as compared to 1.38% at December 31, 1997. The improved coverage resulted primarily from a decrease in the amount of the net loan portfolio, due primarily to a lower level of residential real estate loans in portfolio. The ratio of the allowance to nonperforming loans at December 31, 1998 was 166%, as compared to 152% at December 31, 1997. Management believes that improvement in this coverage ratio is consistent with the change in composition of the loan portfolio. The allowance for loan and leases losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management's ongoing evaluation. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other procedures, 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. The Company evaluates the commercial real estate and commercial business loan portfolio by using a loan by loan analysis of a significant portion of "classified" loans and calculating a reserve requirement on these loans. Based on these results, factors are applied to the remaining portfolio to calculate a range of possible loan losses. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each type of loan category, with consideration given to loan growth over the preceding twelve months. Although management utilizes its judgment in providing for possible losses, for the reasons discussed under "Asset Quality - Nonperforming Assets," there can be no assurance that the Company will not have to change its level of provision for loan losses in subsequent periods. 17 20 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 3 - Five Year Table of Activity in the Allowance for Loan and Lease Losses - -------------------------------------------------------------------------------- The following sets forth information concerning the activity in the Company's allowance for loan and lease losses during the periods indicated. - --------------------------------------------------------------------------------
Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- Average loans and leases outstanding $7,078,368 $5,923,445 $4,692,204 $3,986,530 $3,661,200 ========== ========== ========== ========== ========== Allowance at the beginning of period $ 89,983 $ 87,820 $ 80,818 $ 82,615 $ 88,465 Additions due to purchase acquisitions -- 7,361 11,365 2,457 -- Charge-offs: Real estate loans 8,324 3,950 13,671 15,543 15,080 Commercial business loans and leases 4,303 6,632 4,353 3,234 6,281 Consumer loans and leases 11,925 10,063 4,906 3,673 3,278 ---------- ---------- ---------- ---------- ---------- Total loans charged off 24,552 20,645 22,930 22,450 24,639 ---------- ---------- ---------- ---------- ---------- Recoveries: Real estate loans 4,543 5,601 10,430 6,397 6,773 Commercial business loans and leases 2,213 3,373 1,856 2,673 3,925 Consumer loans and leases 2,295 1,925 1,096 1,082 1,095 ---------- ---------- ---------- ---------- ---------- Total loans recovered 9,051 10,899 13,382 10,152 11,793 ---------- ---------- ---------- ---------- ---------- Net charge-offs 15,501 9,746 9,548 12,298 12,846 Provision for loan and lease losses 13,423 4,548 5,185 8,044 6,996 ---------- ---------- ---------- ---------- ---------- Allowance at the end of the period $ 87,905 $ 89,983 $ 87,820 $ 80,818 $ 82,615 ========== ========== ========== ========== ========== Ratio of net charge-offs to average loans and leases outstanding 0.22% 0.16% 0.20% 0.31% 0.35% Ratio of allowance to total portfolio loans and leases at end of period 1.42 1.38 1.67 1.97 2.16 Ratio of allowance to nonperforming loans at end of period 165.85 152.38 186.50 156.35 126.33 - ----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Table 4 - Allocation of the Allowance for Loan and Lease Losses - Five Year Schedule - -------------------------------------------------------------------------------- The allowance for loan and lease losses is available for offsetting credit losses in connection with any loan, but is internally allocated to various loan categories as part of the Company's process for evaluating the adequacy of the allowance for loan and lease losses. The following table sets forth information concerning the allocation of the Company's allowance for loan and lease losses by loan categories at the dates indicated.
December 31, ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1998 1997 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------------------------- PERCENT OF LOANS Percent Percent Percent Percent IN EACH of Loans of Loans of Loans of Loans CATEGORY in each in each in each in each TO LOANS Category to Category to Category to Category to AMOUNT TOTAL Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ----------------------------------------------------------------------------------------------------------------------------------- Real estate loans $45,024 55.63% $51,553 61.94% $50,450 62.49% $49,416 62.59% $50,543 64.58% Commercial business loans and leases 24,190 13.70 16,322 12.06 18,304 12.34 12,632 13.27 11,062 11.89 Consumer loans and leases 18,691 30.67 14,866 26.00 12,809 25.17 11,795 24.14 12,163 23.53 Unallocated allowance at end of period -- -- 7,242 -- 6,257 -- 6,975 -- 8,847 -- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ $87,905 100.00% $89,983 100.00% $87,820 100.00% $80,818 100.00% $82,615 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== - -----------------------------------------------------------------------------------------------------------------------------------
18 21 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- The unallocated component in the prior table relates to reserves acquired in connection with the acquisition of CFX. These reserves were allocated during 1998 in accordance with the Company's analysis of the CFX loan portfolios. Otherwise, the Company's methods and assumptions in determining the adequacy of the allowance for loan losses has not changed significantly from prior years. Review of specific loans, loan growth, charge-off history and regional and national economic conditions and trends remain the primary determinants of the adequacy of the allowance for loan and lease losses. Loan terms and portfolio concentrations have not changed significantly during 1998, although mortgage loans decreased from 40% to 33% of the loan portfolio at December 31, 1997 and 1998, respectively. At December 31, 1998, non-performing loans as a percent of total loans was 0.87%, as compared to 0.91% at December 31, 1997. At December 31, 1998, the Company's allowance as a percentage of non-performing loans was 166% and has averaged 157% over the past five years (based on year end data). At December 31, 1998, the Company's allowance was 5.7 times the 1998 net charge-offs and has averaged 7.4 times net charge-offs over the past five years (based on year end data.) This decline is due primarily to a reduced level of recoveries related to loans charged off in the early 1990s. Noninterest Income Noninterest income was $104.8 million in 1998 compared to $82.5 million in 1997. The 27% increase in 1998 resulted primarily from increases of $5.2 million in customer services income, $3.9 million in trust and investment advisory income and $11.1 million in insurance commissions. Customer services income of $33.5 million increased 18% from 1997 and was attributable to growth in the number of transaction accounts (30,000 new accounts were added in 1998 through internal growth) and related fees and increases in ATM income of $1.8 million. Mortgage banking services income of $23.1 million decreased 10% or $2.7 million during 1998. The decrease resulted from $11.1 million of impairment recognized on mortgage servicing rights due to increased loan prepayments as a result of decreases in market interest rates. This was partially offset by a $2.4 million valuation adjustment on a related interest rate floor and by increased gains on sales of loans. The Company's portfolio of residential mortgages of $3.6 billion serviced for investors decreased by $1.8 billion or 33% from December 31, 1997 to December 31, 1998 because of sales of mortgage servicing rights. Gains on the sales of mortgage servicing rights totaled $1.6 million and $2.4 million in 1998 and 1997, respectively. As a result of these sales and the impairment writedowns, capitalized mortgage servicing rights decreased from $59.7 million at December 31, 1997 to $39.3 million at December 31, 1998. See Note 7 to the Consolidated Financial Statements. Residential mortgage loan originations obtained from correspondent lenders amounted to $4.1 billion, $2.9 billion and $844.5 million in 1998, 1997, and 1996, respectively, or 74%, 82% and 66% of total residential mortgage loan originations during these periods. The increased amounts of loan originations significantly contributed to the increase in residential mortgage sales income of $7.7 million in 1998. Gains from the sale of loans are dependent on market and economic conditions and, as a result, there can be no assurance that the mortgage sales income reported in prior periods will be achieved in the future. In January, 1999, the Company announced its intention to exit the correspondent mortgage business. The Company determined that profit margins derived from the correspondent mortgage business were not sufficient to offset the risks or to support the resources needed to service the volume generated. The Company intends to increase its emphasis on core businesses and believes that resulting income opportunities, when combined with the reduction in operating expenses associated with the correspondent mortgage lending business, will help to offset the loss of income from exiting this business in future years. 19 22 - -------------------------------------------------------------------------------- Table 5 - Mortgage Banking Services Income - -------------------------------------------------------------------------------- The following table sets forth certain information relating to the Company's mortgage banking activities at the dates or for the periods ended.
- -------------------------------------------------------------------------------- At or for the Year Ended December 31, (Dollars in Thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Residential mortgages serviced for investors $3,598,896 $5,381,003 $4,343,659 ========== ========== ========== Residential mortgage sales income $ 20,964 $ 13,227 $ 9,358 Residential mortgage servicing income, net 9,135 10,160 8,298 Impairment reserve for mortgage servicing rights (11,055) -- -- Valuation adjustment - interest rate floor 2,380 -- -- Gains on sale of mortgage servicing rights 1,642 2,380 -- ---------- ---------- ---------- Mortgage banking services income $ 23,066 $ 25,767 $ 17,656 ========== ========== ========== - --------------------------------------------------------------------------------
Trust and investment advisory services income of $15.7 million increased 33% during 1998 primarily due to increased assets under management. Assets under management were $3.0 billion and $2.7 billion at December 31, 1998 and 1997, respectively, an increase of 11%. Insurance commissions of $13.0 million and $1.9 million in 1998 and 1997, respectively, were generated through the Company's recent acquisitions of insurance agencies. Net securities gains amounted to $5.8 million and $2.7 million during 1998 and 1997, respectively. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future. Other noninterest income amounted to $13.6 million and $12.0 million during 1998 and 1997, respectively, and consisted primarily of miscellaneous loan fees and increases in the cash surrender value of bank owned life insurance. 23 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Noninterest Expense Noninterest expense of $309.9 million in 1998 compared to $280.6 million in 1997. The $29.3 million increase was largely attributable to the increase in special charges ($16.8 million), higher data processing expenses ($5.2 million) and higher intangible amortization ($2.9 million). Excluding special charges and intangible amortization, noninterest expense increased 3.8%. The efficiency ratio improved to 57.17% during 1998 from 59.78% in 1997 reflecting the efficiencies created by the assimilation of recent acquisitions, as well as operating improvements. Salaries and benefits expense of $138.8 million increased 6% during 1998. This increase was due primarily to salaries and benefits related to 1997 fourth quarter acquisitions accounted for as purchases (MPN and Atlantic) as well as increased commissions on retail loan originations and back office staffing costs to support the increased loan and deposit volumes. The cost savings achieved as a result of the recent acquisitions partially offset the effect of these increases. Data processing expense increased 34% to $20.1 million in 1998 from $15.0 million during 1997. The increase in expense was attributable to the implementation of system upgrades to accommodate increased volumes, and to a lesser degree, expenditures for the Year 2000 initiatives. See "Impact of the Year 2000" for further discussion. Occupancy expenses increased 9% while equipment expense and advertising and marketing expense each decreased 8% during 1998. These expenses reflected the assimilation of recent acquisitions and a related branch divestiture. Amortization of goodwill and deposit premiums increased by $2.9 million or 33% during 1998 due to goodwill associated with the recent acquisitions which were accounted for as purchases. See "General - Acquisitions". Other noninterest expense, which is comprised primarily of general and administrative expenses, decreased $3.2 million or 6% during 1998 through cost savings realized from the assimilation of recent acquisitions. Special Charges Special charges consist of merger expenses of $35.4 million, $11.4 million, and $9.6 million during 1998, 1997 and 1996, respectively, and a $7.2 million charge related to exiting the lease securitization business, conducted through CFX Funding, in 1997. On an after-tax basis, special charges amounted to $24.6 million, $12.1 million and $7.8 million for the years ended 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- Table 6 - Special Charges - -------------------------------------------------------------------------------- The following table summarizes special charges recorded in 1998 by type, all of which were related to the acquisition of CFX, and shows the balance in the accrued liability account as of December 31, 1998.
- ------------------------------------------------------------------------------------------------------------------------ Special Cash Write- Balance at (In Thousands) Charges in 1998 Transactions downs Adjustments December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------ Termination payments to employees $12,551 $(11,156) $ -- $(1,363) $ 32 Data processing/systems integration 7,663 (10,624) -- 2,961 -- Professional fees 8,169 (8,653) -- 484 -- Other exit costs 3,637(1) (1,906) -- (600) 1,131 Property and asset write-downs 16,707 -- (15,114) (1,593) -- Gain on sale of branches (13,353) 13,242 -- 111 -- ------- -------- -------- ------- ------ $35,374(2) $(19,097) $(15,114) $ 0 $1,163 ======= ======== ======== ======= ====== - ------------------------------------------------------------------------------------------------------------------------
(1) Primarily related to CFXFunding. (2) On an after-tax basis special charges in 1998 amounted to $24.6 million. The termination payments made in connection with the CFX merger covered approximately 280 employees whose positions were eliminated as a result of the merger. Property and asset write-downs related to the CFX merger related mainly to real estate investments, duplicate facilities, fixed assets, and a portfolio of automobile leases. Write-downs to estimated fair value were based on independent appraisals where practical and on management estimates for the remaining assets. The write-down on the auto lease portfolio was based on expected future cash flows. The Company will incur additional one-time merger charges related to the acquisition of SIS, which were previously estimated by the Company to amount to approximately $18 million on an after-tax basis (inclusive of the after-tax cost of the establishment of a charitable foundation). Although the Company currently does not believe that there will be a material change in this amount, special charges will be dependent on actual expenses incurred in connection with the acquisition of SIS and as a result may be more or less than previously estimated by the Company. Taxes The Company's effective tax rate was 32% in 1998 compared to 35% in 1997. The decrease in 1998 was due primarily to the reorganization of certain corporate entities, increased levels of bank-owned life insurance and lower state taxes. Comprehensive Income The Company's comprehensive income amounted to $94.2 million and $98.2 million during 1998 and 1997, respectively. Comprehensive income differed from the Company's net income in these periods because of a $6.4 million unrealized loss on securities during 1998 and a $5.9 million unrealized gain on securities during 1997. For additional information, see the Consolidated Financial Statements. 20 24 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- COMPARISON OF 1997 AND 1996 The Company reported net income of $92.3 million for 1997, or $1.04 per diluted share, compared with the $76.0 million, or $0.92 per diluted share reported in 1996. Return on average assets and return on average equity were 1.09% and 13.27%, respectively, for 1997 compared with 1.15% and 12.69%, respectively, in 1996. Excluding the impact of special charges, net income and diluted earnings per share were $104.4 million and $1.17, respectively, for 1997 and $83.8 million and $1.01, respectively, for 1996. Return on average assets and return on average equity were 1.25 % and 15.17%, respectively, for 1997 and 1.27% and 13.99%, respectively, for 1996, excluding special charges. Net interest income on a fully taxable-equivalent basis totaled $346.3 million compared with $281.2 million in 1996. The 23% increase in 1997 reflected strong internal loan growth, as well as the 12 month impact of the Family acquisition and an approximately three month impact of the Atlantic acquisition in 1997. Both acquisitions were accounted for as purchases. The provision for loan and lease losses was $4.5 million in 1997 compared to a $5.2 million provision in 1996 as a result of favorable asset quality trends. The ratio of the allowance to nonperforming loans at December 31, 1997 was 152% compared to 187% at December 31, 1996. The allowance for loan and lease losses represented 1.38% of total loans at December 31, 1997 compared to 1.67% at December 31, 1996. The decline reflects the impact of purchase acquisitions of institutions with lower allowances as a percentage of loans and leases. Noninterest income was $82.5 million and $60.7 million for the years ended December 31, 1997 and 1996, respectively. Increases of $8.0 million in customer services income and $8.1 million in mortgage services income contributed to the $21.8 million or 36% increase in 1997. Customer services income of $28.3 million reflected a 39% growth from 1996. In 1997, mortgage banking income was $25.8 million, which increased $8.1 million or 46% due to a $6.2 million increase in mortgage sales income and a $1.0 million increase in residential mortgage servicing income. Noninterest expense was $280.6 million for 1997 compared with $219.3 million for 1996, a 28% increase. The 1997 increase was primarily attributable to the Family and Atlantic acquisitions, in addition to the expense associated with capital securities issued by a subsidiary trust and an increase in special charges related to the CFX acquisition. The efficiency ratio, which excludes special charges and dividends on the Trust Preferred Capital securities, improved from 62.28% in 1996 to 59.78% in 1997. Average earning assets increased $1.6 billion or 26% in 1997, mostly due to the acquisition of Family in December 1996 and Atlantic in the fourth quarter of 1997. However, the increase also reflected internal growth in loans and loans held for sale. Average interest-bearing deposits increased 19% in 1997 primarily from the aforementioned acquisitions. FINANCIAL CONDITION The Company's consolidated total assets increased by $434 million, or 4%, from $9.7 billion at December 31, 1997 to $10.1 billion at December 31, 1998. Shareholders' equity totaled $762 million at December 31, 1998 compared to $721 million at December 31, 1997, an increase of 6%. Average earning assets increased $1.2 billion or 15% in 1998 primarily as a result of increased loan originations. After adjusting for loan growth related to purchase acquisitions and required divestitures, average loans increased by 16% in 1998. In 1997, average earning assets increased 9%, excluding the impact of the acquisition of Family Bank in December 1996 and Atlantic Bank in the fourth quarter of 1997. See Table 1 for more information on loan growth. Average loans as a percentage of average earning assets was 79% in 1998 and 76% in 1997. Investment Securities and Other Earning Assets The average balance of the securities portfolio was $1.8 billion in both 1998 and 1997. The portfolio is comprised primarily of U.S. Treasury securities and mortgage-backed securities, most of which are seasoned 15-year federal agency securities. Other securities consist of collateralized mortgage obligations and asset-backed securities. Substantially all securities are AAA or equivalently rated. 21 25 - -------------------------------------------------------------------------------- Table 7 - Maturities of Securities - -------------------------------------------------------------------------------- The following table sets forth the scheduled maturities and weighted average yields of the Company's debt securities available for sale at December 31, 1998.
