-----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, LRl7zRMg1xVwOAyadtrsT/UQ+ltZFuzMwnEb2Yu4rZigtS3nTYwqPEzEhPhve61V 6PzVW5Vkf3JZHwMFt+97iQ== 0000950135-00-001842.txt : 20000331 0000950135-00-001842.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950135-00-001842 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 586730 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 10-K405 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, 1999 [ ] 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 20, 2000, the aggregate market value of the 100,274,508 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the 1,059,106 shares held by all directors and executive officers of the Registrant as a group (excluding the effects of unexercised stock options), was $1.39 billion. This figure is based on the last sale price of $13.875 per share of the Registrant's Common Stock on March 20, 2000, as reported in THE WALL STREET JOURNAL on March 21, 2000. 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 20, 2000: 101,333,614 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, 1999 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 25, 2000 are incorporated by reference into Part III, Items 10-13 of this Form 10-K. =========================== 2 PEOPLES HERITAGE FINANCIAL GROUP, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I PAGE ---- Item 1. BUSINESS......................................................... 1 General.......................................................... 1 Business of the Company.......................................... 1 Acquisitions..................................................... 2 Subsidiaries..................................................... 3 Competition...................................................... 4 Employees........................................................ 4 Regulation of the Company........................................ 4 Regulation of Banking Subsidiaries............................... 8 Taxation......................................................... 11 Item 2. PROPERTIES....................................................... 11 Item 3. LEGAL PROCEEDINGS................................................ 12 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 12 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................... 12 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 12 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 12 Item 8. FINANCIAL STATEMENTS............................................. 12 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 12 (i) 3 PEOPLES HERITAGE FINANCIAL GROUP, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS (CONTINUED) PART III PAGE ---- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT................... 13 Item 11. EXECUTIVE COMPENSATION........................................... 13 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 13 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 13 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................................ 13 SIGNATURES....................................................... 19 (ii) 4 FORWARD-LOOKING STATEMENTS IN THE NORMAL COURSE OF BUSINESS, THE COMPANY, IN AN EFFORT TO HELP KEEP ITS SHAREHOLDERS AND THE PUBLIC INFORMED ABOUT THE COMPANY'S OPERATIONS, MAY FROM TIME TO TIME ISSUE OR MAKE CERTAIN STATEMENTS, EITHER IN WRITING OR ORALLY, THAT ARE OR CONTAIN FORWARD-LOOKING STATEMENTS, AS THAT TERM IS DEFINED IN THE U.S. FEDERAL SECURITIES LAWS. GENERALLY, THESE STATEMENTS RELATE TO BUSINESS PLANS OR STRATEGIES, PROJECTED OR ANTICIPATED BENEFITS FROM ACQUISITIONS MADE BY OR TO BE MADE BY THE COMPANY, PROJECTIONS INVOLVING ANTICIPATED REVENUES, EARNINGS, PROFITABILITY OR OTHER ASPECTS OF OPERATING RESULTS OR OTHER FUTURE DEVELOPMENTS IN THE AFFAIRS OF THE COMPANY OR THE INDUSTRY IN WHICH IT CONDUCTS BUSINESS. THESE 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 "ANTICIPATE," "BELIEVE," "COMMITMENT," "CONSIDER," "CONTINUE," "COULD," "ENCOURAGE," "ESTIMATE," "EXPECT," "INTEND," "IN THE EVENT OF," "MAY," "PLAN," "PRESENT," "PROPOSE," "PROSPECT," "UPDATE," "WHETHER," "WILL," "WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY BELIEVES THAT THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE THAT THOSE RESULTS OR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS DUE TO RISKS, UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING: - COMPETITIVE PRESSURE AMONG DEPOSITORY AND OTHER FINANCIAL INSTITUTIONS MAY INCREASE SIGNIFICANTLY; - CHANGES IN THE INTEREST RATE ENVIRONMENT MAY REDUCE INTEREST MARGINS AND NET INTEREST INCOME, AS WELL AS ADVERSELY AFFECT LOAN ORIGINATIONS AND SALES ACTIVITIES AND THE VALUE OF CERTAIN ASSETS, SUCH AS INVESTMENT SECURITIES AND MORTGAGE SERVICING RIGHTS; - GENERAL ECONOMIC OR BUSINESS CONDITIONS, EITHER NATIONALLY OR IN THE STATES OR REGIONS IN WHICH THE COMPANY DOES BUSINESS, MAY BE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY OR A REDUCED DEMAND FOR CREDIT; - LEGISLATION OR CHANGES IN REGULATORY REQUIREMENTS, INCLUDING WITH OUT LIMITATION CAPITAL REQUIREMENTS, OR ACCOUNTING STANDARDS MAY ADVERSELY AFFECT THE COMPANY AND THE BUSINESSES IN WHICH IT IS ENGAGED; - ADVERSE CHANGES MAY OCCUR IN THE SECURITIES MARKETS; - COMPETITORS OF THE COMPANY MAY HAVE GREATER FINANCIAL RESOURCES AND DEVELOP PRODUCTS AND TECHNOLOGY THAT ENABLE THOSE COMPETITORS TO COMPETE MORE SUCCESSFULLY THAN THE COMPANY; - THE GROWTH AND PROFITABILITY OF THE COMPANY'S NONINTEREST INCOME MAY BE LESS THAN EXPECTED; (iii) 5 - COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF THE COMPANY AND ITS MERGER PARTNERS MAY BE GREATER THAN EXPECTED; - ESTIMATED COST SAVINGS AND REVENUE ENHANCEMENTS FROM MERGERS INVOLVING THE COMPANY MAY NOT BE FULLY REALIZED WITHIN THE EXPECTED TIME FRAMES; AND - DEPOSIT ATTRITION, CUSTOMER LOSS OR REVENUE LOSS FOLLOWING MERGERS INVOLVING THE COMPANY MAY BE GREATER THAN EXPECTED. THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF FACTORS IS NOT EXCLUSIVE, AND NEITHER SUCH LIST NOR ANY SUCH FORWARD-LOOKING STATEMENT TAKES INTO ACCOUNT THE IMPACT THAT ANY FUTURE ACQUISITIONS MAY HAVE ON THE COMPANY AND ANY SUCH FORWARD-LOOKING STATEMENT. IN ADDITION, THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO RELEASE PUBLICLY THE RESULTS 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. (iv) 6 PART I. ITEM 1. BUSINESS GENERAL 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, 1999, 220 offices located in Maine, New Hampshire, Massachusetts and Connecticut. At December 31, 1999, the Company had consolidated assets of $13.9 billion and consolidated shareholders' equity of $851 million. Based on total assets at December 31, 1999, the Company is the largest bank holding company headquartered in northern New England and the fourth largest 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 four wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New Hampshire ("BNH"), Family Bank, FSB ("Family Bank") and Glastonbury Bank & Trust Company, ("GBT"). 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, 1999, PHB had consolidated assets of $4.4 billion and consolidated shareholder's equity of $290 million. BNH is a New Hampshire-chartered commercial bank which operates offices throughout New Hampshire. At December 31, 1999, BNH had consolidated assets of $4.8 billion and consolidated shareholder's equity of $253 million. Family Bank is a federally-chartered savings bank which operates offices in Massachusetts and southern New Hampshire. At December 31, 1999, Family Bank had consolidated assets of $4.4 billion and consolidated shareholder's equity of $243 million. GBT is a Connecticut-chartered commercial bank which operates offices in north-central Connecticut. At December 31, 1999, GBT had consolidated assets of $338 million and consolidated shareholder's equity of $22 million. Unless the context otherwise requires, references herein to the Company include its direct and indirect subsidiaries. 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 1 7 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, trust services, investment advisory services and other services, insurance commissions 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, 1999, the Company had $3.2 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 and its subsidiaries are subject to regulation and supervision by various U.S. federal and state banking and other regulatory authorities. ACQUISITIONS Acquisitions have been, and are expected to continue to be, an important part of the expansion of the Company's business. Since January 1, 1994, the Company has completed four acquisitions which have been accounted for under the pooling-of-interests method and eight acquisitions which have been accounted for under the purchase method. The Company continually evaluates acquisition opportunities and frequently conducts due diligence in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities can be expected. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of book value and net income per share of common stock of the Company may occur in connection with any future transactions. 2 8 On June 2, 1999, the Company entered into a definitive agreement to acquire Banknorth Group, Inc. ("Banknorth"), which acquisition is expected to close in the second quarter of 2000. As of December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. SUBSIDIARIES At December 31, 1999, the Company's only direct subsidiaries were PHB, BNH, Family Bank, GBT 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, 1999 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, 1999, the Company's banking subsidiaries investments in these limited partnerships had a carrying value of $20.6 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, 1999, PHLC had $51.2 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 9 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. 