Amortized Cost Maturing in - ---------------------------------------------------------------------------------------------------------------------------------- More than One More than Five More than One Year or Less to Five Years to Ten Years Ten Years Total (Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Government and federal agencies $153,630 4.97% $ 99,206 5.20% $12,998 6.41% $ 54,574 5.71% $ 320,408 5.23% Tax-exempt bonds and notes 18,153 5.03 8,698 4.57 202 5.43 439 5.36 27,492 4.89 Other bonds and notes 1,276 7.46 834 7.00 819 7.32 272 6.66 3,201 7.24 Mortgage-backed securities 1,158 5.71 13,743 6.59 97,760 6.44 1,605,737 6.12 1,718,398 6.14 Collateralized mortgage obligations -- -- 2,735 4.66 13,213 6.59 139,653 5.96 155,601 5.99 -------- -------- -------- ---------- ---------- Total $174,217 5.00 $125,216 5.31 $124,992 6.46 $1,800,675 6.10 $2,225,100 5.99 ======== ======== ======== ========== ========== - ----------------------------------------------------------------------------------------------------------------------------------
26 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Securities available for sale are carried at fair value and had an unrealized loss of $984 thousand at December 31, 1998 as compared to an unrealized gain of $9.1 million at December 31, 1997. These unrealized gains and losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders' equity, net of related deferred income taxes. Unrealized gains and losses, net of related deferred income taxes, are a component of the Company's "Comprehensive Income" contained in the Consolidated Statement of Changes in Shareholders' Equity. Loans Residential real estate loans (including loans held for sale) averaged $3.0 billion in 1998 compared to $2.5 billion in 1997, a 21% increase. The increase in the 1998 average balance resulted primarily from a significant increase in loans originated through correspondent lenders for resale into the secondary market. It is the Company's general practice to sell loans that conform to federal agency standards into the secondary market. Commercial real estate loans averaged $1.4 billion in 1998 and $1.3 billion in 1997, an 11% increase. The Company is continuing to focus on lending to small and medium size business customers within its geographic markets. These loans consist of loans secured by income-producing commercial real estate, service industry real estate, multi-family residential real estate and retail trade real estate, as well as loans for the acquisition, development and construction of such commercial real estate. Commercial loans and leases averaged $832 million in 1998 and $743 million in 1997, an increase of 12%. The Company also originates commercial business leases through one of its subsidiaries. These leases are direct equipment leases, primarily office equipment, and amounted to $34.9 million at December 31, 1998. Consumer loans and leases averaged $1.8 billion in 1998 and $1.4 billion in 1997, an increase of 27%. The growth in consumer loans was primarily in indirect auto loans and home equity loans. Mobile home loans continue to decline, reflecting the Company's strategy to emphasize other types of consumer loans. The Company has ceased originating auto lease receivables. Automobile lease receivables acquired through the CFX acquisition totaled $96.9 million at December 31, 1998 compared to $117.8 million at December 31, 1997. The Company had classified these auto lease receivables as held for sale during most of 1998, but transferred the balance to portfolio in December 1998 at the lower of cost or market value. Although the Company had negotiated with several interested parties to sell the portfolio, it was determined to be more advantageous to hold the portfolio until maturity. - -------------------------------------------------------------------------------- Table 8 - Scheduled Contractual Amortization of Loans at December 31, 1998 - -------------------------------------------------------------------------------- The following table sets forth the scheduled contractual amortization of the Company's loans at December 31, 1998, as well as the amount of loans which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans having no schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.
December 31, 1998 - ------------------------------------------------------------------------------------------------------------- Commercial Residential Commercial Business Consumer Real Estate Real Estate Loans and Loans and (Dollars in Thousands) Loans Loans Leases Leases Total - ------------------------------------------------------------------------------------------------------------- Amounts due: Within one year $ 75,778 $ 417,767 $489,120 $ 249,170 $1,231,835 After one year through five years 366,688 519,141 249,243 975,294 2,110,366 Beyond five years 1,577,548 484,674 109,086 672,883 2,844,191 ---------- ---------- -------- ---------- ---------- Total $2,020,014 $1,421,582 $847,449 $1,897,347 $6,186,392 ========== ========== ======== ========== ========== Interest rate terms on amounts due after one year: Fixed $ 952,676 $ 650,533 $270,073 $1,081,919 $2,955,201 Adjustable 991,560 353,282 88,256 566,258 1,999,356 - -------------------------------------------------------------------------------------------------------------
22 27 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 9 - Composition of Loan Portfolio - -------------------------------------------------------------------------------- The following table sets forth the composition of the Company's loan portfolio at the dates indicated.
December 31, - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- % OF % OF % OF % OF % OF (Dollars in Thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - -------------------------------------------------------------------------------------------------------------------------------- Residential real estate loans $2,020,014 33% $2,635,663 40% $2,050,484 39% $1,530,801 37% $ 1,49 39% Commercial real estate loans: Permanent first mortgage loans 1,281,774 21 1,286,372 20 1,149,910 22 981,160 24 933,482 24 Construction and development loans 139,808 2 118,985 2 79,864 2 57,607 1 37,794 1 ---------- --- ---------- --- ---------- --- ---------- --- ---------- --- Total 1,421,582 23 1,405,357 22 1,229,774 24 1,038,767 25 971,276 25 ---------- --- ---------- --- ---------- --- ---------- --- ---------- --- Commercial loans and leases 847,449 14 786,578 12 647,737 12 544,685 14 454,583 12 Consumer loans and leases 1,897,347 30 1,696,623 26 1,321,004 25 990,872 24 899,638 24 ---------- --- ---------- --- ---------- --- ---------- --- ---------- --- Total loans receivable 6,186,392 100% 6,524,221 100% 5,248,999 100% 4,105,125 100% 3,822,639 100% === === === === === Allowance for loan and lease losses 87,905 89,983 87,820 80,818 82,615 ---------- ---------- ---------- ---------- ---------- Net loans receivable $6,098,487 $6,434,238 $5,161,179 $4,024,307 $3,740,024 ========== ========== ========== ========== ========== - --------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY General The Company monitors its asset quality with lending and credit policies which require the regular review of its portfolio. The Company maintains an internal rating system which provides a mechanism to regularly monitor the credit quality of its loan portfolio. The Company's residential loan portfolio accounted for 33% of the total loan portfolio at December 31, 1998, down from 40% at the end of 1997. The decrease in 1998 resulted primarily from refinancings due to falling market interest rates. The Company's strategy generally is to originate fixed-rate residential loans for sale to investors in the secondary market. The Company's residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At December 31, 1998, 0.44% of the Company's residential loans were nonperforming, as compared to .58% at December 31, 1997. The Company's commercial real estate loan portfolio accounted for 23% of the total loan portfolio at December 31, 1998, compared to 22% at December 31, 1997. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and food stores. 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 December 31, 1998, 1.34% of the Company's commercial real estate loans were nonperforming, as compared to 1.56% at December 31, 1997. The Company's commercial business loan portfolio accounted for 14% of the total loan portfolio at December 31, 1998, compared to 12% at December 31, 1997. Commercial business loans and leases are generally made to small to medium size businesses located within the Company's geographic market area. These loans are not concentrated in any particular industry, but reflect the broad-based economies of Maine, New Hampshire and Massachusetts. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to business in the form of lines of credit. At December 31, 1998, 1.68% of the Company's commercial business loans were nonperforming, as compared to 1.70% at December 31, 1997. Consumer loans and leases accounted for 30% of the Company's total loan portfolio at December 31, 1998, compared to 26% at December 31, 1997. The Company has a diversified consumer loan portfolio which included $767.0 million of automobile loans and leases, $538.4 million of home equity, $182.5 million of mobile home, $138.3 million of education, and $47.0 million of boat and recreational vehicle loans. The increase over the prior year was due primarily to growth in automobile and home equity loans. The growth is consistent with the Company's strategy to provide a full range of financial services to its customers and to originate loans which are short-term and offer a higher yield than longer-term mortgage loans. At December 31, 1998, 0.57% of the Company's consumer loans were nonperforming, as compared to 0.50% at December 31, 1997. 23 28 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Nonperforming Assets Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue) and other real estate owned and repossessed assets. Total nonperforming assets as a percentage of total assets decreased to .63% at December 31, 1998 compared to .72% at December 31, 1997. In addition, total nonperforming assets as a percentage of total loans and other nonperforming assets was 1.02% and 1.06% at December 31, 1998 and 1997, respectively. See Table 11 for a summary of nonperforming assets for the last five years. The Company continues to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and reductions of nonperforming asset levels, there can be no assurance that adverse changes in the real estate markets and economic conditions in the Company's primary market areas will not result in higher nonperforming asset levels in the future and negatively impact the Company's operations through higher provisions for loan losses, net loan chargeoffs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets. It is the policy of the Company to generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. Residential real estate loans and consumer loans and leases are placed on nonaccrual status generally when in management's judgment the collectability of interest and/or principal is doubtful. At December 31, 1998, the Company had $21.6 million of accruing loans which were 90 days or more delinquent, as compared to $8.4 million of such loans at December 31, 1997. The increase at year end 1998 was primarily attributable to an increase in residential real estate loans over 90 days delinquent, which the Company believes are well secured and in the process of collection. Customer service and collection issues caused by converting to a new residential loan servicing system in October 1998 were the primary cause of the increase. The Company has been working with customers to resolve the service and collection matters, and believes the increase is not indicative of a trend. It is also the policy of the Company to place on nonaccrual and therefore nonperforming status loans currently less than 90 days past due or performing in accordance with their terms but which in management's judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming. Net Charge-offs Net charge-offs were $15.5 million during 1998, as compared to $9.7 million in 1997. Net charge-offs in 1998 represented .22% of average loans and leases outstanding, as compared to .16% in 1997. Increased charge-offs in 1998 compared to 1997 were primarily due to real estate loans which benefited from net recoveries of $1.7 million in 1997 while 1998 had net charge-offs of $3.8 million. Net recoveries on real estate loans in 1997 related primarily to commercial real estate loans. - -------------------------------------------------------------------------------- Table 10 - Net Charge-offs as a Percent of Average Loans Outstanding - -------------------------------------------------------------------------------- The following table sets forth net charge-offs (recoveries) to average loans outstanding by type of loan during the periods indicated.
- -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Real estate loans 0.09% (0.40)% Commercial business loans and leases 0.25 0.44 Consumer loans and leases 0.52 0.56 Total 0.22 0.16 - --------------------------------------------------------------------------------
See Table 3 for the more information concerning charge-offs and recoveries during each of the past five years. 24 29 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Table 11 - Five Year Schedule of Nonperforming Assets - -------------------------------------------------------------------------------- The following table sets forth information regarding nonperforming assets at the dates indicated: - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Residential real estate loans: Nonaccrual loans $ 8,901 $15,323 $10,811 $12,634 $13,435 Troubled debt restructurings -- -- -- -- -- ------- ------- ------- ------- ------- Total 8,901 15,323 10,811 12,634 13,435 ------- ------- ------- ------- ------- Commercial real estate loans: Nonaccrual loans 19,110 19,582 17,174 19,746 26,978 Troubled debt restructurings 6 2,304 3,476 4,546 9,316 ------- ------- ------- ------- ------- Total 19,116 21,886 20,650 24,292 36,294 ------- ------- ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 14,186 13,255 9,650 8,866 9,082 Troubled debt restructurings 59 114 579 1,859 2,684 ------- ------- ------- ------- ------- Total 14,245 13,369 10,229 10,725 11,766 ------- ------- ------- ------- ------- Consumer loans: Nonaccrual loans 10,742 8,473 5,398 4,040 3,903 Troubled debt restructurings -- -- -- -- -- ------- ------- ------- ------- ------- Total 10,742 8,473 5,398 4,040 3,903 ------- ------- ------- ------- ------- Total nonperforming loans: Nonaccrual loans 52,939 56,633 43,033 45,286 53,398 Troubled debt restructurings 65 2,418 4,055 6,405 12,000 ------- ------- ------- ------- ------- Total 53,004 59,051 47,088 51,691 65,398 ------- ------- ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 6,717 7,158 13,071 14,150 18,503 In-substance foreclosures, net of related reserves -- -- -- -- 3,391 Repossessions, net of related reserves 3,624 3,218 2,107 1,553 2,003 ------- ------- ------- ------- ------- Total 10,341 10,376 15,178 15,703 23,897 ------- ------- ------- ------- ------- Total nonperforming assets $63,345 $69,427 $62,266 $67,394 $89,295 ======= ======= ======= ======= ======= Accruing loans 90 days overdue $21,574 $ 8,355 $ 8,038 $ 4,412 $ 6,354 ======= ======= ======= ======= ======= Total nonperforming loans as a percentage of total loans 0.86% 0.91% 0.90% 1.26% 1.71% Total nonperforming assets as a percentage of total assets 0.63 0.72 0.80 1.09 1.57 Total nonperforming assets as a percentage of total loans and other nonperforming assets 1.02 1.06 1.18 1.64 2.32 - --------------------------------------------------------------------------------------------------------------------
25 30 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Deposits Average interest-bearing deposits increased 9% during 1998 to $5.8 billion. Average retail certificates of deposit increased $184 million during 1998 to $2.9 billion. The average rate paid on certificates of deposit in 1998 of 5.49% was comparable to the 1997 rate of 5.48%. See Table 13 for the scheduled maturities of certificates of deposits of $100,000 or more. As part of its overall funding strategy, the Company uses deposits obtained through investment banking firms which obtain funds from their customers for deposit with the Company ("brokered deposits"). These brokered deposits (which include short term certificates of deposit and money market accounts) averaged $283 million and $155 million in 1998 and 1997, respectively. The average rate paid on brokered deposits was 5.83% in 1998 compared to 6.00% in 1997. Other interest-bearing deposits (savings, NOW and money market accounts) averaged $2.6 billion and $2.5 billion in 1998 and 1997, respectively. The average rate paid on these deposits declined from 2.54% in 1997 to 2.49% in 1998. Demand deposit accounts averaged $1.1 billion and $827 million in 1998 and 1997, respectively, an increase of $236.7 million. Excluding the impact of acquisitions, average demand deposit accounts increased $213.3 million in 1998 or 26%. The increase in demand deposits is consistent with the Company's increased marketing of these lower-cost accounts. - -------------------------------------------------------------------------------- Table 12 - Change in Deposit Balances by Category of Deposits - -------------------------------------------------------------------------------- The following table presents the changes in the balances of deposits outstanding at the dates indicated:
- ------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998-1997 Change (Dollars in Thousands) 1998 1997 1996 Amount Percent - ------------------------------------------------------------------------------------------------------------------- Demand deposits $1,122,812 $ 969,567 $ 798,559 $ 153,245 15.8% Money market access/NOW accounts 1,702,394 1,522,252 1,390,714 180,142 11.8 Regular savings 1,009,051 1,084,158 1,059,751 (75,107) (6.9) Certificates of deposit 2,889,418 2,921,452 2,617,446 (32,034) (1.1) Brokered deposits 257,570 249,990 69,960 7,580 3.0 ---------- ---------- ---------- --------- Total deposits $6,981,245 $6,747,419 $5,936,430 $ 233,826 3.5 ========== ========== ========== ========= - -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Table 13 - Maturity of Certificates of Deposit of $100,000 or more at December 31, 1998 - -------------------------------------------------------------------------------- The following table sets forth the scheduled maturity of certificates of deposit of $100,000 or more at December 31, 1998. - -------------------------------------------------------------------------------- (Dollars in Thousands) Balance Percent - -------------------------------------------------------------- 3 months or less $203,786 35.46% Over 3 to 6 months 155,302 27.03 Over 6 to 12 months 123,167 21.44 More than 12 months 92,344 16.07 -------- ------ $574,599 100.00% ======== ====== - -------------------------------------------------------------- Other Funding Sources Average borrowed funds for 1998 were $2.0 billion, compared with $1.4 billion in 1997. The Company's primary source of funds, other than deposits, are securities sold under repurchase agreements and advances from the Federal Home Loan Bank of Boston ("FHLB"). FHLB borrowings increased because growth in earning assets, particularly loans held for sale, exceeded growth in deposits. FHLB collateral consists primarily of first mortgage loans secured by 1-4 family properties, certain unencumbered securities and other qualified assets. At December 31, 1998, FHLB borrowings amounted to $1.7 billion. The Company's estimated additional borrowing capacity with the FHLB at December 31, 1998 was $1.3 billion. At December 31, 1998 and 1997, securities sold under repurchase agreements amounted to $444.8 million and $453.7 million, respectively, and were collateralized by mortgage backed securities and U.S. Government obligations. 26 31 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- ASSET LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-Liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (the Board) and monitored periodically by a committee of the Board. The Board delegates responsibility for asset-liability management to the corporate Liquidity and Funds Management Committee (LFMC), which is comprised of members of senior management, sets strategic directives that guide the day-to-day asset-liability management activities of the Company. The LFMC also reviews and approves all major risk, liquidity and capital management programs. Market Risk Market Risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices, and other market-driven rates or prices. The Company has no trading operations and is only exposed to non-trading market risk. Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-credit risk to which the Company is exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets affect net interest income, the Company's primary source of revenue. This risk arises directly from the Company's core banking activities - lending, deposit gathering, and loan servicing. In addition to directly impacting net interest income, changes in the level of interest rates can also affect, (i) the amount of loans originated and sold by the institution, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans and (iv) the value of the company's investment securities and mortgage loans and the resultant ability to realize gains on the sale of such assets. The primary objective of interest-rate risk management is to control the Company's exposure to interest-rate risk both within limits approved by the Board of Directors and guidelines established by the LFMC. These limits and guidelines reflect the Company's tolerance for interest-rate risk over both short-term and long-term horizons. The Company controls interest-rate risk by identifying, quantifying and, where appropriate, hedging its exposure. The Company quantifies and measures interest-rate exposures using a model to dynamically simulate net-interest income under various interest rate scenarios over 12 months. Simulated scenarios include deliberately extreme interest rate "shocks" and more gradual interest rate "ramps". Key assumptions in these simulation analyses relate to behavior of interest rates and spreads, the growth or shrinkage of product balances and the behavior of the Company's deposit and loan customers. The most material assumption relates to the prepayment of mortgage assets (including mortgage loans, securities, and mortgage servicing rights). The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly. Complicating management's efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of the Company's assets and liabilities. To cope with these uncertainties, management gives careful attention to its assumptions. For example, many of the Company's interest-bearing deposit products (e.g. interest checking, savings and money market deposits) have no contractual maturity and based on historical experience have only a limited sensitivity to movements in market rates. Because management believes it has some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built in to the model. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The Company manages the interest-rate risk inherent in its core banking operations using on-balance sheet instruments, mainly fixed-rate portfolio securities and borrowed fund maturities. When appropriate, the Company will utilize off-balance sheet interest rate instruments such as interest-rate swaps forward-rate agreements, options, options on swaps and exchange traded futures and options. The Company owns two interest-rate floors with a combined notional amount of $20 million, expiring from 1999-2000, which were purchased to protect certain rate sensitive assets against falling interest rates. The Company has no direct or contingent liability as a result of these floors. The Board's limits on interest-rate risk simulation specify that if interest rates were to shift up or down 300 basis points, estimated net interest income for the subsequent 12 months should decline by less than 10%. The Company was in compliance with this limit at December 31, 1998. The following table reflects the estimated exposure of the Company's net interest income for the next 12 months assuming an immediate shift in market interest rates of 200 basis points. - --------------------------------------------------------------------- 200 Basis Point 200 Basis Point Rate Increase Rate Decrease - --------------------------------------------------------------------- December 31, 1998 $(8,416) $(7,661) ======= ======== - --------------------------------------------------------------------- Management believes that the exposure of the Company's net interest income to gradual and/or modest changes in interest rates is relatively small. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. The Company uses interest rate floors tied to the Constant Maturity Treasury ("CMT") index and U.S. Treasury debt instruments to mitigate the prepayment risk associated with mortgage servicing rights (see "Non-Interest Income" for further details). At December 31, 1998 the Company had $100 million notional amount in CMT floors and $40 million in Treasury bonds. See Note 14 to the Consolidated Financial Statements. For Mortgage Servicing Rights, the adverse impact of current movements in interest rates on expected future cash flows must be recognized immediately through an adjustment to their carrying value. If interest rates decline, estimated future fee income from mortgage servicing rights is reduced because of an expected increase in mortgage prepayments. 27 32 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following table sets forth the net exposure at the date indicated of the carrying value of mortgage servicing rights assuming an immediate shift by the indicated amount in market interest rates. - ------------------------------------------------------------------------------------------------- 200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point (Dollars in Thousands) Rate Decrease Rate Decrease Rate Increase Rate Increase - ------------------------------------------------------------------------------------------------- December 31, 1998 Mortgage servicing rights $(15,709) $(9,818) $ 7,855 $ 11,782 CMT Floors 7,600 3,400 (2,500) (3,200) Treasury bonds 14,336 6,360 (5,110) (9,250) -------- ------- ------- -------- Net Exposure $ 6,227 $ (58) $ 245 $ (668) ======== ======= ======= ======== - -------------------------------------------------------------------------------------------------
The foregoing estimates of the effects of specified changes in interest rates on the Company's net interest income and the carrying value of its mortgage servicing rights are based on various assumptions, as discussed above, which approximate actual experience and which management of the Company considers to be reasonable. The effects of changes in interest rates on the Company could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. The most significant factors affecting market risk exposure of net interest income during 1998 were (i) the decrease in interest rates during October, 1998, (ii) changes in the composition of mortgage assets (iii) increases in consumer savings accounts and increase in net free funds, (iv) the increase in assets and off-balance sheet interest-rate instruments to increase the hedge position for mortgage servicing rights. The Company's earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the US dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity of the amount of fees from investment-related businesses. LIQUIDITY On a parent-only basis, the Company does not have substantial commitments or debt service requirements. At December 31, 1998, such commitments consisted primarily of $105.7 million of junior subordinated debentures (including accrued interest) issued to a subsidiary, Peoples Heritage Capital Trust I, in connection with that subsidiary's issuance of 9.06% Capital Securities due 2027. See Notes 12 and 18 to the Consolidated Financial Statements. The principal sources of funds for the Company to meet parent-only obligations are dividends from its banking subsidiaries, which are subject to regulatory limitations. See Note 13 to the Consolidated Financial Statements. Other sources of funds available to the Company on a parent-only basis include borrowings from public and private sources. For banking subsidiaries of the Company, 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, banks have 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 its banks' loan portfolios also provides a significant 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. For additional information regarding off-balance sheet risks and commitments, see Note 14 to the Consolidated Financial Statements. CAPITAL At December 31, 1998, shareholders' equity totaled $762 million or 7.54% of total assets, as compared to $721 million or 7.46% at December 31, 1997. The 6% increase was primarily due to the Company's net income during 1998, which more than offset $38 million of stock repurchases (1,761,040 shares) and $38 million in dividends to shareholders. In addition, the Company issued 454,864 shares in connection with purchase acquisitions. During 1997, the Company completed a stock repurchase of 2,245,600 shares for $36 million. In January 1997, a trust subsidiary of the Company issued $100 million of Capital Securities, as discussed above, which qualify as Tier 1 Capital. See Note 12 to the Consolidated Financial Statements. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios. The Company's Tier 1 Capital, as defined by the Federal Reserve Board, was $735.5 million at December 31, 1998, compared to $687.4 million at December 31, 1997. The Company's regulatory capital ratios currently exceed all applicable requirements. See Note 13 to the Consolidated Financial Statements. The Company's banking subsidiaries also are subject to federal, and in certain cases, state regulatory capital requirements. At December 31, 1998, each of the Company's banking subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency and in compliance with applicable state regulatory capital requirements. 28 33 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- IMPACT OF THE YEAR 2000 General The Company recognizes the significant potential impact from what is generally called the "year-2000" computer problem. This problem results from a computer programming convention where the specification of year data is truncated to two digits instead of the literal four digits (i.e., the year "1998" is represented as "98" and the century indicator of "19" is only assumed or automatically added after processing is completed). As computer software programs using this programming convention encounter data with year-2000 dates, they may misinterpret the resulting "00" year representation as the year "1900" instead of "2000." Date-based calculations under these conditions could result in inaccurate results or system failures. The use of embedded chips in non-information processing applications has also increased the risk of year-2000 problems in automated control and production systems where date and calendar programming is involved (e.g., in automated building environment controls or automated production equipment). Year-2000 computer software or embedded chip system failures external to the Company have the potential for negative impacts if they occur "upstream" (at suppliers, service providers, fiduciary counter-parties, or funding sources) or "downstream" (at customers or other third-parties). As with most large financial service providers, the Company relies on a substantial number of information processing systems to deliver and manage its financial services products and the year-2000 problem presents a significant challenge. The Company relies heavily on external sources for computer software, basic infrastructure services, product-line support services, and other goods and materials. The Company also exchanges a significant volume of data with external parties, including other financial institutions, government entities, customers and business partners. The extent of the Company's reliance on external support for its business operations adds to the challenge of getting "year-2000 ready." Solution Strategy The Company initiated a formal Year-2000 Readiness Project in 1997. A senior management committee monitors the project and receives status reports on a periodic basis. The Board of Directors receives quarterly project status updates. A project team chaired by the Vice President of Technology and made up of a full-time project coordinator and team leaders from core support and data processing units directs the detail readiness effort. Business unit representatives are involved in assessment, testing, and implementation tasks as required. The Company is using both internal and external resources for various project tasks. The project plan has been segregated into five phases and closely follows the guidelines provided by the Federal Financial Institutions Examination Council (FFIEC), an inter-agency collaborative effort sponsored by the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration. The project phases and description are as follows: Awareness Phase - the problem and project effort was initially defined and senior project sponsorship and support was obtained. The project team was formed and the overall nature of the project effort was communicated to employees and other important external parties. This phase was initiated in January 1997 and, except for the on-going customer and community awareness efforts, was completed in July 1998. Assessment Phase - an inventory of system components, external relationships and funding risks was conducted across the Company. This included identifying all internally managed and controlled hardware, software, networks, unique processing platforms and external customer and vendor data processing interdependencies. Various non-information processing systems, such as physical security, elevator, and HVAC/building operations, were also included in the inventory. Each system component was rated on its importance to the enterprise and its year-2000 compliance status. This assessment was used as a guide for repair or replacement priority and resource assignments. Systems and servicers were rated as "critical," "important" or "non-critical." A "critical" system, if not operational for 0-48 hours, would materially risk customer service delivery, assets or prestige of a primary business line; an "important" system, if not operational for 2 to 10 days, would present a similar risk. The Company identified nearly 100 internally controlled or managed systems or system categories as "critical." Approximately 30 external services or data interfaces are listed as "critical." Assessments of non-information processing systems indicated they were a low risk to the Company. During this phase, a plan to identify material customers (as funds takers, funds providers or capital market/asset management counterparties), assess their Year-2000 readiness, evaluate the risks to the Company and develop appropriate risk management strategies was formulated. The assessment phase for Company systems and external suppliers and servicers was concluded in August 1998. Renovation Phase - a solution strategy was determined and planned for each system at risk and the strategies were executed. This included re-coding, hardware and software replacement or upgrade and other associated changes. For systems and services supplied by external parties, the Company obtained from vendors their year-2000 readiness certifications and statements or monitored the vendor's progress in renovation, internal testing and availability of certified systems or upgrades. The review of current service contracts for year-2000 implications were also included in this phase. The Company relies on vendors for over 90% of its software systems and components, including the core mainframe-based software. The remaining approximately ten percent of software is mainframe-based customized product or in-house developed micro-computer database applications. The renovation phase commenced in October 1997. Software upgrades, custom code remediation, current functionality testing and re-installation into the production environment was completed in January 1999 for all of the critical rated mainframe-based software systems. Vendor upgrades have been received for all critical rated networked and stand-alone micro-computer systems and approximately 90% have been installed into the production environment as of December 1998. The remaining critical upgrades will be installed into the production environment by April 1999 while the important rated upgrades will be installed into production by June 1999. Any required renovations or replacements for non-information processing systems are expected to be completed by June 1999. Validation Phase - this phase includes developing and executing test scripts in specific testing environments where system dates can be set ahead and documenting the results. The validation plans closely follow 29 34 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- regulatory guidance dictating the independent testing of critical systems in test centers even when vendor certifications are available. Testing designs include unit, integrated (with internal and external systems), point-to-point and end-to-end testing as appropriate. Business unit management, project management and internal audit provide final validation of the testing process and year-2000 readiness. Unit and internal integrated testing of critical software was substantially completed in January 1999, with re-testing and testing with critical external systems to be completed by April 1999. Micro-computer and mainframe hardware clock testing was completed in December 1998. Validation of internal telecommunications (voice and data) hardware are expected to be completed by April 1999. The testing and validation of critical and important rated systems are expected to be completed by June 1999. The Company is communicating with, or otherwise monitoring, the year-2000 readiness progress of significant external providers of infrastructure services on an on-going basis; the Company does not expect to directly test with these providers. At this time, the Company is not aware of any material disruption of infrastructure services which may be likely to occur. Implementation Phase - once systems are validated as year-2000 ready, repairs, upgrades or replacements are installed into production if not done so already. Contingency plans and precautionary steps for various failure scenarios are developed based on an on-going risk assessment process and the Company's business recovery plan. A specific year-2000 implementation strategy (event management plan) will be developed to manage the century transition period. Contingency and event management plans are tested or validated by internal or external independent reviewers. This phase also includes the monitoring and evaluation of internal system changes for year-2000 risk impacts, the monitoring of material customer, vendor and counterparty risk, and the development and implementation of customer and community awareness efforts. The Company expects to complete the contingency and event management plan and validation by June 1999. In light of the foregoing, it is expected that the year-2000 event management team will be ready by December 1999 to manage the century transition period into the year 2000. Costs The Company does not separately track the internal costs incurred for the year 2000 project, except for the dedicated salary of the project coordinator. The vast majority of internal costs relates to the payroll cost for staff assigned to the year 2000 project team and Company personnel assigned to testing the changes resulting from the Year 2000 effort. The Company incurred approximately $1.4 million in incremental costs in 1998 for year-2000 work and currently estimates that incremental costs of the Year 2000 project will total approximately $1.7 million in 1999, for a total incremental cost of $3.1 million. The estimate of total year-2000 costs has increased $0.5 million from the Company's third quarter 1998 estimates due mainly to higher estimates for contract programming. All year-2000 costs are expensed as incurred, and are being funded out of the Company's operating cash flow. Summary Based on the risk assessment, remediation, testing, and monitoring efforts to date, the Company expects substantially all of its critical and important systems will operate successfully in all material respects through the century change. Therefore, the Company believes internal system failures are unlikely to adversely affect the Company's operations or financial condition, although there can be no assurances in this regard. The Company has already successfully tested with several critical external service providers and will continue in 1999 to validate and monitor the readiness of the remainder, including the Company's electric power, telecommunications and transportation service providers. At this time, the Company believes the most likely "worst case" scenario consists of temporary and localized disruptions in infrastructure services which may disrupt the Company's ability to service customers and/or the ability of external service providers to service the Company. The magnitude and scope of the Company's efforts to address the year-2000 problem may be revised periodically as the quality and quantity of knowledge about the project increases. It should also be noted that this description of the Company's efforts involves estimates and projections that are subject to change as work continues and such changes could be substantial. Acquisitions affected by the Company, including the recently completed acquisition of SIS, also could alter the potential effects of the Year 2000 issue on the Company's business and operations. Pursuant to FFIEC guidelines, the Company is required to develop commercial credit risk controls to monitor and assess Year 2000 risk. The Company set an internal goal, in conformity with industry standards, of reviewing 70% of the commercial loan balances for Year 2000 readiness. As of January 31, 1999, 74% of the goal has been achieved. 