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 and its banking subsidiaries are subject to vigorous competition in all aspects and areas of their business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. The Company and its banking subsidiaries also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than that of the Company and its banking subsidiaries. The Company and its banking subsidiaries generally have been able to compete effectively with other financial institutions by emphasizing customer service, including local decision-making, by establishing long-term customer relationships and building customer loyalty and by providing products and services designed to address the specific needs of our customers. No assurance can be given, however, that the Company and its banking subsidiaries will continue to be able to compete effectively with other financial institutions in the future. The financial services industry is likely to become even more competitive as further technological advances enable more companies to provide financial services. These technical advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. EMPLOYEES The Company had approximately 3,900 full-time equivalent employees as of December 31, 1999. None of these employees is represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel. REGULATION OF THE COMPANY THE FOLLOWING DISCUSSION SETS FORTH CERTAIN OF THE MATERIAL ELEMENTS OF THE REGULATORY FRAMEWORK APPLICABLE TO BANK HOLDING 4 10 COMPANIES AND THEIR SUBSIDIARIES AND PROVIDES CERTAIN SPECIFIC INFORMATION RELEVANT TO THE COMPANY. THE REGULATORY FRAMEWORK IS INTENDED PRIMARILY FOR THE PROTECTION OF DEPOSITORS AND THE FEDERAL DEPOSIT INSURANCE FUNDS AND NOT FOR THE PROTECTION OF SECURITY HOLDERS. TO THE EXTENT THAT THE FOLLOWING INFORMATION DESCRIBES STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTICULAR STATUTORY AND REGULATORY PROVISIONS. A CHANGE IN APPLICABLE STATUTES, REGULATIONS OR REGULATORY POLICY MAY HAVE A MATERIAL EFFECT ON THE BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES. 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. 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. The Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to bank holding companies. In addition, the Federal Reserve Board may from time to time require that a bank holding company maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve 5 11 Board's risk-based guidelines define a three-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, subordinated and other qualifying debt, and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing entity's risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital, at least 50 percent of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4 percent and the minimum total capital ratio is 8 percent. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3 percent, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3 percent. At December 31, 1999, the Company's capital ratios substantially exceeded applicable requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital" included in Item 7 hereof and Note 13 to the Consolidated Financial Statements included in Item 8 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 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 Federal Deposit Insurance Corporation ("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. 6 12 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. Financial Modernization. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act which will, effective March 11, 2000, permit bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is "well capitalized" and "well managed," as defined, and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory or better. State Regulation. The Company 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. The Company also is subject to varying degrees of regulation under the laws of New Hampshire, Massachusetts and Connecticut as a result of its ownership of banks which are located in these states. 7 13 REGULATION OF BANKING SUBSIDIARIES General. 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; as a federally-chartered savings bank, Family Bank is subject to regulation and examination by the Office of Thrift Supervision ("OTS"); and as a Connecticut-chartered commercial bank, GBT is subject to regulation and examination by the Connecticut Commissioner of Banking. 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. Capital Requirements. Each of the Company's banking subsidiaries is subject to regulatory capital requirements of the FDIC (in the case of PHB, BNH and GBT) 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, as discussed above. At December 31, 1999, the regulatory capital of each of the Company's banking subsidiaries substantially exceeded applicable requirements. See Note 13 to the Consolidated Financial Statements included in Item 8 hereof. 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" 8 14 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 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, 1999, 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 Bank Insurance Fund ("BIF") administered by the FDIC, although certain deposits of certain 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 $174 million of brokered deposits outstanding at December 31, 1999. 9 15 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 must conduct regular CRA examinations of insured financial institutions and assign to them a CRA rating of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In 1999, 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. 10 16 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 eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income. The Company also is subject to various forms of state taxation under the laws of Maine, New Hampshire, Massachusetts and Connecticut as a result of its ownership of banks located in these states. For additional information regarding the business of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 hereof. ITEM 2. PROPERTIES At December 31, 1999, the Company conducted its business from its executive offices at One Portland Square, Portland, Maine and 220 offices located in Maine, New Hampshire, Massachusetts and Connecticut. For additional information regarding the Company's lease obligations, see Note 14 to the Consolidated Financial Statements included in Item 8 hereof. The following table sets forth certain information with respect to the offices of the Company as of December 31, 1999.
Net Book Value of Number of Property and Leasehold State Banking Offices Improvements Deposits ----- --------------- ---------------------- -------- (Dollars in Thousands) PHB 75 $27,124 $2,702,414 BNH 78 28,067 2,854,819 Family Bank 60 35,394 2,344,839 GBT 8 5,384 212,685 --- ------- ---------- Total 221 $95,969 $8,114,757 === ======= ==========
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. 11 17 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 of the Company's Annual Report to Shareholders for the year ended December 31, 1999 (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 29 of the Company's Annual Report is incorporated herein by reference. 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 30 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. 12 18 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, 2000 (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 page 19 of the Proxy Statement. 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 Shareholders included herein as Exhibit 13: Consolidated balance sheets at December 31, 1999 and 1998 Consolidated statements of income for each of the years in the three-year period ended December 31, 1999 Consolidated statements of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1999 Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1999 Notes to Consolidated Financial Statements 13 19 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. Exhibit No. Exhibit Location - ----------- ------- -------- 3(a)(1) Amended and Restated Articles of Incorporation of (1) the Company 3(a)(2) Amendments to the Articles of Incorporation of (2) the Company 3(b) Bylaws of the Company (21) 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 14 20 Exhibit No. Exhibit Location - ----------- ------- -------- 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 10(b) Amended and Restated Severance Agreement between (7) the Company and Peter J. Verrill 10(c) Form of Severance Agreement between the Company (6) and 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 (8) the Company and R. Scott Bacon 10(e) Supplemental Retirement Agreement among the (9) Company, its subsidiaries and William J. Ryan 10(f) Supplemental Retirement Agreement among the (9) Company, 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 amended (11) 10(j) Directors' Deferred Compensation Plan, as amended (11) 10(k) 1986 Stock Option and Stock Appreciation Rights (1)(12) Plan, as amended 10(l) 1986 Employee Stock Purchase Plan, as amended (1)(12) 10(m) Amended and Restated Restricted Stock Plan for (6) Non-Employee Directors 10(n) Amended and Restated 1995 Stock Option Plan for (13) Non-Employee Directors, as amended 10(o)(1) Amended and Restated Thrift Incentive Plan (6) 15 21 Exhibit No. Exhibit Location - ----------- ------- -------- 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 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) Consulting Agreement between the Company and David D. Hindle 10(v) Form of Severance Agreement between the Company and (19) Christopher W. Bramley 10(w) Stockholder Rights Agreement, dated as of September (20) 12, 1989 and amended and restated as of July 27, 1999, between the Company and American Stock Transfer & Trust Company, as Rights Agent 13 Annual Report to Shareholders for 1999 21 Subsidiaries of the Company 23 Consent of KPMG 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. 16 22 (2) Exhibits are incorporated by reference to (i) the proxy statement filed by the Company with the SEC on March 23, 1998 and (ii) the proxy statement filed by the Company with the SEC on March 22, 2000. (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. (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, and an amendment to such plan is incorporated by reference to the proxy statement filed by the Company with the SEC on March 22, 2000. 17 23 (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) 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 April 22, 1998. (20) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on July 28, 1999. (21) Exhibit is incorporated by reference to the Form 10-K report filed by the Company with the SEC for the year ended December 31, 1998. The Company's management contracts or compensatory plans or arrangements consist of Exhibit Nos. 10(a)-(v). (b) The Company filed Current Reports on Form 8-K with the SEC on December 23, 1999 and January 21, 2000. (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 Shareholders which are required to be included herein. 