30 35 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- IMPACT ON NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This Statement, which is effective for years beginning January 1, 2000, is not expected to have a significant impact on the Company's financial condition or results of operations. 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 these 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 polices 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. 31 36 Peoples Heritage Financial Group, Inc. and Subsidiaries - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Number of Shares and Per Share Data) 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 360,271 $ 424,567 Federal funds sold and other short-term investments 250,084 13,091 Securities available for sale, at market value 2,334,575 1,802,758 Securities held to maturity, market value $28,495 in 1997 -- 28,184 Loans held for sale, market value $500,679 in 1998 and $400,363 in 1997 500,134 398,369 Loans and leases 6,186,392 6,524,221 Less: Allowance for loan and lease losses 87,905 89,983 ----------- ---------- Net loans and leases 6,098,487 6,434,238 ----------- ---------- Premises and equipment 108,027 114,729 Goodwill and other intangibles 124,363 127,416 Mortgage servicing rights 39,273 59,702 Other assets 287,245 265,188 ----------- ---------- Total assets $10,102,459 $9,668,242 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings $ 1,009,051 $1,084,158 Money market access and NOW accounts 1,702,394 1,522,252 Certificates of deposit (including certificates of $100 or more of $574,599 in 1998 and $482,065 in 1997) 2,889,418 2,921,452 Brokered deposits 257,570 249,990 Demand deposits 1,122,812 969,567 ----------- ---------- 6,981,245 6,747,419 Federal funds purchased and securities sold under repurchase agreements 444,801 568,535 Borrowings from the Federal Home Loan Bank of Boston 1,701,517 1,394,746 Other borrowings 20,011 18,909 Other liabilities 92,961 117,850 ----------- ---------- Total liabilities 9,240,535 8,847,459 ----------- ---------- Company obligated, mandatorily redeemable securities of subsidiary trust holding solely parent junior subordinated debentures 100,000 100,000 Shareholders' equity: Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued -- -- Common stock, par value $0.01; 200,000,000 shares authorized, 90,391,699 issued in 1998 and 89,324,737 in 1997 904 893 Paid-in capital 450,409 436,367 Retained earnings 364,353 303,864 Accumulated other comprehensive income: Net unrealized gain (loss) on securities available for sale (571) 5,805 Treasury stock at cost (2,845,731 shares in 1998 and 1,739,347 shares in 1997) (53,171) (26,146) ----------- ---------- Total shareholders' equity 761,924 720,783 ----------- ---------- $10,102,459 $9,668,242 =========== ========== - ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 32 37 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, - --------------------------------------------------------------------------------------------------------- (In Thousands, Except Number of Shares and Per Share Data) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Interest and dividend income: Interest and fees on loans and leases $ 597,975 $ 521,509 $ 417,532 Interest and dividends on securities 114,981 120,242 91,945 ----------- ----------- ----------- Total interest and dividend income 712,956 641,751 509,477 ----------- ----------- ----------- Interest expense: Interest on deposits 241,007 219,812 184,077 Interest on borrowed funds 106,520 77,463 46,105 ----------- ----------- ----------- Total interest expense 347,527 297,275 230,182 ----------- ----------- ----------- Net interest income 365,429 344,476 279,295 Provision for loan and lease losses 13,423 4,548 5,185 ----------- ----------- ----------- Net interest income after provision for loan and lease losses 352,006 339,928 274,110 ----------- ----------- ----------- Noninterest income: Customer services 33,524 28,304 20,305 Mortgage banking services 23,066 25,767 17,656 Trust and investment advisory services 15,737 11,824 9,584 Insurance commissions 13,006 1,899 -- Net securities gains 5,817 2,697 3,287 Other noninterest income 13,645 11,989 9,878 ----------- ----------- ----------- 104,795 82,480 60,710 ----------- ----------- ----------- Noninterest expenses: Salaries and employee benefits 138,778 131,433 107,378 Data processing 20,104 14,962 12,528 Occupancy 21,969 20,143 17,452 Equipment 16,721 18,164 13,653 Amortization of goodwill and deposit premiums 11,611 8,743 5,527 Distributions on securities of subsidiary trust 9,060 8,351 -- Advertising and marketing 8,261 8,946 6,693 Special charges 35,374 18,591 9,627 Other noninterest expenses 48,041 51,223 46,485 ----------- ----------- ----------- 309,919 280,556 219,343 ----------- ----------- ----------- Income before income tax expense 146,882 141,852 115,477 Applicable income tax expense 46,292 49,517 39,444 ----------- ----------- ----------- Net income $ 100,590 $ 92,335 $ 76,033 =========== =========== =========== Weighted average shares outstanding: Basic 88,092,605 87,449,885 81,263,004 Diluted 89,452,863 89,180,826 82,729,714 Earnings per share: Basic $ 1.14 $ 1.06 $ 0.94 Diluted 1.12 1.04 0.92 - ---------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements 33 38 Peoples Heritage Financial Group, Inc. and Subsidiaries - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT Compen- Accumulated Other NUMBER OF SHARES Par Paid-in Retained sation Treasury Comprehensive AND PER SHARE DATA) Value Capital Earnings ESOP Stock Income Total - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1995 $ 809 $ 368,179 $ 216,926 $(118) $ (7,805) $ 8,509 $ 586,500 Net Income -- -- 76,033 -- -- -- 76,033 Unrealized gains on securities, net of reclassification adjustment (1) -- -- -- -- -- (8,946) (8,946) --------- Comprehensive Income 67,087 --------- Issuance of 658,996 shares under benefit plans 6 3,286 -- -- -- -- 3,292 Treasury stock issued (337,354 shares at an average price of $6.91) -- -- (134) -- 2,466 -- 2,332 Treasury stock purchased and retired (56,000 at an average price of $18.35) -- (609) -- -- (419) -- (1,028) Purchase of 5,000,000 shares of treasury stock pursuant to acquisition -- -- -- -- (60,342) -- (60,342) Issuance of 10,960,670 shares pursuant to acquisition 60 47,492 -- -- 60,342 344 108,238 Decrease in unearned compensation - ESOP -- -- -- 118 -- -- 118 Cash dividends paid -- -- (29,350) -- -- -- (29,350) Common stock dividends declared 10 11,412 (11,422) -- -- -- -- -------- --------- --------- ----- -------- ------- --------- Balances at December 31, 1996 885 429,760 252,053 -- (5,758) (93) 676,847 Net Income 92,335 92,335 Unrealized gains on securities, net of reclassification adjustment (1) -- -- -- -- -- 5,898 5,898 --------- Comprehensive Income 98,233 --------- Issuance of 651,000 shares under benefit plans 7 4,846 -- -- -- -- 4,853 Treasury stock issued (1,255,198 shares at an average price of $13.59) -- -- 1,530 -- 15,529 -- 17,059 Treasury stock purchased (2,245,600 shares at an average price of $15.99) -- -- -- -- (35,917) -- (35,917) Cash dividends paid -- -- (40,285) -- -- -- (40,285) Common stock dividends declared 1 1,761 (1,769) -- -- -- (7) -------- --------- --------- ----- -------- ------- --------- Balances at December 31, 1997 893 436,367 303,864 -- (26,146) 5,805 720,783 Net Income -- -- 100,590 -- -- -- 100,590 Unrealized gains on securities, net of reclassification adjustment (1) -- -- -- -- -- (6,376) (6,376) --------- Comprehensive Income 94,214 --------- Cancellation of CFX treasury shares at acquisition (110,586 shares) (1) (1,879) -- -- 1,880 -- -- Issuance of 727,038 shares under benefit plans 8 7,366 -- -- -- -- 7,374 Treasury stock issued (544,071 shares at an average price of $12.60) -- -- (2,244) -- 9,098 -- 6,854 Treasury stock purchased (1,761,040 shares at an average price of $21.58) -- -- -- -- (38,003) -- (38,003) Common stock issued for acquisitions 5 8,601 -- -- -- -- 8,606 Payment of fractional shares (1) (46) -- -- -- -- (47) Cash dividends -- -- (37,857) -- -- -- (37,857) -------- --------- --------- ----- -------- ------- --------- Balances at December 31, 1998 $ 904 $ 450,409 $ 364,353 $ -- $(53,171) $ (571) $ 761,924 ======== ========= ========= ===== ======== ======= ========= - ------------------------------------------------------------------------------------------------------------------------------------
December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (1) Disclosure of reclassification amount: 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Unrealized holding gains (losses) arising during the period $(2,595) $7,651 $ (6,809) Less: reclassification adjustment for gains included in net income, net of tax 3,781 1,753 2,137 ------- ------ ----------- Net unrealized gains (losses) on securities $(6,376) $5,898 $ (8,946) ======= ====== =========== - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements 34 39 Peoples Heritage Financial Group, Inc. and Subsidiaries - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 100,590 $ 92,335 $ 76,033 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan and lease losses 13,423 4,548 5,185 Provision for depreciation 14,662 14,866 12,018 Amortization of goodwill and other intangibles 11,611 8,657 5,388 Net (increase) decrease in net deferred tax assets/liabilities 21,916 8,837 5,742 Net (gains) losses realized from sales of securities and consumer loans (5,817) (2,610) (2,723) Net (gains) losses realized from sales of loans held for sale (17,198) (11,257) (7,364) Net decrease (increase) in mortgage servicing rights 20,429 (18,744) (9,305) Proceeds from sales of loans held for sale (5,041,304) 3,156,388 1,204,155 Residential loans originated and purchased for sale 4,956,737 (3,349,645) (1,236,280) Net decrease (increase) in interest and dividends receivable and other assets (36,952) (58,782) (7,789) Net increase (decrease) in other liabilities (23,251) (17,346) 29,473 ----------- ----------- ----------- Net cash provided (used) by operating activities $ 14,846 $ (172,753) $ 74,533 ----------- ----------- ----------- - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities and principal repayments of investment securities -- $ 53,328 $ 89,755 Purchase of investment securities -- (37,905) (87,253) Proceeds from sales of securities available for sale 624,398 298,779 120,283 Proceeds from maturities and principal repayments of securities available for sale 813,138 735,940 694,466 Purchases of securities available for sale (1,945,453) (1,250,168) (698,146) Net (increase) decrease in loans and leases 322,328 (1,033,785) (710,543) Proceeds from sales of loans -- 36,358 16,356 Net additions to premises and equipment (12,846) (13,000) (19,903) Payment for acquisitions, net of cash acquired -- (28,261) 54,605 ----------- ----------- ----------- Net cash provided (used) by investing activities $ (198,435) $(1,238,714) $ (540,380) ----------- ----------- ----------- - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits $ 233,826 $ 456,813 $ 326,882 Net increase (decrease) in securities sold under repurchase agreements (8,888) 144,100 87,396 Proceeds from Federal Home Loan Bank of Boston borrowings 3,083,947 1,440,445 717,498 Payments on Federal Home Loan Bank of Boston borrowings (2,777,176) (825,000) (507,147) Proceeds from issuance of securities of subsidiary trust -- 98,361 -- Net increase (decrease) in other borrowings 1,102 (8,228) 1,737 Issuance of stock 14,181 12,609 5,355 Purchase and retirement of treasury stock (38,003) (35,924) (61,370) Cash dividends paid to shareholders (37,857) (40,285) (29,350) ----------- ----------- ----------- Net cash provided by financing activities $ 471,132 $ 1,242,891 $ 541,001 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents $ 287,543 $ (168,576) $ 75,154 Cash and cash equivalents at beginning of period 322,812 491,388 416,234 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 610,355 $ 322,812 $ 491,388 =========== =========== =========== - ---------------------------------------------------------------------------------------------------------------------------------
In conjunction with the purchase acquisitions detailed in Note 2 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Fair value of assets acquired $10,615 $21,425 $959,089 Less liabilities assumed 2,009 12,122 850,851 ------- ------- -------- Net effect on capital $ 8,606 $ 9,303 $108,238 ======= ======= ======== - -------------------------------------------------------------------------------- For the year ended December 31, 1998, 1997, and 1996, interest of $355,450, $290,358, and $225,491 and income taxes of $29,850, $39,305, and $28,835 were paid, respectively. During 1998, $28,184 of investment securities were transferred to securities available for sale. During 1997, $73,859 of portfolio loans were transferred to loans held for sale. - -------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements 35 40 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All Dollar Amounts Expressed in Thousands, Except Share Data) - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Peoples Heritage Financial Group, Inc. (the "Company") and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The Company's principal business activities are retail, commercial and mortgage banking as well as trust, investment advisory and insurance brokerage services, and are conducted through the Company's direct and indirect subsidiaries located in Maine, New Hampshire and Massachusetts, consisting of Peoples Heritage Bank, Bank of New Hampshire and Family Bank, respectively (collectively, the "Banks"), as well as wholly owned subsidiaries of the Banks. The Company and its subsidiaries are subject to competition from other financial institutions and are also subject to regulation of, and periodic examination by, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Maine Bureau of Banking, the New Hampshire Bank Commissioner and the Federal Reserve Board. The following is a description of the more significant accounting policies. Financial Statement Presentation. The Consolidated Financial Statements include the accounts of Peoples Heritage Financial Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation. Assets held in a fiduciary capacity by subsidiary trust departments are not assets of the Company and, accordingly, are not included in the Consolidated Balance Sheets. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, deferred tax assets and the valuation of mortgage servicing rights. Cash and Cash Equivalents. The Company is required to comply with various laws and regulations of the Federal Reserve Bank which require that the Company maintain certain amounts of cash on deposit and is restricted from investing those amounts. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and other short-term investments minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods. Securities. Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. Investments not classified as "held to maturity" are classified as "available for sale." Securities available for sale consist of debt and equity securities that are available for sale in response to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at market value. Changes in market value, net of applicable income taxes, are reported as a separate component of shareholders' equity. When a decline in market value of a security is considered other than temporary, the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Premiums and discounts are amortized and accreted over the term of the securities on a level yield method adjusted for prepayments. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method. Loans. Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Except for residential real estate and consumer loans, loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management's judgment the collectibility of interest or principal of the loan has been significantly impaired. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Loans are classified as impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield using the interest method over the contractual life of the related loans. Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectible. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans and leases. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. Primary considerations in this evaluation are prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management's estimation of future potential losses. The Company evaluates the commercial loan portfolio by using a loan by loan analysis of a significant portion of "classified" loans and calculating a reserve requirement on these loans. Based on these results, loss factors are applied to the remaining portfolio to calculate a range of possible loan losses. Loss factors are calculated based on the assigned risk rating, and are regularly updated based on the Company's actual loss experience. Residential real estate and consumer loans are evaluated as a group by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months. Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary based on estimates that are susceptible to 36 41 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- change as a result of changes in economic conditions and other factors. 