18 24 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 28, 2000 -------------------------------- 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/ Gary R. Bahre Date: March 28, 2000 - -------------------------------- Gary R. Bahre Director /s/ P. Kevin Condron Date: March 28, 2000 - -------------------------------- P. Kevin Condron Director /s/ Katherine M. Greenleaf Date: March 28, 2000 - -------------------------------- Katherine M. Greenleaf Director /s/ Douglas S. Hatfield Date: March 28, 2000 - -------------------------------- Douglas S. Hatfield Director 19 25 /s/ David D. Hindle Date: March 28, 2000 - -------------------------------- David D. Hindle Director /s/ Dana S. Levenson Date: March 28, 2000 - -------------------------------- Dana S. Levenson Director /s/ Philip A. Mason Date: March 28, 2000 - -------------------------------- Philip A. Mason Director /s/ John M. Naughton Date: March 28, 2000 - -------------------------------- John M. Naughton Director /s/ Malcolm W. Philbrook, Jr. Date: March 28, 2000 - -------------------------------- Malcolm W. Philbrook, Jr. Director Date: - -------------------------------- Pamela P. Plumb Vice Chairman /s/ Seth A. Resnicoff Date: March 28, 2000 - -------------------------------- Seth A. Resnicoff Director /s/ William J. Ryan Date: March 28, 2000 - -------------------------------- William J. Ryan Chairman, President and Chief Executive Officer (principal executive officer) 20 26 /s/ Curtis M. Scribner Date: March 28, 2000 - -------------------------------- Curtis M. Scribner Director /s/ Paul R. Shea Date: March 28, 2000 - -------------------------------- Paul R. Shea Director /s/ John E. Veasey Date: March 28, 2000 - -------------------------------- John E. Veasey Director /s/ Peter J. Verrill Date: March 28, 2000 - -------------------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer (principal financial and accounting officer) EX-10.(U) 2 CONSULTING AGREEMENT 1 EXHIBIT 10(u) CONSULTING AGREEMENT Consulting Agreement (the "Agreement"), dated as of the 4th day of January 2000, between Peoples Heritage Financial Group, Inc. (the "Company") and David D. Hindle (the "Consultant"). WITNESSETH: WHEREAS, the Company desires to have the Consultant provide, and the Consultant is willing to provide the Company with, consulting services to the Company on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows: 1. CONSULTANCY. (a) During the calendar year ended December 31, 2000 (the "Consulting Period"), the Consultant undertakes to provide his personal advice and counsel to the Company regarding its operations, customer relationships, customer service and other business matters (collectively, the "Consulting Services"), subject to the terms and conditions which are set forth herein. (i) In no event shall the Consultant be required to provide Consulting Services hereunder for more than 25 hours per week or 100 hours in any calendar month during the Consulting Period. (ii) The Consultant shall provide Consulting Services commensurate with the Consultant's prior experience as may be reasonably requested by the Chief Executive Officer of the Company or his designee from time to time and at mutually agreeable times. It is contemplated that the Consulting Services will include, without limitation, service as Chairman of the Customer Service Committee of the Company; continuation of the "customer scorecard" reporting previously conducted by the Consultant; monthly meetings between the Consultant and the Chief Executive Officer of the Company, the Management Committee of the Company and/or the Board of Directors of the Company; attendance at certain public functions on behalf of the Company and its banking subsidiaries in states in which they have offices; and attendance at certain functions of the Company. Consulting Services may be provided in person, telephonically, electronically or by correspondence to the extent appropriate under the circumstances. (iii) The Consultant shall provide the Consulting Services in the Haverhill, Massachusetts metropolitan area, provided that the Consultant may be required to provide Consulting Services at the executive offices of the Company located in Portland, Maine up to not more than two times per month during the Consulting Period. 2 (b) The Company shall reimburse the Consultant or otherwise provide for or pay for all reasonable expenses incurred by the Consultant at the request of the Company, subject to such reasonable documentation as may be requested by the Company. If such expenses are paid in the first instance by the Consultant, the Company shall reimburse the Consultant therefor upon receipt of such reasonable documentation as may be requested by the Company. (c) During the Consulting Period, the Consultant shall be treated as an independent contractor and shall not be deemed to be an employee of the Company or any subsidiary or other affiliate of the Company for any purpose. 2. NON-COMPETE. The Consultant agrees that during the Consulting Period the Consultant will not, directly or indirectly, without the prior written consent of the Company, (i) become a director, officer, employee, principal, agent or consultant of any insured depository institution, trust company or parent holding company of any such institution or company which has an office in Connecticut, Maine, Massachusetts or New Hampshire, and transacts business in any area in such states in which the Company or any of its banking subsidiaries maintains offices, provided, however, that this provision shall not prohibit the Consultant from owning bonds, preferred stock or up to five percent (5%) of the outstanding common stock of any such entity if such common stock is publicly traded, (ii) solicit or induce, or cause others to solicit or induce, any employee of the Company or any of its subsidiaries to leave the employment of such entities or (iii) solicit any customer of the Company or any of its subsidiaries other than in connection with the provision of Consulting Services hereunder. 3. CONFIDENTIALITY. Except (i) in the course of providing Consulting Services hereunder or (ii) as required by law or regulation (including without limitation in connection with any judicial or administrative process or proceeding), the Consultant shall keep secret and confidential and shall not disclose to any third party in any fashion or for any purpose whatsoever any information regarding the Company or any of its subsidiaries which is (i) not available to the general public and/or (ii) not generally known outside the Company, to which he has or will have had access at any time during the course of his employment by the Company or its subsidiaries or his consultancy with the Company, including, without limitation, any such information relating to: business or operations; plans, strategies, prospects or objectives; products, technology, processes or specifications; research and development operations or plans; customers and customer lists; distribution, sales, service, support and marketing practices and operations; financial condition, results of operations and prospects; operational strengths and weaknesses; and personnel and compensation policies and procedures. 2 3 4. INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, the Consultant agrees that damages at law will be an insufficient remedy to the Company in the event that the Consultant violates any of the provisions of Sections 2 or 3, and that the Company may apply for and, upon the requisite showing, have injunctive relief in any court of competent jurisdiction to restrain the breach or threatened breach of or otherwise to specifically enforce any of the covenants contained in Sections 2 or 3. 5. RELEASE. (a) For, and in consideration of the commitments made herein by the Company, the Consultant, for himself and for his heirs, successors and assigns, does hereby release completely and forever discharge the Company and its subsidiaries, affiliates, stockholders, attorneys, officers, directors, agents, employees, successors and assigns, and any other party associated with the Company (the "Released Parties"), to the fullest extent permitted by applicable law, from any and all claims, rights, demands, actions, liabilities, obligations, causes of action of any and all kind, nature and character whatsoever, known or unknown, in any way connected with his employment by the Company or any of its subsidiaries (including in each case predecessors thereof), either as a director, officer or employee, or termination of such employment. Notwithstanding the foregoing, the Consultant does not release the Company from any obligations of the Company to the Consultant under (i) any employee benefit plan or arrangement of the Company pursuant to which the Consultant is entitled to any post-retirement benefits or payments, (ii) Section 5.9 of the Agreement and Plan of Merger, dated as of May 30, 1996, among the Company, Peoples Heritage Merger Corp. and Family Bancorp (the "Merger Agreement"), and (iii) this Agreement. (b) For and in consideration of the commitments made herein by the Consultant, including without limitation the releases in paragraph (a) above, the Company, for itself, and for its successors and assigns does hereby release completely and forever discharge the Consultant and his heirs, successors and assigns, to the fullest extent permitted by applicable law, from any and all claims, rights, demands, actions, liabilities, obligations, causes of action of any and all kind, nature and character whatsoever, known or unknown, in any way connected with the Consultant=s employment by the Company or any of its subsidiaries (including predecessors thereof), either as a director, officer or employee. Notwithstanding anything in the foregoing to the contrary, the Company does not release the Consultant from claims arising out of any breach by the Consultant of (i) any law or regulation by the Consultant during the term of and related to his employment by the Company or any of its subsidiaries (including predecessors thereof) or (ii) this Agreement. 3 4 6. COMPENSATION. (a) In consideration of the obligations and agreements of the Consultant hereunder, the Company agrees to pay to the Consultant compensation during the Consulting Period at a rate of $28,200 per year, payable in 12 equal monthly installments on the last business day of each calendar month during the Consulting Period. Payments to the Consultant under this Section 6 may be paid by the Company by (i) check mailed to the address of the Consultant set forth in Section 10 hereof or at such other address as the Consultant may notify the Company in accordance with the terms of such section or (ii) deposit to an account designated in writing by the Consultant. (b) For purposes of this Agreement, the term "business day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Maine are authorized by law, regulation or executive order to remain closed. (c) In the event of a Change in Control of the Company, (i) any remaining payments due to the Consultant pursuant to paragraph (a) of this Section 6 shall become immediately due and payable in one lump sum payment, and (ii) the Consultant shall not have any obligations under Section 2 of this Agreement beyond the date of the Change in Control. A "Change in Control of the Company" shall be deemed to have occurred: (i) if any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company and any trustee or other fiduciary holding securities under any employee benefit plan of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) if at any time during the term of this Agreement, individuals who at the beginning of such period constitute the Board of Directors, and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (iii) upon the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company outstanding immediately after such merger or consolidation; or (iv) upon the complete liquidation of the Company or the consummation of the sale or disposition by the Company of all or substantially all of the Company's assets. 4 5 7. NATURE OF PAYMENT OBLIGATIONS. (a) Except as otherwise provided in Section 7(b) hereof, the Company's obligation to pay the Consultant the benefits and payments provided in Section 6 hereof shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any purported termination of this Agreement, other than pursuant to Section 7(b) hereof, set-off, counterclaim, recoupment, defense or other right which the Company may have against the Consultant or anyone else, and each and every such payment made or benefit provided shall be final and the Company shall not seek to recover all or any part of any such payment or benefit from the Consultant or from whomsoever may be entitled thereto for any reason whatsoever. (b) If the Consultant materially breaches any of his obligations hereunder, the Company may terminate this Agreement by written notice of termination provided to the Consultant, and thereafter the Consultant shall be entitled to no further benefits and payments under the terms of this Agreement. In the event of the death of the Consultant, the estate and heirs of the Consultant shall be entitled to no further payments under Section 6(a) of this Agreement. 8. REPRESENTATION. The Company and the Consultant represent and warrant to each other that they have carefully read this Agreement and consulted with respect thereto with their respective counsel and that each of them fully understands the content of this Agreement and its legal effect. Each party hereto also represents and warrants that this Agreement is a legal, valid and binding obligation of such party which is enforceable against it in accordance with its terms. 9. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Consultant and his heirs, successors and assigns, and upon the Company, including any successor to the Company by merger or consolidation or any other change in form or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. This Agreement may not be assigned by any party hereto without the consent of the other party. 10. NOTICES. Any communication to a party required or permitted under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party or parties, as applicable: 5 6 If to the Consultant: David D. Hindle 133 Cushing Road Newmarket, New Hampshire 03857 If to the Company: Peoples Heritage Financial Group, Inc. P.O. Box 9540 One Portland Square Portland, Maine 04112-9540 Attention: President 11. WITHHOLDING. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. ENTIRE AGREEMENT; SEVERABILITY. This Agreement incorporates the entire understanding among the parties relating to the subject matter hereof, recites the sole consideration for the promises exchanged and supersedes any prior agreements between the Company and the Consultant with respect to the subject matter hereof, provided that nothing contained herein shall affect any obligations of the Company to the Consultant under (i) any employee benefit plan or arrangement of the Company pursuant to which the Consultant is entitled to any post-retirement benefits or payments and (ii) Section 5.9 of the Merger Agreement. In reaching this Agreement, no party has relied upon any representation or promise except those set forth herein. If any of the terms or conditions of this Agreement shall be declared void or unenforceable by any court or administrative body of competent jurisdiction, such term or condition shall be deemed severable from the remainder of this Agreement, and the other terms and conditions of this Agreement shall continue to be valid and enforceable. 13. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. 6 7 15. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Maine applicable to agreements made and entirely to be performed within such jurisdiction. 16. HEADINGS. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. 7 8 IN WITNESS WHEREOF, the Company and the Consultant have entered into this Agreement as of the day and year first above written. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ William J. Ryan ------------------------------------ William J. Ryan, Chairman, President and Chief Executive Officer /s/ David D. Hindle ------------------------------------ David D. Hindle 8 EX-13 3 ANNUAL REPORT TO STOCKHOLDERS 1 Exhibit 13 OUR TRADITION GROWS. [GRAPHIC OF A WATERFRONT SCENE, SKIING, PINE TREE STATE PHOTO] PEOPLES HERITAGE FINANCIAL GROUP NEW ENGLAND'S COMMUNITY BANK 1999 ANNUAL REPORT 2 EXPANDING OUR REACH WHILE STAYING CLOSE TO OUR COMMUNITIES. [GRAPHIC OF THE MAINE, MASSACHUSETTS AND CONNECTICUT] The New England region is an area rich in heritage and tradition. At Peoples Heritage Financial Group, we recognize this fact with our unique approach to banking. By staying close to our communities and offering a growing set of financial services, we have once again achieved record success. We produced record earnings for the sixth consecutive year, expanded our reach through our disciplined approach to acquisitions, and strengthened our franchise for the future. [GRAPHIC OF A CHURCH] TABLE OF CONTENTS Financial Highlights 1 Letter to Shareholders 2 Performance 4 Strategy 6 Markets 8 Services 10 Outlook 12 Selected 5-year Consolidated Financial and Other Data 13 Management's Discussion and Analysis 14 Financial Statements 30 Corporate Directory 57 [GRAPHIC OF A BOAT] 3 PEOPLES HERITAGE FINANCIAL GROUP, INC. Peoples Heritage Financial Group, Inc. ended the year as a $13.9 billion multi-state banking and financial services holding company headquartered in Portland, Maine. Its subsidiaries include Peoples Heritage Bank, with the top market share in Maine, Bank of New Hampshire with the leading market share in New Hampshire, Family Bank, one of the six largest banks in Massachusetts, and Glastonbury Bank & Trust Company in Connecticut. The Company and its affiliate banks also operate subsidiaries in the fields of trust and investments, insurance brokerage, and leasing. With the expected completion of the acquisition of Banknorth Group, Inc., the Company will extend its banking operations into Vermont and upstate New York and expand its franchises in Massachusetts and New Hampshire. Peoples Heritage Bank 75 branches throughout ME, No. 1 market position. 20% market share. $4.4 billion in assets. Bank of New Hampshire 78 branches throughout NH, No. 1 market position, 22% market share. $4.8 billion in assets. Family Bank 56 branches throughout MA, 4 in southern NH. Strong local market position. $4.4 billion in assets. Glastonbury Bank & Trust Company 8 branches in north/central CT, $338 million in assets. [MAP OF NEW HAMPSHIRE] [PHOTO] [BARCHART OPERATING RETURN ON AVERAGE EQUITY] FINANCIAL HIGHLIGHTS You could say our record-setting financial performance is something of a tradition itself. As the numbers indicate, we ended the year with a continued strengthening of our key financial ratios. In 1999, Peoples Heritage Financial Group achieved its sixth consecutive record earnings year with net income of $142.4 million. On an operating basis, exclusive of special charges, net income rose 16% to $164.1 million, or $1.58 per diluted share, over 1998 operating earnings of $141.8 million, or $1.34 per diluted share. SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
FOR THE YEAR 1999 1998 % Change 1997 1996 1995 ----------- ----------- -------- ----------- ---------- ---------- Net interest income $ 446,247 $ 426,473 5% $ 404,924 $ 332,029 $ 298,816 Noninterest income (excluding securities transactions) 128,907 112,782 14 91,800 68,665 56,990 Net income 142,422 112,824 26 103,672 87,341 70,209 SHARE DATA (2) Earnings per share: Basic $ 1.38 $ 1.09 27 $ 1.01 $ 0.91 $ 0.75 Diluted 1.37 1.07 28 0.99 0.89 0.73 Dividends per share (as declared by PHFG) 0.47 0.44 7 0.38 0.34 0.26 Book value per share at year end 8.33 8.68 -4 8.20 7.67 7.14 KEY PERFORMANCE RATIOS Return on average assets 1.08% 0.97% 11 1.02% 1.09% 0.99% Return on average equity 16.36 13.09 25 12.73 12.35 10.96 Excluding special charges: Return on average assets (1) 1.24 1.22 2 1.18 1.18 1.04 Return on average equity (1) 18.85 16.45 15 14.64 13.45 11.53 AT YEAR END Assets $13,919,528 $12,050,239 16 $11,401,860 $9,364,346 $7,477,894 Loans and leases 6,736,788 6,977,470 -3 7,258,560 5,911,986 4,715,182 Deposits 8,114,757 8,376,715 -3 8,034,776 7,129,538 5,910,325 Shareholders' equity 850,977 901,128 -6 846,255 795,714 692,401