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 adjustments to the allowance based on their judgments about information available to them at the time of their examination. Bank Owned Life Insurance. Bank owned life insurance ("BOLI") represents life insurance on the lives of certain employees. The Company is the beneficiary of the insurance policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other income, and are not subject to income taxes. The cash value is included in other assets. Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets. Long-lived assets are evaluated periodically for other-than-temporary impairment. An assessment of recoverability is performed prior to any writedown of the asset. If circumstances suggest that their value may be permanently impaired, an expense would then be charged in the current period. Goodwill and Other Intangibles. Goodwill is amortized on a straight-line basis over various periods not exceeding twenty years; core deposit premiums are amortized on a level-yield basis over the estimated life of the associated deposits. Goodwill and other intangible assets are reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. Mortgage Banking and Loans Held for Sale. Loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Forward commitments to sell residential real estate mortgages are contracts which the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Purchased mortgage servicing rights are recorded at cost upon acquisition. Mortgage servicing rights are amortized on an accelerated method over the estimated weighted average life of the loans. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. The Company's assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted periodically to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, the Company assesses the estimated life of its servicing portfolio based on data which is disaggregated to reflect note rate, type and term on the underlying loans. Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expenses when incurred. Derivative Financial Instruments. The Company may purchase interest rate floors tied to the CMT index to mitigate the prepayment risk associated with mortgage servicing rights. Changes in fair value are reported as a component of mortgage banking income. The Company also utilizes Treasury options to modify its forward mortgage commitments. Changes in fair value of the options are included in the calculation of the carrying value of the loans held for sale. Investments in Limited Partnerships. The Company has several investments in tax advantaged limited partnerships. These investments are included in other assets and are amortized over the same period the tax benefits are expected to be received. Pension and 401(k) Plans. The Company and its subsidiaries have defined benefit and defined contribution pension plans which cover most full-time employees. The benefits are based on years of service and the employee's career average earnings. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company maintains Section 401(k) savings plans for substantially all employees of the Company and its subsidiaries. Under the plans, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee's annual salary. The plans allow for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. Stock Compensation Plans. Statement of Financial Accounting Standards (SFAS No. 123), "Accounting for Stock-Based Compensation" encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. See Note 15 - Stock Based Compensation Plans. 37 42 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Income Taxes. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes. Earnings Per Share. Earnings per share have been computed in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution, and diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the common stock equivalents were converted into common stock using the treasury stock method. Segment Reporting. 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 is effective for 1998 annual financial statements. The Company's primary business is banking, which provides over 90% of its revenues and profits. Banking services are provided within the framework of three community banks which have similar economic characteristics and provide similar products and services through similar distribution channels in similar regulatory environments. Accordingly disaggregated segment information is not presented. 38 43 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 2. ACQUISITIONS On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"). Approximately 16,255,885 shares of common stock of the Company (the "Common Stock") were issued in connection with this acquisition, which was accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. The accompanying financial statements do not include SIS. During 1998, the Company completed the acquisition of three insurance agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition.. The Company recorded $9.3 million of goodwill in connection with these purchases. The acquired agencies are being integrated into the Company's existing insurance agency operations. On April 10, 1998, the Company completed the acquisition of CFX Corporation ("CFX"). Approximately 32,796,280 shares of Common Stock were issued in connection with this transaction. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The acquisition of CFX was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. In the fourth quarter of 1997, the Company purchased Atlantic Bancorp ("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million and total shareholders' equity of $37.7 million. The Company recorded $34.7 million of goodwill with this transaction. During the same period, the Company also acquired all of the outstanding stock of MPN Holdings "MPN", the holding company of Morse, Payson & Noyes Insurance. The transaction was effected through the exchange of MPN stock for 445,678 shares of Common Stock and resulted in $7.8 million of goodwill. Both acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. On December 6, 1996, the Company completed the acquisition of Family Bancorp, the holding company for Family. Approximately 10,960,670 shares of Common Stock were issued in connection with this transaction, including 5,000,000 shares of treasury stock. Family had total assets of $925.8 million and total shareholders' equity of $73.3 million. This transaction was accounted for as a purchase and, accordingly, the financial statements reflect it from the date of acquisition. The Company recorded $34.2 million of goodwill in connection with this purchase. On April 2, 1996, the Company completed the acquisition of Bank of New Hampshire Corporation ("BNHC"), the holding company for BNH. Approximately 16,256,660 shares of Common Stock were issued in connection with this transaction. At December 31, 1995, BNHC had total consolidated assets of $977.8 million and total consolidated shareholders' equity of $84.5 million. The acquisition of BNHC was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions (collectively, "special charges"). On a pre-tax basis special charges amounted to $35.4 million, $18.6 million and $9.6 million in 1998, 1997 and 1996, respectively. For additional information, see Note 9 - Special Charges. 39 44 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY A summary of the amortized cost and market values of securities available for sale and held to maturity follows:
- -------------------------------------------------------------------------------------------------------------------------- Amortized Gross Unrealized Gross Unrealized Market AVAILABLE FOR SALE Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 U. S. Government obligations and obligations of U.S. Government agencies and corporations $ 320,408 $ 664 $ (803) $ 320,269 Tax-exempt bonds and notes 27,492 286 -- 27,778 Other bonds and notes 3,201 42 -- 3,243 Mortgage-backed securities 1,718,398 2,964 (4,453) 1,716,909 Collateralized mortgage obligations 155,601 693 (443) 155,851 ---------- -------- --------- ---------- Total debt securities 2,225,100 4,649 (5,699) 2,224,050 ---------- -------- --------- ---------- Federal Home Loan Bank of Boston stock 110,429 -- -- 110,429 Other equity securities 30 66 -- 96 ---------- -------- --------- ---------- Total equity securities 110,459 66 -- 110,525 ---------- -------- --------- ---------- Total securities available for sale $2,335,559 $ 4,715 $ (5,699) $2,334,575 ========== ======== ========= ========== - -------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 U. S. Government obligations and obligations of U.S. Government agencies and corporations $ 507,134 $ 1,859 $ (702) $ 508,291 Tax-exempt bonds and notes 19,899 46 -- 19,945 Other bonds and notes 82,780 15 (33) 82,762 Mortgage-backed securities 814,037 6,271 (1,499) 818,809 Collateralized mortgage obligations 257,591 1,551 (168) 258,974 ---------- -------- --------- ---------- Total debt securities 1,681,441 9,742 (2,402) 1,688,781 ---------- -------- --------- ---------- Federal Home Loan Bank of Boston stock 88,309 0 -- 88,309 Other equity securities 23,944 1,728 (4) 25,668 ---------- -------- --------- ---------- Total equity securities 112,253 1,728 (4) 113,977 ---------- -------- --------- ---------- Total securities available for sale $1,793,694 $ 11,470 $ (2,406) $1,802,758 ========== ======== ========= ========== - -------------------------------------------------------------------------------------------------------------------------- HELD TO MATURITY: DECEMBER 31, 1998 -- -- -- -- ========== ======== ========= ========== DECEMBER 31, 1997 U.S. Government obligations and obligations of U.S. Government agencies and corporations $ 7,721 $ 76 $ (6) $ 7,791 Tax-exempt bonds and notes 13,470 177 (1) 13,646 Other bonds and notes 400 -- -- 400 Mortgage-backed securities 6,234 75 (9) 6,300 Collateralized mortgage obligations 359 -- (1) 358 ---------- -------- --------- ---------- Total securities held to maturity $ 28,184 $ 328 $ (17) $ 28,495 ========== ======== ========= ========== - --------------------------------------------------------------------------------------------------------------------------
The amortized cost and market values of debt securities available for sale at December 31, 1998 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1998, the Company had $76.1 million of securities available for sale with call provisions. - -------------------------------------------------------------------------------- Available for Sale Amortized Cost Market Value - -------------------------------------------------------------------------------- December 31, 1998: Due in one year or less $ 174,217 $ 174,640 Due after one year through five years 125,216 125,561 Due after five years through ten years 124,992 125,422 Due after ten years 1,800,675 1,798,427 ---------- ---------- Total debt securities $2,225,100 $2,224,050 ========== ========== - -------------------------------------------------------------------------------- A summary of realized gains and losses on securities available for sale for 1998, 1997 and 1996 follows: - -------------------------------------------------------------------------------- Gross Realized Gross Realized Gains Losses - --------------------------------------------------------- 1998 $5,837 $ 20 1997 5,244 2,634 1996 2,281 109 - --------------------------------------------------------- 40 45 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 4. LOANS AND LEASES The Company's lending activities are conducted principally in Maine, New Hampshire and Massachusetts. The principal categories of loans in the Company's portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows: - -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Residential real estate mortgages $2,020,014 $2,635,663 Commercial real estate mortgages: Commercial real estate 1,281,774 1,286,372 Construction and development 139,808 118,985 ---------- ---------- 1,421,582 1,405,357 ---------- ---------- Commercial business loans and leases 847,449 786,578 Consumer loans and leases 1,897,347 1,696,623 ---------- ---------- Total loans and leases $6,186,392 $6,524,221 ========== ========== Loans and leases include unearned income and net deferred loan costs of $9.5 million at December 31, 1998 and net deferred loan fees of $2.2 million at December 31, 1997. - -------------------------------------------------------------------------------- NONPERFORMING LOANS The following table sets forth information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated: - -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Residential real estate mortgages: Nonaccrual loans $ 8,901 $15,323 Commercial real estate loans: Nonaccrual loans 19,110 19,582 Troubled debt restructurings 6 2,304 ------- ------- Total 19,116 21,886 Commercial business loans and leases: Nonaccrual loans 14,186 13,255 Troubled debt restructurings 59 114 ------- ------- Total 14,245 13,369 Consumer loans: Nonaccrual loans 10,742 8,473 Total nonperforming loans: Nonaccrual loans 52,939 56,633 Troubled debt restructurings 65 2,418 ------- ------- Total $53,004 $59,051 ======= ======= Accruing loans which are 90 days overdue $21,574 $ 8,355 ======= ======= - -------------------------------------------------------------------------------- 41 46 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- The ability and willingness of the borrowers to repay loans is generally dependent on current economic conditions and real estate values within the borrowers' geographic areas. Interest income that would have been recognized for 1998 if nonperforming loans at December 31, 1998 had been performing in accordance with their original terms approximated $4.9 million. Impaired loans are commercial, commercial real estate, and individually significant mortgage and consumer loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. Nonaccrual loans include impaired loans and loans on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or on which payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. The amount of impairment for these types of 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, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage and consumer loans which are not individually significant are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into the consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. At December 31, 1998 and 1997, total impaired loans were $36.4 million and $39.0 million, of which $20.6 million and $24.8 million had related allowances of $7.1 million and $7.0 million, respectively. During the years ended December 31, 1998 and 1997, the income recognized related to impaired loans was $3.2 million and $2.3 million respectively, and the average balance of outstanding impaired loans was $35.2 million and $36.6 million, respectively. The Company recognizes interest on impaired loans on a cash basis when the ability to collect the principal balance is not in doubt; otherwise, cash received is applied to the principal balance of loan. 5. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses follow:
- -------------------------------------------------------------------------------- Year ended December 31, - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Balance at beginning of period $ 89,983 $ 87,820 $ 80,818 Allowance on acquired loans -- 7,361 11,365 Provisions charged to operations 13,423 4,548 5,185 Loans and leases charged off (24,552) (20,645) (22,930) Recoveries 9,051 10,899 13,382 -------- -------- -------- Balance at end of period $ 87,905 $ 89,983 $ 87,820 ======== ======== ======== - --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT A summary of premises and equipment follows: - -------------------------------------------------------------------------------- December 31, - ---------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------- Land $ 15,814 $ 18,960 Buildings and leasehold improvements 100,816 110,997 Furniture, fixtures and equipment 110,976 106,115 -------- -------- 227,606 236,072 Less accumulated depreciation and amortization 119,579 121,343 -------- -------- $108,027 $114,729 ======== ======== - ---------------------------------------------------------------------- 42 47 7. MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights for the years ended December 31, 1998, 1997 and 1996 follows:
- ----------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- Balance at January 1 $ 59,702 $ 40,958 $ 27,195 Mortgage servicing rights capitalized 80,695 55,845 19,620 Mortgage servicing rights acquired through acquisitions -- -- 3,700 Amortization charged against mortgage servicing fee income (14,159) (7,924) (5,938) Impairment reserve charged against mortgage servicing fee income (11,055) -- -- Mortgage servicing rights sold (75,910) (29,177) (3,619) ---------- ---------- ---------- Balance at December 31 $ 39,273 $ 59,702 $ 40,958 ========== ========== ========== Residential real estate loans serviced for investors $3,598,896 $5,381,003 $4,343,659 ========== ========== ========== - -----------------------------------------------------------------------------------
The Company generally continues to service residential real estate mortgages after the loans have been sold into the secondary market. The Company pays the investor that purchased the loan a pass-through rate which is less than the interest rate the Company receives from the borrower. The difference is retained by the Company as a fee for servicing the residential real estate mortgages. The Company capitalizes mortgage servicing rights at their allocated cost, based on relative fair values upon sale of the related loans. The Company periodically sells residential mortgage servicing rights to other servicers. 48 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 8. INCOME TAXES The current and deferred components of income tax expense follow: - ----------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------- Current Federal $22,643 $35,078 $30,932 State 1,733 2,439 1,942 Deferred Federal 20,792 10,993 5,607 State 1,124 1,007 963 ------- ------- ------- $46,292 $49,517 $39,444 ======= ======= ======= - ----------------------------------------------------- The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense:
- ----------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Computed federal tax expense $ 51,408 $ 49,648 $40,417 State income tax, net of federal benefits 1,857 2,240 1,888 Benefit of tax-exempt income (1,509) (1,245) (1,268) Nondeductible merger expenses 2,345 1,409 1,495 Amortization of goodwill and other intangibles 2,785 2,131 1,115 Low income/rehabilitation credits (2,994) (2,890) (1,670) Restructuring of legal entities within affiliated group (5,069) -- -- Increase in cash surrender value of life insurance (1,297) (765) (349) Other, net (1,234) (1,011) (2,184) -------- -------- ------- Recorded income tax expense $ 46,292 $ 49,517 $39,444 ======== ======== ======= - -----------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities which are included in Other Assets and Other Liabilities, respectively, at December 31, 1998 and 1997 follow:
- --------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan and lease losses $ 32,129 $33,062 Reserve for mobile home dealers 1,404 1,812 Accrued pension expense 2,272 1,434 Difference of tax and book basis of OREO 229 623 Interest accrued and payments received on non-performing loans for tax purposes 1,408 1,444 Unrealized depreciation on securities 413 -- Investment in leasehold residual -- 3,266 Alternative minimum tax credit carry forward -- 1,079 Compensation and employee benefits 3,785 2,136 Book reserves not yet realized for tax purposes 1,629 -- Difference in tax and book basis of premises and equipment 581 -- Other 665 1,939 -------- ------- Total gross deferred tax assets 44,515 46,795 -------- ------- Deferred tax liabilities: Difference of tax and book basis of leases 16,753 13,311 Difference of tax and book basis of premises & equipment -- 1,907 Difference of tax and book basis of partnership investments 4,381 4,296 Difference of tax and book basis of loans 7,453 -- Mortgage servicing 13,648 3,520 Tax bad debt reserve 7,418 7,761 Unrealized appreciation of securities -- 3,054 Other 572 207 -------- ------- Total gross deferred tax liabilities 50,225 34,056 -------- ------- Net deferred tax asset (liability) $ (5,710) $12,739 ======== ======= - ---------------------------------------------------------------------------------------------