(1) Special charges consist of merger related and other restructuring charges which on an after-tax basis were $21,690, $28,944, $15,547, $7,753, and $3,678 for 1999, 1998, 1997, 1996 and 1995, 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. 4 DEAR SHAREHOLDERS: [PHOTO OF CHAIRMAN WILLIAM RYAN] 1999 was our sixth annual record earnings year at Peoples Heritage Financial Group and a period of tremendous achievement. Thanks to our dedicated employees and successful community banking strategy, we turned in an impressive performance across a wide range of financial measures. Our return on equity and efficiency ratio were our best ever. Our return on assets, earnings and earnings per share were all up significantly over last year. We grew our trust, insurance and investment advisory income. We experienced double digit growth in our consumer and commercial loan business as we continued to shift our balance sheet to focus on these higher yielding loans while reducing our dependence on lower yielding mortgage loans. In our first full year of operations since acquiring SIS Bancorp in January of 1999, we successfully merged our operations while reducing noninterest expenses by 4%. The acquisition nearly doubled our size in Massachusetts, extended our reach into the western part of the state, and introduced us to the Connecticut market. In 1999, we also enjoyed our first full year of operations with the former CFX Corporation which was acquired in April, 1998. CFX increased our presence as the leading bank in New Hampshire. In a major step to broaden our market leadership, in June of 1999 we reached a definitive agreement to acquire Banknorth Group, Inc., one of the Northeast's most respected financial services providers. Overwhelmingly approved by shareholders of both organizations and expected to be completed in the Spring of 2000, the acquisition will bring our assets to nearly $19 billion and make us the third largest banking company based in New England. In addition, the acquisition of Banknorth Group will expand our franchise into Vermont and upstate New York and add to our franchises in New Hampshire and Massachusetts. The acquisition will also truly establish us as a Northeast banking leader, giving us the largest combined market share in Maine, New Hampshire and Vermont. Like our other acquisitions, Banknorth Group's community banking approach makes the organization a smart strategic fit for us. Their seasoned team of respected community bankers with a solid reputation for customer service and community support mirrors our own approach. In fact, as we expanded our franchise west into New Hampshire and Massachusetts, Banknorth expanded east into the same markets. By combining our strengths, we gain a dominant market position, gain new economies of scale and access to capital, and strengthen our franchise for the future. 2 5 As we have in the past, we will create new efficiencies by consolidating operations, and at the same time, let these local banks operate with the same customer contact people in place and local decision making. It's a community-focused formula that continues to prove itself as we expand across the Northeast. While staying close to our communities, our customers will continue to benefit from our expanded size and strength. The expected acquisition of Banknorth Group will give us 300 branches and expand our network of ATMs to 400 so customers can access their funds throughout the Northeast. Our size ensures local businesses will not outgrow us with our sophisticated cash management, payroll services and credit card processing capabilities. We will continue to share successful products across markets and cross-sell services as appropriate to offer our customers a one-stop financial resource including banking, insurance, investment and trust services. In the Spring of 2000, we also expect to change the name of our multi-state banking and financial services holding company from Peoples Heritage Financial Group, Inc., to Banknorth Group, Inc. While we take great pride in the Peoples Heritage name and will continue to use the name where it originated at our Maine banking subsidiary, we believe the Banknorth name more accurately reflects the diversified Northeast financial services holding company we are becoming. Looking ahead, I believe we can continue to succeed by combining our operational discipline, personalized community banking approach, and the strength of an increasingly sophisticated financial services network. By maintaining our strategy and focus, we have grown from $3 billion in assets in 1992, to $14 billion in 1999, to an expected $19 billion once the acquisition of Banknorth Group is complete. By expanding our franchise and increasing profitability, we expect to continue increasing opportunities for both our customers and shareholders. I wish to personally thank our shareholders for continuing to support us during a difficult period for bank stocks. I remain convinced that solid performance will eventually be rewarded by a fair valuation. In addition, thanks goes to our employees for all their incredibly hard work, talent and commitment to our organization and its customers. Thank you all for being a part of our success. Sincerely yours, /s/ William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer "Thanks to our dedicated employees and successful community banking strategy, we turned in an impressive performance across a wide range of financial measures." [BARCHARTS - OPERATING EARNINGS PER SHARE AND NET INCOME] 3 6 PERFORMANCE TOKENS OF OUR SUCCESS. RECORD EARNINGS [NEW HAMPSHIRE GRAPHIC] For the sixth year in a row, Peoples Heritage Financial Group achieved record earnings. In 1999, annual net income reached $142.4 million, or $1.37 per diluted share, up 26% over 1998's net income of $112.8 million or 1.07 per diluted share. STRONG PROFITS In 1999, on an operating basis, exclusive of special charges, net income rose 16% to $164.1 million, or $1.58 per diluted share, over operating earnings of $141.8 million, or $1.34 per diluted share, in 1998. Our operating earnings have increased steadily year after year since 1992. INCREASED DIVIDEND In keeping with our commitment to return income to our shareholders in the form of dividends, following the fourth quarter of 1999, we increased our quarterly dividend by 9% over the dividend paid in the same quarter a year ago. NET INTEREST INCOME Despite the continued squeeze on margins, our net interest income was up 5% as a result of strong consumer and commercial loan volume. INCREASED FEE INCOME Strong growth in our noninterest income included a customer service fee income increase of 30% from 1998. In both Maine and New Hampshire, we continue to open thousands of new accounts each month because of our attractive product mix. We also enjoyed increased fees from our growth in areas beyond traditional banking including a 56% increase in income from insurance commissions, a 37% increase in income from investment advisory services, and 15% growth in trust income. By increasing our fee income, we increase our growth potential and reduce our reliance on margins which come under pressure from rising interest rates. [PHOTO OF AN APPLE PIE] [PHOTO OF THE ROCKY COAST] REDUCED NONINTEREST EXPENSES With our commitment to operational efficiency and successful merger strategy, we reduced noninterest expenses 4% in 1999. RETURN ON EQUITY Our profitability rates have consistently improved each year. A key [PHOTO OF A RED WAGON WITH A CHILD AND DOG] 4 7 financial ratio, our operating Return on Average Equity (ROE), reached 18.85% for the year, as compared to 16.45% for 1998. Our ROE topped 20% in the fourth quarter of 1999. RETURN ON ASSETS Our operating Return on Average Assets (ROA) was 1.24% for the year, as compared to 1.22% for 1998. EFFICIENCY RATIO Our efficiency ratio improved to 53.56% in the fourth quarter of the year, as compared to 57.44% for the last quarter of 1998. We are pleased with the results and expect to continue to improve our efficiency. TOTAL ASSETS Our assets at year end were $13.9 billion thanks largely to acquisitions and strong growth in consumer and commercial lending. The expected completion of the acquisition of the $4.6 billion Banknorth Group and continued internal growth should bring our total assets to nearly $19 billion. [MOHAWK TRAILPENNANT GRAPHIC] LOAN GROWTH 1999 saw double digit growth in consumer and business lending, an important contributor to our record earnings. Our competitive situation should provide good opportunities to gain more small and mid-size business loan customers. We believe there are particularly strong loan growth opportunities in Massachusetts. STRONG ASSET QUALITY [TREE GRAPHIC] Our balance sheet continues to improve each year. Nonperforming assets as a percentage of total assets dropped to 0.40% at the end of 1999, compared to 0.56% at the end of 1998. Our credit quality standards and a strong economy continue to bolster our asset quality strength. CAPITAL POSITION Our capital position remains well above the regulatory minimum for well-capitalized banks. [EFFICIENCY RATIO BARCHART] [COUNTRY LANDSCAPE GRAPHIC] [FIRE TRUCK GRAPHIC] 5 8 STRATEGY CLOSE TO OUR COMMUNITIES. [MAN ON THE PHONE GRAPHIC] [COUNTRY SETTING GRAPHIC] GROWING PROFITABILITY Our profitability continues to strengthen with our emphasis on commercial and consumer lending, a commitment to achieving cost savings of 25% with our acquisitions, and by increasing our fee income. INCREASING MARKET SHARE The expected acquisition of Banknorth Group will enhance our diversified loan and fee revenue streams, provide $1 billion in Massachusetts assets, and expand our franchise into Vermont and New York. The acquisition should also favorably impact our loan mix, funding, net interest margin, and credit quality. DOMINANT POSITION Our strong market position is a result of both internal growth and our ongoing track record of successful acquisitions. As one of the dominant financial players in the Northeast, our challenge is to continue successfully expanding our markets while deepening our market penetration by increasing the number of customers we serve and the number of services utilized by each customer. INTEGRATION TRACK RECORD In just the past five years, we have executed 12 profitable bank acquisitions. In addition to increasing revenue opportunities, we consistently achieve cost savings as well. [MASSACHUSETTS GRAPHIC] INCREASED RETENTION RATE In addition to expanding our depth of relationships with our customers, and acquiring new customers, we drive revenues by promoting greater customer retention. With customer satisfaction as the key to retention, our retention rate has improved by 15% over past two years. This improvement represents estimated annual revenue from increased deposit balances and checking account fees of $2.6 million after two years. MORE CROSS-SALES We are steadily increasing the number of products sold to each customer by improving cross-sell ratios. We have developed a strategic planning task force focused on prioritizing and cross-selling products. [CHAIRS ON PORCH GRAPHIC] 6 9 Our goals include enabling our