43 49 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 9. SPECIAL CHARGES Special charges include merger expenses of $35.4 million and $11.4 million in 1998 and 1997, respectively, and $7.2 million of charges related to exiting the lease securitization business (conducted through CFX Funding) in 1997. In 1998, the Company recorded $24.6 million after-tax merger charges related to the acquisition of CFX on April 10, 1998. Merger expenses represented reorganization and restructuring costs net of an $8.1 million after-tax gain from the sale of five CFX branches in connection with the transaction. The after-tax reorganization and restructuring costs consisted of costs relating to termination of employment contracts and severance obligations ($7.8 million), professional fees ($7.4 million), writedown of assets ($10.4 million), data processing/integration costs ($4.8 million) and charges related to CFX Funding ($2.3 million). At December 31, 1998 accrued but unpaid expenses related to the CFX merger amounted to $1.2 million, pre-tax. 10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS - -------------------------------------------------------------------------------- The details of federal funds purchased and securities sold under repurchase agreements were as follows: - -------------------------------------------------------------------------------- December 31, - ------------------------------------------------------ 1998 1997 - ------------------------------------------------------ Federal funds purchased $ -- $114,846 Securities sold under repurchase agreements: Short term 442,100 443,784 Long term 2,701 9,905 -------- -------- $444,801 $568,535 ======== ======== - ------------------------------------------------------ A summary of securities sold under short term repurchase agreements follows: - -------------------------------------------------------------------------------- At or for the Year Ended December 31, - --------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------- Balance outstanding at end of period $444,801 $453,689 $301,432 Market value of collateral at end of period 482,971 497,603 381,398 Amortized cost of collateral at end of period 482,944 526,031 380,174 Average balance outstanding 433,621 387,607 233,591 Maximum outstanding at any month end during the period 444,801 477,536 330,731 Average interest rate during the period 4.46% 4.45% 4.62% Average interest rate at end of period 4.15% 4.91% 4.30% - ---------------------------------------------------------------------------- Securities sold under repurchase agreements generally have maturities of 270 days or less and are collateralized by mortgage-backed securities and U.S. Government obligations. The long term agreement is a wholesale agreement maturing June 26, 2000 and bears interest at 6.39%. 11. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON - -------------------------------------------------------------------------------- A summary of the borrowings from the Federal Home Loan Bank of Boston is as follows: - -------------------------------------------------------------------------------- December 31, 1998 - ---------------------------------------------------------------- Maturity Dates Principal Amounts Interest Rates - ---------------------------------------------------------------- 1999 $163,352 5.85% - 8.13% 2000 386,444 4.70% - 6.49% 2001 925,000 4.98% - 5.80% 2002 120 6.97% - 6.97% 2003 105,201 5.00% - 5.66% 2004-2018 121,400 3.60% - 7.72% ---------- $1,701,517 ========== - ---------------------------------------------------------------- 44 50 December 31, 1997 - ---------------------------------------------------------------- Maturity Dates Principal Amounts Interest Rates - ---------------------------------------------------------------- 1998 $367,048 5.19% - 7.04% 1999 315,207 5.02% - 6.38% 2000 701,406 4.70% - 6.49% 2001 2,079 5.20% - 6.14% 2002 2,327 5.20% - 6.97% 2003 2,440 5.00% - 6.14% 2004-2018 4,239 3.75% - 7.72% ---------- $1,394,746 ========== - ---------------------------------------------------------------- Short and long-term borrowings from the Federal Home Loan Bank of Boston, which consist of both fixed and adjustable rate borrowings, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets. The Company has the ability to prepay most of its borrowings without penalty. In addition, the Company has an existing line of credit with the Federal Home Loan Bank of Boston of $125 million, none of which was outstanding at December 31, 1998. 12. CAPITAL TRUST SECURITIES On January 24, 1997, the Company sponsored the creation of Peoples Heritage Capital Trust I (the "Trust") a statutory business trust created under the laws of Delaware. The Company is the owner of all of the common securities of the Trust. On January 31, 1997, the Trust issued $100 million of 9.06% Capital Securities (the "Capital Securities," and with the common securities, the "Trust Securities"), the proceeds from which were used by the Trust, along with the Company's $3.1 million capital contribution for the Common Securities, to acquire $103.1 million aggregate principal amount of the Company's 9.06% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Debentures"), which constitute the sole assets of the Trust. The Company has, through the Declaration of Trust establishing the Trust, Common Securities and Capital Securities Guarantee Agreements, the Debentures and a related Indenture, taken together fully irrevocably and unconditionally guaranteed all of the Trust's obligations under the Trust Securities. Separate financial statements of the Trust are not required pursuant to Staff Accounting Bulletin 53 of the Securities and Exchange Commission. 51 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 13. SHAREHOLDERS' EQUITY In April 1998, the stockholders of the Company approved an increase in the authorized number of shares of Common Stock from 100,000,000 to 200,000,000, and in May 1998, the Company declared a two-for-one split for each share of Common Stock then outstanding and for all then outstanding options to purchase shares of Common Stock. All references in the Consolidated Financial Statements to the number of shares and per share amounts have been adjusted retroactively for the recapitalization and the stock split. Regulatory Capital Requirements. Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitoring and control of the industry. These standards relate capital to level of risk by assigning different weighting to assets and certain off-balance sheet activity. The Company must maintain a minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
- -------------------------------------------------------------------------------------------------------------------------------- Actual Capital Requirements Excess - -------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------------------- As Of December 31, 1998 Total capital (to risk weighted assets) $813,166 13.10% $496,458 8.00% $316,708 5.10% Tier 1 capital (to risk weighted assets) 735,467 11.85% 248,229 4.00% 487,238 7.85% Tier 1 leverage capital ratio (to average assets) 735,467 7.54% 389,644 4.00% 345,823 3.54% As of December 31, 1997 Total capital (to risk weighted assets) 762,391 12.65% 482,056 8.00% 280,335 4.65% Tier 1 capital (to risk weighted assets) 687,421 11.41% 241,028 4.00% 446,393 7.41% Tier 1 leverage capital ratio (to average assets) 687,421 7.51% 366,124 4.00% 321,297 3.51% - --------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company and each of its banking subsidiaries were well-capitalized and in compliance with all applicable regulatory capital requirements and had capital ratios in excess of federal and regulatory risk-based and leverage requirements. - -------------------------------------------------------------------------------- Dividend Limitations. Dividends paid by subsidiaries are the primary source of funds available to the Company for payment of dividends to its shareholders. The Banks are subject to certain requirements imposed by state and federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the Banks to the Company. Stockholder Rights Plan. In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Common Stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to acquisition of, the right to acquire beneficial ownership of, or tender offer for 20% or more of the outstanding shares of Common Stock. The Rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of the Company. The Rights expire in ten years unless extended by the Board of Directors. 14. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET RISKS The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, standby letters of credit, recourse arrangements on serviced loans and forward commitments to sell loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward commitments to sell loans through credit approvals, limits and monitoring procedures. 45 52 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Financial instruments with off-balance sheet risk at December 31, 1998 and 1997 follow: - -------------------------------------------------------------------------------- Contract or Notional Amount at December 31, 1998 1997 - ------------------------------------------------------------------------- Financial instruments with notional or contract amounts which represent credit risk: Commitments to originate loans, unused lines, standby letters of credit and unadvanced portions of construction loans $1,685,341 $1,461,747 Loans serviced with recourse 24,176 32,603 Loans sold with credit enhancements 3,294 8,713 Leases serviced with credit enhancements 6,227 19,200 Financial instruments with notional or contract amounts which exceed the amount of credit risk: Forward commitments to sell loans 249,450 717,650 Interest rate floors - notional amount 120,000 90,000 fair value 3,433 881 Treasury put options - notional amount -- 50,000 fair value -- 156 Treasury call options - notional amount -- 12,500 fair value -- 371 - ------------------------------------------------------------------------- Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company has retained credit risk on certain residential mortgage loans sold with full or partial recourse and on certain residential mortgage loans whose servicing rights were acquired during 1990. Forward commitments to sell residential mortgage loans are contracts which the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. Risks may arise from the possible inability of the Company to originate loans to fulfill the contracts, in which case the Company would normally purchase loans from correspondent banks or in the open market to deliver against the contract. At December 31, 1998, the Company was committed to invest up to $8.7 million in real estate development limited partnerships. At December 31, 1998 and 1997 the Company had $18.8 million and $13.2 million, respectively, invested in such partnerships, which are included in other assets. Legal Proceedings. The Company and certain of its subsidiaries have been named as defendants in various legal proceedings arising from their normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, based upon the opinions of counsel, any such liability will not have a material effect on the consolidated financial position or results of operations or liquidity of the Company and its subsidiaries. Lease Obligations. The Company leases certain properties used in operations under terms of operating leases which include renewal options. Rental expense under these leases approximated $8.3 million, $6.5 million, and $5.5 million for the years ended 1998, 1997 and 1996, respectively. Approximate minimum lease payments over the remaining terms of the leases at December 31, 1998 follow: - -------------------------------------------------------------------------------- 1999 $ 7,645 2000 6,907 2001 6,423 2002 4,555 2003 3,499 2004 and after 19,772 ------- $48,801 ======= - -------------------------------------------------------- 46 53 15. STOCK BASED COMPENSATION PLANS Profit Sharing Employee Stock Ownership Plan. In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan which is designed to invest primarily in Common Stock of the Company. Substantially all employees are eligible to participate in the Plan following one year of service. Employees may not make contributions to the Plan but may receive a discretionary contribution from the Company based on their pro-rata share of eligible compensation. For 1998, 1997 and 1996, the Company contributed 3%, 3% and 4% of eligible compensation, respectively. The approximate expense of this contribution for 1998, 1997 and 1996 was $2.1 million, $1.3 million and $1.5 million, respectively. Stock Option Plans. In 1995, the Company adopted a stock option plan for non-employee directors. The maximum number of shares which may be granted under the plan is 530,000 shares, of which 110,000 were granted in 1998 at $24.31 per share, 59,000 were granted in 1997 at $15.82 per share and 40,000 were granted in 1996 at $10.44 per 54 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- share. 18,500 shares had been issued upon exercise of the stock options cumulatively through December 31, 1998. The Company has adopted various stock option plans for key employees. These plans include a stock option plan adopted in 1996 (the "1996 Option Plan") and a stock option plan adopted in 1986 (the "1986 Option Plan"). The 1986 Option Plan, as amended, authorized the issuance of 3,340,000 shares of common stock, substantially all of which have been issued. The 1996 Option Plan, as amended, authorizes grants of options to purchase up to 6,000,000 shares of common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of the grant and expire 10 years from the date of the grant. At December 31, 1998, there were 3,798,675 additional shares available for grant under the 1996 Option Plan. The per share weighted-average fair value of stock options granted by the company during 1998, 1997 and 1996 was $5.78, $11.16 and $5.34 on the date of the grants using the Black Scholes option-pricing model with the following average assumptions: - -------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------- Expected dividend yield 2.50% 2.50% 2.50% Risk-free interest rate 5.50% 5.82% 6.06% Expected life 5.00 YEARS 5.00 Years 5.56 Years Volatility 32.87% 32.90% 34.5% - ----------------------------------------------------------------- The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no cost has been recognized for its stock options in the financial statements. Had the Company determined cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated as follows: - -------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------- Net income As reported $100,590 $92,335 $76,033 Proforma $ 97,732 $89,581 $74,769 Basic earnings per share As reported $ 1.14 $ 1.06 $ 0.94 Proforma $ 1.11 $ 1.02 $ 0.92 Diluted earnings per share As reported $ 1.12 $ 1.04 $ 0.92 Proforma $ 1.09 $ 1.00 $ 0.90 - ----------------------------------------------------------------------- Pro forma net income reflects only stock options granted since January 1, 1995. Therefore, the full impact of calculating cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because cost is reflected over the options' vesting period and cost for options granted prior to January 1, 1995 is not considered. Stock Option Activity - ---------------------------------------------------------------------- Number of Weighted Average Shares Exercise Price - ---------------------------------------------------------------------- Balance at December 31, 1996 5,252,198 $ 6.57 Granted 1,013,538 16.20 Exercised 1,374,606 4.79 Forfeited 65,856 9.50 --------- Balance at December 31, 1997 4,825,274 9.02 Granted 1,099,875 19.16 Exercised 1,188,174 6.57 Forfeited 46,470 16.57 --------- BALANCE AT DECEMBER 31, 1998 4,690,505 12.90 ========= - ---------------------------------------------------------------------- 47 55 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The range of per share prices for outstanding and exercisable stock options at December 31, 1998 was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------------------ Number Weighted Average Number Range of Outstanding Remaining Weighted Average Outstanding Weighted Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ up to $5.00 351,052 3.4 years $ 2.78 351,052 $ 2.78 $5.01 - $10.00 911,630 5.3 6.81 699,488 6.70 $10.01 - $15.00 1,422,660 7.3 11.13 1,047,660 11.00 $15.01 - $20.00 1,660,113 9.2 17.75 623,788 17.47 Over $20.00 345,050 9.5 23.20 115,000 24.35 --------- --------- 4,690,505 7.4 12.90 2,836,988 10.89 ========= ========= - ------------------------------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan covering all full-time employees with one year of service. The maximum number of shares which may be issued under the Employee Stock Purchase Plan is 1,352,000 shares. Employees have the right to authorize payroll deductions up to 10% of their salary. As of December 31, 1998, 790,289 shares had been purchased under this plan. Restricted Stock Plan. In 1990, the Company adopted a Restricted Stock Plan under which up to $10,000 of the annual fee payable to each non-employee Director of the Company and participating subsidiaries is payable solely in shares of Common Stock. Directors of the Company and certain participating subsidiaries who are not full-time employees of the Company or any of its subsidiaries are eligible to participate. Shares issued were 6,420, 3,840 and 6,360 in 1998, 1997 and 1996, respectively. 16. RETIREMENT AND OTHER BENEFIT PLANS PENSION PLAN. The Company and its subsidiaries have noncontributory defined benefit plans covering most permanent, full-time employees. Benefits are based on career average earnings and length of service. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The Company has adopted supplemental retirement plans for several key officers. These plans were designed to offset the impact of changes in the Pension Plans which reduced benefits for highly paid employees. The Company has also entered into deferred compensation agreements with certain key officers. The cost of these agreements is accrued but not funded. The Company purchased corporate-owned life insurance policies on the lives of certain retirees. The death benefits are payable to the Company and will assist in the funding of the deferred compensation liability. The Company will recover the costs of premium payments from the cash value of these policies. Post Retirement Benefits Other Than Pensions. The Company and its subsidiaries sponsor post-retirement benefit programs which provide medical coverage and life insurance benefits to employees and directors who meet minimum age and service requirements. The Company and its subsidiaries recognize costs related to post retirement benefits under the accrual method, which recognizes costs over the employee's period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty year period beginning January 1, 1993. 48 56 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following tables set forth the funded status and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1998 and 1997 for the pension plans and other post retirement benefit plans:
- -------------------------------------------------------------------------------------------------------------- Pension Plans Other Post Retirement Benefits - -------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $48,994 $ 46,526 $ 5,973 $ 6,049 Service cost 2,714 2,163 88 58 Interest cost 3,510 2,911 425 418 Assumption changes 3,654 4,591 299 247 Actuarial (gain) loss (19) (4,805) 269 599 Curtailment gain (446) -- -- -- Acquisitions -- 253 -- (876) Benefits paid (3,507) (2,645) (514) (522) ------- -------- ------- ------- Benefit obligation at end of year $54,900 $ 48,994 $ 6,540 $ 5,973 ======= ======== ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $53,533 $ 48,148 -- -- Actual return on plan assets 8,100 7,336 -- -- Employer contribution 213 694 513 522 Benefits paid (3,508) (2,645) (513) (522) ------- -------- ------- ------- Fair value of plan assets at end of year $58,338 $ 53,533 $ -- $ -- ======= ======== ======= ======= Funded status $ 3,438 $ 4,539 $(6,540) $(5,973) Unrecognized net actuarial (gain) loss (5,192) (5,247) (276) (844) Unrecognized prior service cost 1,529 1,577 1,725 1,866 Unrecognized net transition obligation (1,700) (2,013) 2,241 2,391 ------- -------- ------- ------- Prepaid (accrued) benefit cost $(1,925) $ (1,144) $(2,850) $(2,560) ======= ======== ======= ======= WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.50% 7.00% 6.50% 7.00% Expected return on plan assets 8.50% 8.50% -- -- Rate of compensation increase 4.50% 4.50% -- --
- -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 2,714 $ 2,163 $ 2,130 $ 88 $ 58 $127 Interest cost 3,510 2,911 2,981 425 418 417 Expected return on plan assets (4,418) (3,450) (4,321) -- -- -- Net amortization and deferral (366) (332) 896 290 258 263 Curtailment gain (446) -- -- -- -- -- ------- ------- ------- ---- ---- ---- Net periodic benefit cost $ 994 $ 1,292 $ 1,686 $803 $734 $807 ======= ======= ======= ==== ==== ==== - --------------------------------------------------------------------------------------------------------------------------------
49 57 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Multi-Employer Pension Plan. During 1996, CFX Corporation and certain subsidiaries terminated their defined benefit pension plans, and transferred plan assets to a multi-employer plan in amounts that would effectively settle the plans' accumulated benefit obligations as of January 1, 1996. As a result, CFX recognized settlement and curtailment gains totaling $877,000 in 1996. The multi-employer plan is a defined benefit pension plan that covered all former eligible employees of CFX Corporation, CFX Bank (excluding former employees of Community and Portsmouth) and Safety Fund National Bank. Pension and expense attributable to the plan for the years ended December 31, 1998, 1997 and 1996 was $377,000, $396,000 and $479,000, respectively. Thrift Incentive Plan. The Company has a contributory Thrift Incentive Plan covering substantially all permanent employees after completion of one year of service. The Company matches employee contributions based on a predetermined formula and may make additional discretionary contributions. The total expense for 1998, 1997 and 1996 was $2.4 million, $2.2 million, and $1.7 million, respectively. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company discloses fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company's fair values should not be compared to those of other banks. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. For certain assets and liabilities, the information required under SFAS No. 107 is supplemented with additional information relevant to an understanding of the fair value. Also, fair values are presented for certain assets that are not financial instruments under the definition in SFAS No. 107. The following describes the methods and assumptions used by the Company in estimating the fair values of financial instruments and certain non-financial instruments: CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD. For these cash and cash equivalents, which have maturities of 90 days or less, the carrying amounts reported in the balance sheet approximate fair values. SECURITIES AND LOANS HELD FOR SALE. Fair values are based on quoted bid market prices, where available. Where quoted market prices for an instrument are not available, fair values are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instrument being valued. Fair values are calculated based on the value of one unit without regard to premiums or discounts that might result from selling all of the Company's holdings of a particular security in one transaction. LOANS AND LEASES. The fair values of commercial, commercial real estate, residential real estate, and certain consumer loans and leases are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality. For certain variable-rate consumer loans, including home equity lines of credit the carrying value approximates fair value. For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows. MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage servicing rights is based on the expected present value of future mortgage servicing income, net of estimated servicing costs, considering market consensus loan prepayment predictions. DEPOSITS. The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on the deposit products of similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding ("deposit base intangibles") BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON, SUBORDINATED CAPITAL NOTES AND OTHER BORROWINGS. The fair value of the Company's long-term borrowings is estimated based on quoted market prices for the issues for which there is a market, or by discounting cash flows based on current rates available to the Company for similar types of borrowing arrangements. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value. OFF-BALANCE SHEET INSTRUMENTS: COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. In the course of originating loans and extending credit and standby letters of credit, the Company will charge fees in exchange for its lending commitment. While these commitment fees have value, the Company has not estimated their value due to the short-term nature of the underlying commitments. FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward commitments to sell loans reflects the value of 50 58 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- origination fees and excess servicing recognizable upon sale of loans net of any cost to the Company if it fails to meet its sale obligation. Of the $249.5 million of forward sales commitments at December 31, 1998, the Company had $500.1 million loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 1998 to fulfill the commitments. Consequently, the Company has no unmet sales obligation to value and due to the short-term nature of the commitments has not estimated the value of the fees and servicing. LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing arrangements with investors, the Company has recourse obligation to those serviced loan portfolios. In the event of foreclosure on a serviced loan, the Company is obligated to repay the investor to the extent of the investor's remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while the Company cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant. - -------------------------------------------------------------------------------- A summary of the fair values of the Company's significant financial instruments at December 31, 1998 and 1997 follows:
- ----------------------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair VALUE VALUE Value Value - ----------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 610,355 $ 610,355 $ 437,658 $ 437,658 Securities - available for sale 2,334,575 2,334,575 1,802,758 1,802,758 Securities - held to maturity -- -- 28,184 28,495 Loans held for sale 500,134 500,679 398,369 400,363 Loans and leases, net 6,098,487 6,161,696 6,434,238 6,494,632 Mortgage servicing rights 39,273 40,213 59,702 71,172 Liabilities: Deposit (with no stated maturity) 4,032,208 4,032,208 3,575,977 3,575,977 Time deposits 2,949,037 2,962,289 3,171,442 3,196,199 Borrowings 2,166,329 2,169,553 1,982,190 1,981,973 - -----------------------------------------------------------------------------------------------------
51 59 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 18. CONDENSED PARENT INFORMATION Condensed Financial Statements of the Parent Company - -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- Balance Sheets 1998 1997 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $ 7,605 $ 38,304 Interest bearing deposits with subsidiaries 21,857 31,227 Securities available for sale 39 55 Investment in subsidiaries 807,210 732,686 Goodwill and other intangibles 14,689 16,528 Amounts receivable from subsidiaries 13,767 6,994 Other assets 14,280 14,577 -------- -------- Total assets $879,447 $840,371 ======== ======== Liabilities and shareholders' equity: Amounts payable to subsidiaries $ 8,953 $ 25 Subordinated debentures supporting mandatory redeemable trust securities 105,705 107,446 Other liabilities 2,865 12,117 Shareholders' equity 761,924 720,783 -------- -------- Total liabilities and shareholders' equity $879,447 $840,371 ======== ======== - --------------------------------------------------------------------------------
Year Ended December 31, - ------------------------------------------------------------------------------------------------ Statements of Income 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Operating income: Dividends from subsidiaries $ 65,230 $62,296 $84,873 Other operating income 2,324 4,336 1,885 -------- ------- ------- Total operating income 67,554 66,632 86,758 Operating expenses: Interest on borrowings 9,375 9,070 609 Amortization of intangibles 1,838 1,864 1,864 Merger expenses 19,006 354 37 Other operating expenses 6,947 7,432 3,504 -------- ------- ------- Total operating expenses 37,166 18,720 6,014 Income before income taxes and equity in undistributed net income of subsidiaries 30,388 47,912 80,744 Income tax expense (benefit) (9,894) (3,097) 85 -------- ------- ------- Income before equity in undistributed net income of subsidiaries 40,282 51,009 80,659 Equity in undistributed net income of subsidiaries (1) 60,308 41,326 (4,626) -------- ------- ------- Net income $100,590 $92,335 $76,033 ======== ======= ======= - ------------------------------------------------------------------------------------------------
(1) Amounts in parenthesis represent the excess of dividends over net income from subsidiaries. 52 60 Peoples Heritage Financial Group, Inc. and Subsidiaries - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------- Statements of Cash Flows 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $100,590 $ 92,335 $ 76,033 Adjustments to reconcile net income to net cash (used) provided by operating activities: Undistributed net income from subsidiaries (60,308) (41,326) 4,626 Amortization of goodwill and other intangibles 1,839 1,864 1,864 Securities losses (gains) (23) (113) (1) (Increase) decrease in amounts receivable from subsidiaries (6,773) (7,330) (3,273) Decrease (increase) in other assets 297 (3,822) (2,701) Increase (decrease) in amounts payable to subsidiaries 8,928 (163) 56 Increase (decrease) in other liabilities (9,252) 6,617 (3,309) Other, net 37 (3,309) (2,080) -------- -------- -------- Net cash provided by operating activities $ 35,335 $ 59,413 $ 77,761 -------- -------- -------- Cash flows from investing activities: Net decrease (increase) in interest bearing deposits with bank subsidiaries $ 9,370 $ (9,818) $ 223 Sales of available for sale securities 16 185 1,047 Purchase of available for sale securities -- (7) -- Sales of held to maturity securities -- 4,337 16,857 Purchase of held to maturity securities -- (4,017) (16,601) Capital contribution to subsidiary (12,000) (55,000) (13,200) -------- -------- -------- Net cash (used) provided by investing activities $ (2,614) $(64,320) $(11,674) -------- -------- -------- Cash flows from financing activities: Issuance of notes payable (net) -- 103,093 -- Payment of notes payable (1,741) (2,177) (1,306) Other shareholders' equity, net -- 1,687 (226) Dividends paid to shareholders (37,857) (40,285) (29,350) Treasury stock acquired (38,003) (35,917) (61,370) Treasury stock sold 14,181 12,609 5,355 -------- -------- -------- Net cash provided (used) by financing activities $(63,420) $ 39,010 $(86,897) -------- -------- -------- Net increase (decrease) in cash due from banks $(30,699) $ 34,103 $(20,810) Cash and due from banks at beginning of year 38,304 4,201 25,011 -------- -------- -------- Cash and due from banks at end of year $ 7,605 $ 38,304 $ 4,201 ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure information: Interest paid on borrowings $ 9,060 $ 5,156 $ 609 - ----------------------------------------------------------------------------------------------------------------------------
53 61 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 19. SUBSEQUENT EVENT (UNAUDITED) As discussed in Note 2, the Company acquired SIS Bancorp on January 1, 1999 in a transaction accounted for under the pooling-of-interest method. The following unaudited pro forma data summarizes the combined results of operations of the Company and SIS as if the combination had been consummated on December 31, 1998. - -------------------------------------------------------------------------------- Year ended December 31, - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Net interest income $427,257 $404,565 $331,979 ======== ======== ======== Net income $112,824 $103,672 $ 87,341 ======== ======== ======== Diluted earnings per share $ 1.07 $ 0.99 $ 0.89 ======== ======== ======== Excluding special charges: Net income $141,768 $119,219 $ 95,094 ======== ======== ======== Diluted earnings per share $ 1.34 $ 1.14 $ 0.97 ======== ======== ======== - -------------------------------------------------------------------------------- This unaudited proforma information may not be indicative of the results that would actually have occurred if the merger had been in effect on the date indicated or which may be obtained in the future. The proforma information does not give effect to merger related charges or anticipated cost savings in connection with the merger. 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------------- Interest income $177,650 $177,657 $177,723 $179,927 $177,504 $163,402 $153,889 $146,956 Interest expense 86,199 86,336 86,887 88,106 85,893 76,067 69,460 65,855 Provision for loan and lease losses 3,721 3,721 2,983 2,998 1,163 1,423 1,020 942 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan and lease losses 87,730 87,600 87,853 88,823 90,448 85,912 83,409 80,159 Noninterest income 27,279 25,677 26,934 24,905 26,179 20,493 17,931 18,065 Special charges -- -- 34,474 900 7,560 11,031 -- -- Noninterest expenses 67,447 66,534 68,208 72,356 72,714 66,093 62,674 60,672 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes 47,562 46,743 12,105 40,472 36,353 29,281 38,666 37,552 Income tax expense 14,968 14,097 3,795 13,432 12,412 10,848 13,214 13,043 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 32,594 $ 32,646 $ 8,310 $ 27,040 $ 23,941 $ 18,433 $ 25,452 $ 24,509 ======== ======== ======== ======== ======== ======== ======== ======== Earnings per share Basic $ 0.37 $ 0.37 $ 0.09 $ 0.31 $ 0.27 $ 0.22 $ 0.29 $ 0.28 Diluted 0.37 0.37 0.09 0.30 0.27 0.21 0.29 0.27 Operating earnings per share (1): Basic $ 0.37 $ 0.37 $ 0.37 $ 0.31 $ 0.33 $ 0.29 $ 0.29 $ 0.28 Diluted 0.37 0.37 0.36 0.31 0.32 0.29 0.29 0.27 - ---------------------------------------------------------------------------------------------------------------------------------
(1) Earnings before special charges. 54 62 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT The Board of Directors Peoples Heritage Financial Group, Inc.: We have audited the accompanying consolidated balance sheets of Peoples Heritage Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Heritage Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Boston, Massachusetts January 19, 1999 55 63 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES 56 64 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CORPORATE DIRECTORY - -------------------------------------------------------------------------------- PEOPLES HERITAGE FINANCIAL GROUP, INC. BOARD OF DIRECTORS [PICTURE OF HERITAGE FINANCIAL GROUP] WILLIAM J. RYAN (1),(4),(6) Chairman of the Board President & Chief Executive Officer Chairman, Governance & Nominating Committee Peoples Heritage Financial Group, Inc. President & Chief Executive Officer Peoples Heritage Bank ROBERT A. MARDEN (1),(4) Vice Chairman of the Board Chairman, Executive/ ALCO Committee Attorney-at-Law Marden, Dubord, Bernier & Stevens PAMELA P. PLUMB (1),(3),(4) Vice Chairman of the Board Pamela Plumb & Associates Former President - National League of Cities ROBERT P. BAHRE (1) President & Chief Executive Officer New Hampshire International Speedway P. KEVIN CONDRON (1) President & CEO The Granite Group EVERETT W. GRAY (2),(3),(5) Retired Attorney Real Estate Investor ANDREW W. GREENE (1),(3),(5) Chief Executive Officer Legacy Co. Services, Inc. KATHERINE M. GREENLEAF (1),(4) Chairman, Human Resources Committee Principal, Katherine M. Greenleaf Consulting DOUGLAS S. HATFIELD, JR. (3) Attorney Hatfield, Moran & Barry, PA DAVID D. HINDLE (6) Retired President & Chief Executive Officer Family Bank PHILIP A. MASON (2),(4) Attorney Mason & Martin, LLP JOHN M. NAUGHTON Retired Executive Massmututal Life Insurance Co. SETH A. RESNICOFF, MD (5) Surgeon MALCOLM W. PHILBROOK, JR. (1),(2),(5),(6) Chairman, Audit Committee Attorney & President Crockett, Philbrook & Crouch, P.A. CURTIS M. SCRIBNER (1),(2),(4),(5),(6) Chairman, Asset Review President C. M. Scribner & Company DANA S. LEVENSON (1),(3),(5) President Quatro Realty Corp. Partner Levenson Business Group PAUL R. SHEA (3),(6) Retired President & CEO Bank of New Hampshire Corp. JOHN E. VEASEY (2) President Cedardale, Inc. (1) Executive/ALCO Committee (2) Audit Committee (3) Human Resources Committee (4) Governance & Nominating Committee (5) Asset Review Committee (4) Liquidity & Funds Management Committee - -------------------------------------------------------------------------------- PEOPLES HERITAGE BANK BOARD OF DIRECTORS [PEOPLES HERITAGE LOGO] [PICTURE OF BOARD OF DIRECTORS] ROBERT A. MARDEN (1),(3),(6) Chairman of the Board Attorney-at-Law Marden, Dubord, Bernier & Stevens WILLIAM J. RYAN (1),(3),(4) Chairman, President & Chief Executive Officer Peoples Heritage Financial Group, Inc. President & Chief Executive Officer Peoples Heritage Bank WILLARD B. ARNOLD III (1),(3),(4) Chairman, Nominating Committee Retired Sales Executive EARL B. AUSTIN, JR. (1),(2),(4) Accountant Earl B. Austin, JL & Assoc., P.A. MEG BAXTER (2),(4) President United Way of Greater Portland CHARLES BELLEGARDE, JR. (2),(4),(6) Consultant & President Charles Bellegarde & Son, Inc. CYNTHIA FOSS BOWMAN, M.D. Medical Director, Clinical Lab Maine General Medical Center SCOTT B. BULLOCK President & Chief Executive Officer Maine General Medical Center PETER B. CHAPMAN (2),(3),(5),(6) President & Chief Executive Officer Paris Farmers Union EVERETT W. GRAY (1),(2),(3),(6) Retired Attorney Real Estate Investor GUY A. HARTNETT (1),(3),(5) President, Treasurer, Owner One-Right Systems, Inc. President Lydimap Corp. GALEN N. HOGAN (2),(4) President, Treasurer, Chief Executive Officer Hogan Tire Co. DAVID M. MACMAHON (2),(6) President Gates Formed-Fibre Products, Inc. MALCOLM W. PHILBROOK, JR. (1),(3),(4),(6) Vice Chairman of the Board Chairman, Executive Committee Chairman, Liquidity & Funds Management Committee Chairman, Trust Committee Attorney & President Crockett, Philbrook & Crouch P.A. CURTIS M. SCRIBNER (1),(4) Chairman Asset Review Committee Principal C.M. Scribner & Company SHELTON S. WHITE, JR. (4) Retired President H.E. Callahan Construction Co. (1) Executive