divisions to work more closely together, increasing the emphasis on cross-sales through incentives, goal setting, tracking and reporting. We are also improving cross-sales tools for our sales force. STRENGTHENING LOAN PORTFOLIO MIX We continue to make significant progress in better balancing our loan portfolio mix as we shift our business mix into higher yielding segments like commercial and consumer lending. Residential mortgages now represent just 21% of our loans, commercial business lending is 19%, commercial real estate represents 26% and consumer loans have risen to over 30%. MAXIMIZE GROWTH POTENTIAL To optimize our growth, we will maintain a focus on our core competencies of retail banking, commercial banking, mortgage banking and trust services. We will seek to continue to expand fee income and be alert for profitable acquisition opportunities. OUR MARKET NICHE We often say that we are too big to be small, but too small to be big. The fact is, we offer more products and services than smaller banks and more service than the biggest competitors. It is a niche that gives us a unique advantage and opportunity to grow in our markets. INVESTED IN OUR COMMUNITIES In addition to our philanthropic activities and local community involvement, Peoples Heritage Financial Group remains a leading mortgage originator and small business lender in our markets. [GRAPHIC - LITTLE GIRL] SHAREHOLDER BUYBACK Peoples Heritage repurchased four million shares in 1999 and early 2000. Shareholders' equity at December 31, 1999 was $851.0 million. [FEE INCOME BARCHART] [GRAPHICS - SCHOOL BUS AND WHITE MOUNTAINS PENNANT] 7 10 MARKETS THE PLACES WE KNOW BEST. [GRAPHIC - CONNECTICUT STATE CAPITAL] THE NORTHEAST'S NO. 1 COMMUNITY BANK The anticipated Banknorth Group acquisition will make us the third largest banking company based in New England, and the Northeast's number one community bank. While our market share will grow significantly, we will still maintain a community banking approach in all the markets we serve - a proven formula for success that continues to serve us well. NO. 1 IN MAINE Our "original" bank, Peoples Heritage Bank in Maine, continues to win awards for small business lending and leads the way in providing home mortgages and consumer loans in the state. NO. 1 IN NEW HAMPSHIRE 1999 was our first full year of operations since acquiring the former CFX Corporation which enhanced our number one market share in New Hampshire. EXPANDED MASSACHUSETTS MARKETS Our expanded reach with Banknorth will enhance our major banking presence in Massachusetts, spanning from the suburbs of Boston to the Berkshires. The acquisition will also give us the No. 2 market share in Worchester, Massachusetts, New England's second largest city. [GRAPHIC OPEN DOOR AND A YARD] NO. 2 IN VERMONT The Banknorth acquisition will boost us to the second largest market share in Vermont. In addition, the Vermont market is quite similar to Maine where we continue to enjoy great success - with similar market economies and comparable customer demographics. We also see compatible management styles with Banknorth's Vermont operations [GRAPHIC - MAPLE CANDY] 8 11 which should bolster our ability to quickly achieve efficiencies. ENTERED CONNECTICUT The purchase of SIS Bancorp, Inc. introduced us to the Connecticut market in 1999, expanding our market share and our opportunities. UPSTATE NEW YORK The anticipated Banknorth acquisition will introduce us to the upstate New York market - a region with a demographic profile similar to the markets we know so well in northern New England. [GRAPHICS - OLDER GENTLEMAN, PAPERMAKING MACHINE AND BUOYS] 12 SERVICES SOMETHING FOR EVERYONE. [GRAPHIC - MOHAWK TRAIL] COMMERCIAL LENDING In 1999, total commercial business loans reached $1.3 billion, more than tripling in four years from $408 million in 1995. Our commercial lending portfolio is strengthened by its diversification across a wide range of industries. We also took advantage of major banking consolidations in Massachusetts to enhance our own first-rate commercial lending team in the state. CONSUMER LENDING Our consumer lending is up 12% for the year with strong growth in home equity and auto loans. Our success is driven by our strong understanding of the unique needs of auto dealerships and our fast turnaround time on loan applications. EXPANDED BRANCH AND ATM NETWORKS The anticipated Banknorth Group acquisition will boost our banking network to more than 300 branches and expand our ATM count to 400 throughout the Northeast. Our customers from all our banks enjoy no-fee ATM use throughout our multi-state network. PHONEBANK Launched three years ago, our PhoneBank now handles over one million calls a month through a combination of live support personnel and its Automatic Response Unit (ARU). In keeping with our commitment to personalized service, while most customers prefer to use the ARU for its quick convenience, we always first provide the option to speak with a live customer representative. [GRAPHIC - LADY WITH LAPTOP COMPUTER] TRUST SERVICES Trust income rose to $15 million in 1999, up from $1 million since 1995. On a yearly basis, trust income rose 15% from 1998 to 1999. In addition, trust assets under management are expected to double once the acquisition of Banknorth is complete. INSURANCE Insurance commissions rose 56% from 1998 to 1999. We will continue to seek opportunities to acquire insurance agencies within our market areas. INVESTMENT PLANNING SERVICES Income from our Heritage Investment Planning Group investment advisory services grew 37% in 1999. [GRAPHIC OF DOG THROUGH GLASS DOOR] 10 13 THE BEST OF BOTH COMPANIES The combination of Peoples Heritage Financial Group and Banknorth Group brings important strengths from each organization. For example, Peoples Heritage adds strength in consumer lending including indirect auto and home equity, breadth in commercial lending, advanced systems and technology; and a widely diversified product line. Complementing these strengths, Banknorth adds depth through its extensive trust services, attractive margins, and its added markets. MORTGAGE LENDING In 1999, we discontinued our less-profitable correspondent mortgage lending business and re-focused our efforts on originations in our own markets. PUBLIC FINANCE Public finance deposits grew to $626 million in 1999, compared to $525 million in 1998, and up from $169 million at the start of 1997. In Maine, we hold 40% of all public sector deposits - more than any other bank. In New Hampshire, we hold the second largest share of public sector deposits after just three years in the state. And in Massachusetts, we have quickly grown our public sector deposits over 600% in just the last two years. CASH MANAGEMENT SERVICES Cash management fees grew more than 50% to $6.3 million in 1999, up from $4.1 million in 1998. In addition, in just those two years, we have grown our cash management customer base from approximately 1,000 to 5,000 customers. PRIVATE BANKING Since its inception in mid-1996, we have grown our Private Banking division to $17 million in deposits, $15 million in commercial loans, $15 million in home equity lines, and $69 million in residential mortgages. INTERNET BANKING To make banking easier and more convenient for our customers, we plan to leverage the power of the Internet through a major e-commerce initiative in late 2000. We expect to offer our customers a full range of Internet banking and financial services. [BARCHART OF NONPERFORMING ASSETS] [GRAPHIC LIGHTHOUSE SUNSET, STOREFRONT AND PENNANT OF MAINE] 11 14 OUTLOOK OUR COMMITMENT IS OUR KEEPSAKE. [GRAPHIC OMITTED] Looking to the future, we expect to see more industry consolidation, an increasing utilization of technology in everything we do, and increased competition for customers. Our competition will also come from wider arenas such as Internet banks and investment companies. Despite these challenges, we remain enthusiastically optimistic about our own prospects. Large community banks have the potential for great success over the coming years. Peoples Heritage is uniquely positioned in our region to serve a wide range of customers. We will continue to look for new ways to increase our market share and profitability through internal growth as well as through merger and acquisition activities that expand our franchise and breadth of services. Of course, our commitment to our customers will remain the same. We will continue to serve our customers with a level of professionalism and expertise that goes beyond the expected. We always strive to work in a way that makes people want to work with us. We seek to embody pride, integrity, passion and respect for others in everything we do. In short, tomorrow looks as bright as the past six record earnings years. [GRAPHIC - "MAN OF THE MOUNTAINS", COUNTRYSIDE, BASKET OF SHELLS] 15 Peoples Heritage Financial Group, Inc. and Subsidiaries - --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) - ----------------------------------------------------------------------------------------------------------------------------------- RESULTS FOR THE YEAR 1999 1998 % Change 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 446,247 $ 426,473 5% $ 404,924 $ 332,029 $ 298,816 Provision for loan and lease losses 14,100 14,430 -2 6,391 8,810 14,235 Noninterest income (excluding securities transactions) 128,907 112,782 14 91,800 68,665 56,990 Securities transactions 281 5,904 -95 2,571 3,495 1,613 Noninterest expenses (excluding special charges) 317,528 321,826 -1 308,680 254,620 231,907 Special charges (1) 29,346 39,172 -25 23,559 9,627 4,958 Net income 142,422 112,824 26 103,672 87,341 70,209 - ----------------------------------------------------------------------------------------------------------------------------------- SHARE DATA (2) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.38 $ 1.09 27 $ 1.01 $ 0.91 $ 0.75 Diluted 1.37 1.07 28 0.99 0.89 0.73 Excluding special charges: Diluted earnings per share (1) 1.58 1.34 18 1.14 0.97 0.77 Diluted cash earnings per share (1)(3) 1.69 1.45 17 1.22 1.03 0.80 Dividends per share 0.47 0.44 7 0.38 0.34 0.26 Book value per share at year end 8.33 8.68 -4 8.20 7.67 7.14 Tangible book value per share at year end 7.22 7.48 -4 6.96 6.89 6.28 Stock price: High 20.25 26.75 -24 23.81 14.32 11.44 Low 14.31 12.81 12 12.94 9.50 5.88 Close 15.06 20.00 -25 23.00 14.00 11.38 Weighted average shares outstanding: Basic 102,988,690 103,637,875 -1 102,219,049 96,068,639 94,100,917 Diluted 104,112,038 105,767,728 -2 104,722,008 98,112,141 95,988,365 - ----------------------------------------------------------------------------------------------------------------------------------- KEY PERFORMANCE RATIOS - ----------------------------------------------------------------------------------------------------------------------------------- Return on average assets 1.08% 0.97% 11 1.02% 1.09% 0.99% Return on average equity 16.36 13.09 25 12.73 12.35 10.96 Net interest margin (4) 3.67 4.02 -9 4.35 4.45 4.55 Average equity to average assets 6.60 7.41 -11 8.05 8.78 9.04 Efficiency ratio (5) 54.05 58.00 -7 60.46 63.54 65.18 Tier 1 leverage capital ratio 6.60 7.50 -12 7.46 8.34 8.96 Dividend payout ratio (6) 34.12 37.37 -9 42.12 34.19 30.41 Excluding special charges: Return on average assets (1) 1.24 1.22 2 1.18 1.18 1.04 Return on average equity (1) 18.85 16.45 15 14.64 13.45 11.53 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES - ----------------------------------------------------------------------------------------------------------------------------------- Assets $ 13,185,084 $ 11,633,615 13 $ 10,114,728 $ 8,049,357 $ 7,087,568 Loans and leases 6,988,007 7,959,667 -12 6,733,736 5,421,977 4,665,795 Earning assets 12,225,724 10,683,175 14 9,359,565 7,511,432 6,618,045 Deposits 8,187,612 8,221,969 0 7,393,762 6,249,138 5,686,211 Shareholders' equity 870,709 861,649 1 814,596 706,979 640,724 - ----------------------------------------------------------------------------------------------------------------------------------- AT YEAR END - ----------------------------------------------------------------------------------------------------------------------------------- Assets $ 13,919,528 $ 12,050,239 16 $ 11,401,860 $ 9,364,346 $ 7,477,894 Loans and leases 6,736,788 6,977,470 -3 7,258,560 5,911,986 4,715,182 Debt and equity securities 5,702,341 3,231,364 76 2,600,057 2,269,365 1,792,615 Deposits 8,114,757 8,376,715 -3 8,034,776 7,129,538 5,910,325 Borrowings 4,788,564 2,554,214 87 2,282,102 1,311,558 775,765 Shareholders' equity 850,977 901,128 -6 846,255 795,714 692,401 Common shares outstanding (thousands) 102,182 103,802 -2 103,218 103,685 96,918 Nonperforming assets (7) 56,356 67,180 -16 77,112 72,709 82,428 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Special charges consist of merger related and other restructuring charges which on an after-tax basis were $21,690, $28,944, $15,547, $7,753, and $3,678 for 1999, 1998, 1997, 1996 and 1995, 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) Net interest income divided by average interest-earning assets, calculated on a fully-taxable equivalent basis. (5) Excludes distribution on securities of subsidiary trust, special charges and securities transactions. (6) Cash dividends paid divided by net income. (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 1999, 1998 and 1997 and financial condition at December 31, 1999 and 1998. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 1999 have been reclassified to conform to the 1999 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, 1999, had 220 offices located in Maine, New Hampshire, Massachusetts and Connecticut. The Company is the largest bank holding company headquartered in northern New England and the fourth 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 four wholly-owned banking subsidiaries: Peoples Heritage Bank ("PHB"), Bank of New Hampshire ("BNH"), Family Bank, FSB ("Family"), which conducts business in certain areas under the name SIS Bank, and Glastonbury Bank & Trust ("GBT"). 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, 1999, PHB had consolidated assets of $4.4 billion and consolidated shareholder's equity of $290 million. BNH is a New Hampshire-chartered commercial bank which operates offices throughout New Hampshire. At December 31, 1999, BNH had consolidated assets of $4.8 billion and consolidated shareholder's equity of $253 million. Family is a federally-chartered savings bank which operates offices in Massachusetts and southern New Hampshire. At December 31, 1999, Family had consolidated assets of $4.4 billion and consolidated shareholder's equity of $243 million. GBT is a Connecticut-chartered commercial bank which operates offices in north-central Connecticut. At December 31, 1999, GBT had consolidated assets of $338 million and consolidated shareholder's equity of $22 million. Each of PHB, BNH, Family and GBT 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 commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for its own portfolio, the Company sells loans into 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 New England, 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 and insurance brokerage services, 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 financial 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 New England The Company believes that New England has 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. Pending and Completed Acquisitions On June 1, 1999, the Company entered into a definitive agreement to acquire Banknorth Group, Inc. ("Banknorth"). Banknorth is headquartered in Burlington, Vermont and has 100 offices located throughout Vermont, Massachusetts, New Hampshire and upstate New York. Under the terms of the definitive agreement, shareholders of Banknorth will receive 1.825 newly issued shares of the Company's common stock (subject to adjustment as provided in the agreement) for each share of Banknorth common stock, plus cash in lieu of any fractional share interests. The definitive agreement is subject to the approval of the shareholders of both Banknorth and the Company, the receipt of requisite regulatory approvals and other customary closing conditions. The acquisition is expected to be accounted for using the pooling-of-interests method and close in the second quarter of 2000. As of December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. 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 acquisition of SIS 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. 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 their operations from the date of acquisition. The Company recorded $9.3 mil- 14 17 lion of goodwill in connection with these purchases. The acquired agencies have been 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 in connection 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. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions (collectively, "special charges"). On an after-tax basis special charges amounted to $21.7 million, $28.9 million and $15.5 million in 1999, 1998 and 1997, respectively. Special charges in 1999 included $5.3 million of after-tax costs to discontinue the correspondent mortgage business. Special charges in 1997 included $4.4 million of after-tax charges related to exiting the lease securitization business conducted through CFX Funding, a subsidiary of CFX. 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 $142.4 million or $1.37 per diluted share in 1999, compared to $112.8 million or $1.07 per diluted share in 1998. Return on average equity was 16.36%, compared to 13.09% in 1998. Excluding special charges, the Company earned $1.58 per diluted share in 1999 compared to $1.34 per diluted share during 1998, an increase of 18%. Return on average equity excluding special charges was 18.85% in 1999 compared to 16.45% in 1998. The improved results were attributable to the successful assimilation of recent acquisitions as well as strong noninterest income growth. Total revenues increased 9% during 1999 as a result of increases in both interest income and noninterest income. Net interest income increased 5% during 1999, as compared to 1998. The increase was attributable to a 14% increase in average interest-earning assets, which was offset in part by a decrease in net interest margin from 4.02% in 1998 to 3.67% in 1999. The decline in net interest margin was attributable to unfavorable changes in asset mix. Noninterest income excluding securities transactions increased 14% during 1999, primarily as a result of increases in income from customer services, trust and investment advisory services and insurance commissions. Noninterest expenses, excluding special charges, decreased 1% during 1999 compared to a 9% increase in total revenues. The decrease in noninterest expenses primarily resulted from a decrease in salaries and employee benefits due to assimilation of recent acquisitions and lower distributions on the securities of a subsidiary trust. Net Interest Income The Company's net interest income increased 5% during 1999 due primarily to the positive impact of a 17 basis point decline in the total cost of funds. Average earning assets increased by 14%. Commercial real estate, commercial business and consumer loan product lines all experienced significant growth while residential real estate loans declined. Residential real estate loans declined largely due to the Company's discontinuance of the correspondent mortgage business and the securitization of $633 million of residential loans in a REMIC, which are now classified as securities held to maturity. Securities increased due primarily to this securitization and additional declines in residential mortgages, which were offset by investments in agency mortgage-backed securities which carry a lower yield. Average securities increased $2.5 billion, or 97% in 1999 compared to 1998. Average levels of loans and leases decreased by $971.7 million, or 12.2%, in 1999 compared to 1998 as a result of the decline in residential real estate loans. The net interest margin declined to 3.67% in 1999 from 4.02% during 1998. The lower margin was largely due to increased levels of securities as a percent of total earning assets, purchases of bank owned life insurance (the earnings from which are recorded as noninterest income) and an increase in average borrowings as a percent of total average liabilities. Information on average balances, yields and rates for the past three years can be found in Table 1. Table 2 shows the changes from 1998 to 1999 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, 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- AVERAGE YIELD/ Average Yield/ (Dollars in Thousands) BALANCE INTEREST RATE Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- Loans and leases (1) $ 6,988,007 $580,888 8.31% $ 7,959,667 $672,007 8.44% Investment securities 5,106,436 322,881 6.32 2,593,640 163,151 6.29 Federal funds sold and other short-term investments 131,281 