Committee (2) Audit Committee (3) Nominating Committee (4) Liquidity & Funds Management Committee (5) Asset Review Committee (6) Trust Committee 57 65 - -------------------------------------------------------------------------------- PEOPLES HERITAGE FINANCIAL GROUP, INC. SENIOR MANAGEMENT WILLIAM J. RYAN Chairman, President & Chief Executive Officer PETER J. VERRILL, CPA Executive Vice President & Chief Operating Officer & Chief Financial Officer F. WILLIAM MARSHALL, JR. Vice Chairman R. SCOTT BACON Executive Vice President Bank of New Hampshire CHRISTOPHER W. BRAMLEY Executive Vice President Family/SISBank JOHN W. FRIDLINGTON Executive Vice President Commercial Lending THOMAS P. HOGAN Executive Vice President Consumer Lending CAROL L. MITCHELL, ESQ. Executive Vice President General Counsel, Clerk & Secretary WENDY P. SUEHRSTEDT Executive Vice President Retail Delivery HALL THOMPSON Executive Vice President Investments BETH WARN Executive Vice President Retail Mortgage Lending TOBY COOK President People Heritage Leasing BRIAN ARSENAULT Senior Vice President Corporate Communications and Investor Relations GEORGE BACIGALUPO Senior Vice President Asset Based Lending JULIE BENAVIDES Senior Vice President Loan Review ROBERT CALDWELL Senior Vice President Chief Information Officer MAURICE GALLANT Senior Vice President Audit CYNTHIA HAMILTON Senior Vice President Director, Human Resources JOSEPH W. HANSON Senior Vice President Operations Division Manager MARK LAWLER Senior Vice President Commercial Workout JOHN OPPERMAN Senior Vice President Legal Affairs RICHARD TARDIF Senior Vice President Director, General Services BRIAN WOOD Senior Vice President Marketing Director - -------------------------------------------------------------------------------- PEOPLES HERITAGE BANK SENIOR MANAGEMENT WILLIAM J. RYAN President & Chief Executive Officer CAROL L. MITCHELL, ESQ. Executive Vice President & General Counsel Legal Affairs, Human Resources, Facilities THOMAS P. HOGAN Executive Vice President Consumer Lending GARY L. ROBINSON Executive Vice President Trust and Investment Group MARY A. SCHNOBRICH Executive Vice President Retail Banking HALL THOMPSON Executive Vice President Investments RICHARD S. VAIL Executive Vice President Commercial Lending ANNE T. DUNNE President Heritage Investment Planning Services NORMAND J. ALBERT Senior Vice President Commercial Lending LEIGH A. BAGLEY Senior Vice President Marketing STEPHEN J. BOYLE Senior Vice President Chief Financial Officer MAURICE C. GALLANT, JR. Senior Vice President Audit CYNTHIA H. HAMILTON Senior Vice President Human Resources ROGER C. LEVESQUE Senior Vice President Commercial Lending THEODORE N. SCONTRAS Senior Vice President Public Finance MICHAEL P. STONE Senior Vice President and Private Banking Manager Private Banking - -------------------------------------------------------------------------------- OXFORD BANK & TRUST A DIVISION OF PEOPLES HERITAGE BANK SENIOR MANAGEMENT EDWARD L. DILWORTH, JR. Division President NEIL R. ELDER Senior Vice President 58 66 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PEOPLES HERITAGE BANKING CENTERS ASHLAND 10 Main Street AUBURN 223 Center Street Great Falls Plaza 600 Center Street (Supermarket) AUGUSTA 101 Western Ave BANGOR 1067 Union Street 74 Hammond Street 353 Main Street (Supermarket) 46 Springer Drive (Supermarket) BIDDEFORD 299 Elm Street 510 Alfred Street (Supermarket) BREWER 508 Wilson Street BRIDGTON 84 Main Street BRUNSWICK 35 Elm Street (Supermarket) Merrymeeting Plaza (Supermarket) CAMDEN 89 Elm Street CARIBOU Downtown Mall EAGLE LAKE Church Street EASTON Main Street ELLSWORTH 204 Main Street FAIRFIELD 112 Main Street FALMOUTH 200 U.S. Route #1 FARMINGTON 60 Main Street Mt Blue Shopping Center (Drive up) Shop 'N Save Plaza (Supermarket) FORT FAIRFIELD 206 Main Street FORT KENT 4 Pleasant Street GRAY Gray Plaza, Rt. # 26 HOULTON 6 North Street KENNEBUNK 56 Portland Road KITTERY 30 State Road LEWISTON 217 Main Street 664 Main Street 790 Lisbon Street LIMESTONE 222 Main Street LINCOLN Lincoln Plaza LISBON FALLS 38 Main Street MARS HILL 37 Main Street NEWPORT 99 Main Street NORTH WINDHAM 756 Roosevelt Trail 770 Roosevelt Trail (Supermarket) OAKLAND 27 Main Street PITTSFIELD 60 Main Street PORTLAND One Portland Square 481 Congress Street Westgate Shopping Center 449 Forest Avenue 883 Forest Avenue Northgate Shopping Center PRESQUE ISLE 551 Main Street ROCKLAND 34 School Street SACO Saco Valley Shopping Center (Supermarket) 180 Main Street SANFORD Lower Main Street 273 Main Street SCARBOROUGH 4 Shop 'N Save Drive 417 Payne Road (Supermarket) SEARSPORT Main Street SOUTH PORTLAND Millcreek Shopping Center (Supermarket) 9 Market Street 250 Maine Mall Road STANDISH 111 Ossipee Trail (Supermarket) THOMASTON 115 Main Street VAN BUREN 29 Main Street WASHBURN 12 Main Street WATERVILLE 182 Main Street Shaw's Plaza (Supermarket) WELLS 107 Wells Plaza (Supermarket) WESTBROOK 835 Main Street YARMOUTH Shop 'N Save Plaza, U.S. Route #1 YORK 127 Long Sands Road - ---------------------------- OXFORD BANK & TRUST BANKING CENTERS CASCO Leach Hill Road MECHANIC FALLS 80 Lewiston Street OXFORD 1586 Main Street SOUTH PARIS 45 Main Street WEST PARIS 233 Main Street 59 67 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BANK OF NEW HAMPSHIRE BOARD OF DIRECTORS [BANK OF NEW HAMPSHIRE LOGO] [PICTURE OF NEW HAMPSHIRE BOARD OF DIRECTORS] DAVIS P. THURBER Chairman of the Board EUGENE E. GAFFEY Vice Chairman of the Board Retired Justice Hinsdale Municipal Court R. SCOTT BACON President & Chief Executive Officer JOHN N. BUXTON Chief Financial Officer St. Paul's School ARTHUR E. COMOLLI, DMD General Dentistry (Retired) RAYMOND G. COTE President (Retired) Harvey Construction Co., Inc. JOSEPH A. DESMOND Chairman & Chief Executive Officer The Concord Group Insurance Companies RALPH GABARRO Chief Executive Officer Mayo-Regional Hospital, Quorum Health Resources, Inc. PETER J. GRIFFIN Director Great Bay Marine, Inc. ELIZABETH S. HAGER Executive Director United Way of Merrimack DONALD G. HAYES President Ricci Supply Company, Inc. ROBERT A. HILL President (Retired) Capitol Plumbing & Heating Supply Co., Inc. DIANA JURIS Vice President and Chief Operating Officer Nashua Motor Express LUCIA P. KITTREDGE President Kapala Kittredge Associates DANA S. LEVENSON President Quatro Realty Corp. Partner Levenson Business Group JOHN E. MENARIO Assistant to the President Peoples Heritage Financial Group, Inc. JOHN M. PARSONS Treasurer MH Parsons & Son Lumber Co. WALTER R. PETERSON Former Governor State of New Hampshire Emeritus President Franklin Pierce College PETER PRUDDEN, JR. Senior Account Executive Moore Business Forms, Inc. PAUL R. SHEA Retired President & Chief Executive Officer Bank of New Hampshire L. WILLIAM SLANETZ President (Retired) Perkins Lumber Co., Inc. GERRY S. WEIDEMA Partner Weidema & Lavin, CPAs - -------------------------------------------------------------------------------- BANK OF NEW HAMPSHIRE SENIOR OFFICERS R. SCOTT BACON President & CEO HAROLD R. ACRES Senior Executive Vice President Chief Lending Officer MARK A. COLLINS Executive Vice President Retail Banking & Small Business ROBERT B. ESAU Executive Vice President Trust Services DONNA F. CLARICO Senior Vice President Financial Services MAUREEN F. DONOVAN Senior Vice President Human Resources PAUL E. DUFFY Senior Vice President Commercial Lending CORNELIUS J. JOYCE Senior Vice President Retail Lending DAVID H. MCARDLE Senior Vice President Loan Administration LEE K. ROBATOR Senior Vice President Commercial Lending STEVEN C. WEBB Senior Vice President Commercial Lending 60 68 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- BANK OF NEW HAMPSHIRE LOCATIONS ALLENSTOWN Routes 3 & 28 AMHERST Route 101A BARRINGTON Route 125 & Province Road BEDFORD 184 Route 101 141 South River Road BRISTOL Central Square BROOKLINE Route 13, Gazebo Square CONCORD 216 Loudon Road 143 North Main Street 43 North Main Street 277 Sheep Davis Drive CONTOOCOOK 884 Main Street CONWAY 51 White Mountain Highway DOVER 353 Central Avenue Shaw's Plaza, 845 Central Avenue EPSOM Epsom Circle FRANKLIN 952 Central Street (Supermarket) GILFORD 1458 Lakeshore Drive (Supermarket) GLEN Junction Routes 16 & 302 GOFFSTOWN 3 Elm Street GREENLAND 95 Ocean Road GREENVILLE 67 Main Street HAMPTON 40 High Street HENNIKER 60 Maple Street HILLSBOROUGH School Street HINSDALE Route 119 HOOKSETT 1323 Hooksett Road HUDSON 80 Derry Road JAFFREY 28 Main Street KEENE 100 Main Street 194 West Street 828 Court Street LACONIA 277 Union Avenue LITTLETON 76 Main Street LOUDON Route 106 MANCHESTER 70 Bay Street 300 Franklin Street 2 South Beech Street 293 South Main Street 1255 South Willow MARLBOROUGH Route 101 MERRIMACK 300 Daniel Webster Highway 32 Daniel Webster Highway MILFORD 57 South Street MOUNT VERNON 10 North Main Street NASHUA 191 Main Street 300 Main Street 4 Northwest Boulevard 225 Daniel Webster Highway Nashua Mall NEW BOSTON Route 13 Central Square NEW ISPWICH 564 Turnpike Road NEWINGTON 2033 Woodbury Avenue NEWMARKET 72 Exeter Street NORTH CONWAY 2561 Main Street Mountain Valley Mall NORTH HAMPTON 46 Lafayette Road NORTH SWANZEY 37 Monadnock Highway NORTHWOOD Route 4 PETERBOROUGH 120 Grove Street PLYMOUTH Tenney Mt. Highway (Supermarket) PORTSMOUTH 1500 Lafayette Road 333 State Street Pease Tradeport RINDGE Route 202 ROCHESTER 1 Merchants Plaza RYE 500 Washington Road STRATHAM 28 Portsmouth Avenue SUNCOOK 50 Glass Street TILTON 10 Sherwood Drive TROY Central Square WALPOLE 8 North Meadow Plaza WEARE 1361 South Stark Highway WEST CHESTERFIELD Route 9 WEST OSSIPEE Junction Routes 16 & 25 WILTON/LYNEBOROUGH 905 Elm Street WINCHESTER Warwick Road 61 69 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FAMILY BANK / SIS BANK BOARD OF DIRECTORS [FAMILY BANK LOGO] [PICTURE OF FAMILY BANK BOARD OF DIRECTORS] F.WILLIAM MARSHALL, JR. Chairman of the Board, Family Bank, FSB Vice Chairman, Peoples Heritage Financial Group, Inc. DAVID D. HINDLE Vice Chairman of the Board, Family Bank, FSB and Director, Peoples Heritage Financial Group, Inc. CHRISTOPHER W. BRAMLEY President and Chief Executive Officer TERESITA ALICEA, ESQ. Senior Partner Alicea and Nagel MARY E. BOLAND, ESQ. Senior Partner Egan, Flanagan & Cohen, P.C. NELSON D. BLINN, CPA Principal Blinn & Farrell, CPAs P. KEVIN CONDRON President The Granite Group WILLIAM B. HART, JR. President Dunfey Group THOMAS O'BRIEN Dean, Eugene M. Isenberg School of Management, University of Massachusetts KENNETH L. PAUL Vice President Process Engineering, Inc. GARY P. SHANNON, ESQ. Senior Partner Doherty, Wallace, Pillsbury & Murphy, P.C. STEPHEN A. SHATZ, ESQ. President Shatz, Schwartz & Fentin, P.C. NICOLA S. TSONGAS Director of External Affairs and College Advancement Middlesex Community College JOHN E. VEASEY President Cedardale, Inc. - -------------------------------------------------------------------------------- FAMILY BANK / SIS BANK SENIOR OFFICERS CHRISTOPHER W. BRAMLEY President and Chief Executive Officer FRANK W. BARRETT Commercial Division Executive Vice President JAMES W. GRIBBONS, SR. Trust Division Executive Vice President RONALD G. TROMBLEY Retail Division Executive Vice President - -------------------------------------------------------------------------------- - ------------------------ MASSACHUSETTS BRANCH OFFICES HAVERHILL Main Office, 153 Merrimack Street 102 Plaistow Road, Route 125 ANDOVER 77 Main Street ATHOL 2156 Main Street BOXFORD 7 Elm Street BRADFORD 860 South Main Street CHELMSFORD 41 Drum Hill Road 66-2 Drum Hill Road (Supermarket) DRACUT 1255 Bridge Street FITCHBURG 470 Main Street 367 Summer Street GARDNER 90 Pearson Blvd. GEORGETOWN 62 Central Street GROVELAND 280 Main Street LEOMINISTER 721 Central Street 25 Water Tower Plaza (Supermarket) LOWELL 45 Central Street, 33 Mammouth Road 350 Westford Street LUNENBURG Lunenburg Crossing 333 Mass. Avenue (Supermarket) MIDDLETON 230 South Main Street, Route 114 ORANGE 30 East Main Street TOPSFIELD 16 Main Street TYNGSBORO One Pondview Place, Middlesex Road WESTBOROUGH 21 East Main Street WEST PEABODY 636 Lowell Street (Supermarket) WORCESTER 200 Commercial Street 430 West Boylston Street 137 Shewsbury Street 50 South West Commons, Rte. 20 (Supermarket) 62 70 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- FAMILY BANK LOCATIONS (CONTINUED) - --------------------- NEW HAMPSHIRE BRANCH OFFICES HAMPSTEAD 10 Main Street, Route 121 KINGSTON Carriage Town Plaza 53 Church Street PLAISTOW 47 Plaistow Road, Route 125 SEABROOK 270 Lafayette Road, Route 1 - --------------------- SIS BRANCH OFFICES AGAWAM 40 Springfield Street AMHERST 11 Amity Street CHICOPEE 693 Memorial Drive 153 Meadow Street EAST LONGMEADOW 465 North Main Street EAST SPRINGFIELD 1360 Carew Street HOLYOKE 50 Holyoke Street LONGMEADOW 847 Williams Street LUDLOW 52 East Street 549 Center Street NORTHAMPTON 175 Main Street SPRINGFIELD 412 Boston Road 619 Chestnut Street 441 Cooley Street 1800 Boston Street 561 Sumner Avenue 1441 Main Street 958 State Street 300 Cooley Street 807 Wilbraham SOUTH HADLEY 501 Newton WEST SPRINGFIELD 969 Riverdale Street 1425 Westfield Street WESTFIELD 60 Main Street 303 East Main Street - -------------------------------------------------------------------------------- GLASTONBURY BANK & TRUST COMPANY BOARD OF DIRECTORS [GLASTONBURY BANK LOGO] [PICTURE OF GLASTONBURY BOARD OF DIRECTORS] RONALD E. BOURBEAU Chairman of the Board REB Realty J. GILBERT SOUCIE President Glastonbury Bank & Trust LOREN J. ANDREO Andy's Foodtown CAMILLE S. BUSHNELL The Prudential CT Realty JOHN J. CARSON University of Hartford HARVEY A. KATZ Kane, Hartley & Katz, P.C. F. WILLIAM MARSHALL, JR. Chairman of the Board Family Bank, FSB GRACE C. NOME Connecticut Foods MARK A. SHEPTOFF Sheptoff & Reuber Co., P.C. JAMES UCCELLO First Realty of Glastonbury - -------------------------------------------------------------------------------- GLASTONBURY BANK & TRUST COMPANY LOCATIONS COLCHESTER 64 Norwich Avenue EAST HARTFORD 29 Main Street GLASTONBURY (Headquarters) 2461 Main Street 730 Hebron Avenue PORTLAND 255 Main Street ROCKY HILL 38 Town Line Road SOUTH GLASTONBURY 902 Main Street WETHERSFIELD 171 Silas Deane Highway 63 71 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- ANNUAL MEETING The 1999 Annual Meeting of the Shareholders of Peoples Heritage Financial Group, Inc. will be held at 10:30 a.m. on Tuesday, April 27, 1999 at the Portland Marriott at Sable Oaks, 200 Sable Oaks Drive, South Portland, Maine. CORPORATE HEADQUARTERS One Portland Square Portland, Maine Mailing Address: P.O. Box 9540 Portland, ME 04112-9540 Contact: Brian S. Arsenault, Senior Vice President, Corporate Communications 207-761-8517 1-800-462-3666 Outside Maine 1-800-462-6606 Outside Greater Portland or Peter J. Verrill Chief Operating Officer and Chief Financial Officer 207-761-8507 WEB SITE www.phbk.com STOCK LISTING Peoples Heritage Financial Group, Inc. is traded over the counter on the NASDAQ National Market System under the symbol: PHBK. FORM 10-K AND OTHER REPORTS Peoples Heritage will send a copy of its 1998 Annual Report and Form 10-K to shareholders upon request. Requests should be addressed to Investor Relations at the Corporate Headquarters. TRANSFER AGENT Shareholder inquiries regarding change of address or title should be directed to : American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005 Phone: 718-921-8206 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS KPMG Peat Marwick LLP 99 High Street Boston, MA 02110 RESEARCH COVERAGE Recent research coverage on Peoples Heritage Financial Group, Inc. is available from: BT Alex.Brown Inc., First Albany Corp., Fox-Pitt, Kelton, Inc., Friedman Billings Ramsey & Co., Johnston, Lemon & Co., Keefe, Bruyette & Woods, Inc., Legg Mason Wood Walker, Inc., Lehman Brothers, Inc., Maine Securities Corp., Merrill Lynch, Pierce, Fenner & Smith, Parker/Hunter Incorporated, Southeast Research Partners, Inc., Tucker Anthony, Inc., MARKET MAKERS The following companies have generally been market makers for Peoples Heritage Financial Group, Inc. Common Stock as of December 31, 1998: Adams, Harkness & Hill, Inc. Advest, Inc. Arthur W. Wood Company Bear, Stearns & Co., Inc. BT Alex.Brown Inc. Cantor Fitzgerald & Co. Carl P. Sherr & Co. Capital Resources, Inc. CIBC Oppenheimer & Co., Inc. Everen Securities, Inc. First Albany Corporation Fox-Pitt Kelton, Inc. Friedman Billings Ramsey & Co. Herzog, Heine, Geduld, Inc. Jeffries & Company, Inc. Johnston Lemon & Co., Inc. Keefe, Bruyette & Woods, Inc. Knight Securities L.P. Legg Mason Wood Walker, Inc. Lehman Brothers Inc. Mayer & Schweitzer, Inc. MacAllister Pitfield MacKay Merrill Lynch, Pierce, Fenner & Smith Moors & Cabot, Inc. PaineWebber, Inc. Ryan Beck & Co., Inc. Salomon Securities Corp. Sherwood Securities Corp. Troster Singer Corp. Tucker Anthony Incorporated Weeden and Co., Inc. - -------------------------------------------------------------------------------- COMMON STOCK PRICES Market prices for Peoples Heritage Financial Group, Inc.'s common stock and dividends per quarter during 1998 and 1997 are as follows: - -------------------------------------------------------------------------------- DIVIDENDS DECLARED MARKET PRICES 1998 QUARTERS PER SHARE HIGH LOW - ------------------------------------------------------------- First $.11 $24.66 $18.69 Second .11 26.75 21.56 Third .11 26.25 15.69 Fourth .11 21.25 12.81 - ------------------------------------------------------------- 1997 Quarters - ------------------------------------------------------------- First $ .09 $16.25 $12.94 Second .09 19.00 13.00 Third .095 21.56 18.00 Fourth .105 23.81 18.94 - ------------------------------------------------------------- As of December 31, 1998, the Company had approximately 11,418 shareholders of record and 87,545,968 shares outstanding. These numbers do not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms and others. 64 72 PEOPLES HERITAGE FINANCIAL GROUP, INC. ONE PORTLAND SQUARE POST OFFICE BOX 9540 PORTLAND, MAINE 04112-9540 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Information relating to certain of the subsidiaries of Peoples Heritage Financial Group, Inc. as of December 31, 1998 is set forth below. All of the indicated subsidiaries are directly or indirectly wholly-owned by Peoples Heritage Financial Group, Inc. Direct Subsidiaries: JURISDICTION OF INCORPORATION NAME Peoples Heritage Bank Maine Bank of New Hampshire Corporation New Hampshire Peoples Heritage Merger Corp. Maine Peoples Heritage Capital Trust I Delaware Indirect Subsidiaries: JURISDICTION OF INCORPORATION NAME Bank of New Hampshire(1) New Hampshire Family Bank, FSB(2) United States Heritage Investment Planning Group, Inc. (3) Maine Peoples Heritage Leasing Corp. (3) Maine MPN Holdings (holding company for Maine insurance brokerage subsidiaries) (3) - -------------------------- (1) Subsidiary of Bank of New Hampshire Corporation. (2) Subsidiary of Peoples Heritage Merger Corp. (3) Subsidiary of Peoples Heritage Bank. EX-23 5 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Peoples Heritage Financial Group, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (Nos. 33- 22205, 33-22206, 33-80310, 333-17467, 333-46367, 333-49999, 333-70095 and 333-72909), on Form S-3 (Nos. 333-34931, 333-64845 and 333-67961) and on Form S-4 (No. 333-61757) of Peoples Heritage Financial Group, Inc. of our report, dated January 19, 1999, incorporated by reference in the December 31, 1998 Annual Report on Form 10-K of Peoples Heritage Financial Group, Inc. /s/ KPMG Peat Marwick LLP Boston, Massachusetts March 24, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1998 DEC-31-1998 360,271 115,520 134,564 0 2,334,575 0 0 6,186,392 87,905 10,102,459 6,981,245 2,166,329 92,961 0 100,000 0 904 761,020 10,102,459 597,975 114,981 0 712,956 241,007 106,520 347,527 13,423 5,817 309,919 146,882 146,882 0 0 100,590 1.14 1.12 4.11 52,939 21,574 65 0 89,983 24,552 9,051 87,905 87,905 0 0
-----END PRIVACY-ENHANCED MESSAGE-----