6,375 4.86 129,868 5,452 4.20 ------------ -------- ----------- -------- Total earning assets 12,225,724 910,144 7.44 10,683,175 840,610 7.87 -------- -------- Nonearning assets 959,360 950,440 ------------ ------------ Total assets $ 13,185,084 $ 11,633,615 ============ ============ Interest-bearing deposits: Certificates of deposit $ 3,339,347 $166,634 4.99% $ 3,462,115 $187,908 5.43% Brokered deposits 179,760 9,653 5.37 283,499 16,535 5.83 Other interest-bearing deposits 3,373,703 75,908 2.25 3,263,152 80,492 2.47 ------------ -------- ------------ -------- Total interest-bearing deposits 6,892,810 252,195 3.66 7,008,766 284,935 4.07 Borrowed funds 3,988,276 209,493 5.25 2,307,034 126,051 5.46 ------------ -------- ------------ -------- Total interest-bearing liabilities 10,881,086 461,688 4.24 9,315,800 410,986 4.41 -------- -------- Non-interest bearing deposits 1,294,802 1,213,203 Other liabilities 65,409 142,963 Securities of subsidiary trust 73,078 100,000 Shareholders' equity 870,709 861,649 ------------ ------------ Total liabilities and shareholders' equity $ 13,185,084 $ 11,633,615 ============ ============ Net earning assets $ 1,344,638 $ 1,367,375 ============ ============ Net interest income (fully-taxable equivalent) 448,456 429,624 Less: fully-taxable equivalent adjustments (2,209) (3,151) -------- -------- Net interest income $446,247 $426,473 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.20% 3.46% Net interest margin (fully-taxable equivalent) 3.67% 4.02% - ---------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ Year Ended December 31, 1997 - ------------------------------------------------------------------------------------------------ Average Yield/ (Dollars in Thousands) Balance Interest Rate - ------------------------------------------------------------------------------------------------ Loans and leases (1) $ 6,733,736 $590,943 8.78% Investment securities 2,538,405 168,290 6.63 Federal funds sold and other short-term investments 87,424 4,366 4.99 ---------- -------- Total earning assets 9,359,565 763,599 8.16 -------- Nonearning assets 755,163 ----------- Total assets $10,114,728 =========== Interest-bearing deposits: Certificates of deposit $ 3,227,858 $175,395 5.43% Brokered deposits 155,281 9,324 6.00 Other interest-bearing deposits 3,026,668 76,759 2.54 ----------- -------- Total interest-bearing deposits 6,409,807 261,478 4.08 Borrowed funds 1,705,603 94,868 5.56 ----------- -------- Total interest-bearing liabilities 8,115,410 356,346 4.39 -------- Non-interest bearing deposits 983,955 Other liabilities 113,279 Securities of subsidiary trust 87,488 Shareholders' equity 814,596 ----------- Total liabilities and shareholders' equity $10,114,728 =========== Net earning assets $ 1,244,155 =========== Net interest income (fully-taxable equivalent) 407,253 Less: fully-taxable equivalent adjustments (2,329) -------- Net interest income $404,924 ======== Net interest rate spread (fully-taxable equivalent) 3.77% Net interest margin (fully-taxable equivalent) 4.35% - --------------------------------------------------------------------------------------------
(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. 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, 1999 vs 1998 Year Ended December 31, 1998 vs 1997 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) $(10,348) $ (82,008) $ 1,237 $ (91,119) $(22,437) $107,586 $(4,085) $ 81,064 Investment securities 778 158,055 897 159,730 (8,613) 3,662 (187) (5,139) Federal funds sold and other short-term investments 858 59 6 923 (696) 2,120 (338) 1,086 -------- --------- ------- --------- -------- -------- ------- -------- Total earning assets (8,712) 76,106 2,140 69,534 (31,746) 113,368 (4,610) 77,011 -------- --------- ------- --------- -------- -------- ------- -------- Interest-bearing liabilities: Deposits: Regular savings and money market access accounts (7,071) 2,727 (240) (4,584) (2,100) 5,997 (164) 3,733 Certificates of deposit (15,148) (6,663) 537 (21,274) (201) 12,729 (15) 12,513 Brokered deposits (1,312) (6,050) 480 (6,882) (268) 7,699 (221) 7,210 -------- --------- ------- --------- -------- -------- ------- -------- Total interest-bearing deposits (23,531) (9,986) 777 (32,740) (2,569) 26,425 (400) 23,456 Borrowed funds (4,869) 91,859 (3,548) 83,442 (1,677) 33,452 (591) 31,184 -------- --------- ------- --------- -------- -------- ------- -------- Total interest-bearing liabilities (28,400) 81,873 (2,771) 50,702 (4,246) 59,877 (991) 54,640 -------- --------- ------- --------- -------- -------- ------- -------- Net interest income (fully taxable equivalent) $ 19,688 ($ 5,767) $ 4,911 $ 18,832 ($27,500) $ 53,491 ($3,619) $ 22,371 ======== ========= ======= ========= ======== ======== ======= ========
(1) Loans and leases include portfolio loans, leases, 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 1999 of $14.1 million, as compared to a $14.4 million provision in 1998. Net chargeoffs to average loans outstanding was 0.24% in 1999 compared to 0.20% in 1998. The slight increase was due to lower average levels of residential real estate loans, which generally have low levels of charge-offs. The allowance for loan and lease losses represented 1.58% of portfolio loans and leases outstanding at December 31, 1999, as compared to 1.56% at December 31, 1998. The improvement resulted primarily from a decrease in the amount of residential real estate loans in portfolio as discussed above. The ratio of the allowance to nonperforming loans at December 31, 1999 was 235%, as compared to 195% at December 31, 1998. Management believes that improvement in this coverage ratio is consistent with the change in the composition of the loan portfolio and reduced levels of nonperforming loans, as discussed below. 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, 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 chargeoff 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 best judgment in providing for 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 future 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) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Average loans and leases outstanding $6,988,007 $7,959,667 $6,733,736 $5,421,977 $4,665,795 ========== ========== ========== ========== ========== Allowance at the beginning of period $ 110,561 $ 112,064 $ 106,769 $ 98,833 $ 102,976 Additions due to acquisitions -- -- 7,361 11,365 2,457 Charge-offs: Real estate loans 5,477 9,054 5,117 17,806 21,128 Commercial business loans and leases 4,153 5,400 7,249 4,898 7,098 Consumer loans and leases 14,279 12,226 10,482 5,285 3,949 ---------- ---------- ---------- ---------- ---------- Total loans charged off 23,909 26,680 22,848 27,989 32,175 ---------- ---------- ---------- ---------- ---------- Recoveries: Real estate loans 2,466 6,026 8,523 12,291 6,914 Commercial business loans and leases 2,496 2,367 3,801 2,205 3,164 Consumer loans and leases 2,157 2,354 2,067 1,254 1,262 ---------- ---------- ---------- ---------- ---------- Total loans recovered 7,119 10,747 14,391 15,750 11,340 ---------- ---------- ---------- ---------- ---------- Net charge-offs 16,790 15,933 8,457 12,239 20,835 Provision for loan and lease losses 14,100 14,430 6,391 8,810 14,235 ---------- ---------- ---------- ---------- ---------- Allowance at the end of the period $ 107,871 $ 110,561 $ 112,064 $ 106,769 $ 98,833 ========== ========== ========== ========== ========== Ratio of net charge-offs to average loans and leases outstanding 0.24% 0.20% 0.13% 0.23% 0.45% Ratio of allowance to total portfolio loans and leases at end of period 1.58% 1.56% 1.52% 1.77% 2.05% Ratio of allowance to nonperforming loans at end of period 235.07% 195.59% 171.02% 190.69% 152.34%
- -------------------------------------------------------------------------------- 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) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- PERCENT OF Percent of Percent of LOANS IN EACH Loans in each Loans in each CATEGORY TO Category to Category to AMOUNT TOTAL LOANS Amount Total Loans Amount Total Loans -------- ------ -------- ------ -------- ------ Real estate loans $ 53,169 46.84% $ 55,487 54.35% $ 60,849 61.05% Commercial business loans and leases 36,469 18.87% 32,878 16.17% 24,650 13.61% Consumer loans and leases 18,233 34.29% 22,196 29.48% 19,323 25.34% Unallocated allowance -- -- -- -- 7,242 -- -------- ------ -------- ------ -------- ------ $107,871 100.00% $110,561 100.00% $112,064 100.00% ======== ====== ======== ====== ======== ======
- ----------------------------------------------------------------------------------------------- December 31, - ----------------------------------------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------------------------- Percent of Percent of Loans in each Loans in each Category to Category to Amount Total Loans Amount Total Loans -------- ------ ------- ------ Real estate loans $ 60,416 62.18% $60,455 63.30% Commercial business loans and leases 25,449 13.75% 18,484 14.25% Consumer loans and leases 14,647 24.07% 12,919 22.45% Unallocated allowance 6,257 -- 6,975 -- -------- ------ ------- ------ $106,769 100.00% $98,833 100.00% ======== ====== ======= ======
18 21 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- The unallocated component in the preceding 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 portfolio. 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 are the primary factors considered by management in determining the adequacy of the allowance for loan and lease losses. Loan terms and portfolio concentrations did not change significantly during 1999, although residential mortgage loans decreased from 31% to 21% of the loan portfolio at December 31, 1998 and 1999, respectively. At December 31, 1999, non-performing loans as a percent of total loans was 0.67%, as compared to 0.80% at December 31, 1998. At December 31, 1999, the Company's allowance as a percentage of non-performing loans was 235% and has averaged 189% over the past five years (based on year end data). At December 31, 1999, the Company's allowance was 6.4 times the 1999 net charge-offs and has averaged 7.2 times net charge-offs over the past five years (based on year end data). This decline was due primarily to increased levels of consumer charge-offs and reduced levels of recoveries. Noninterest Income Noninterest income was $129.2 million in 1999 compared to $118.7 million in 1998. The 9% increase in 1999 resulted primarily from increases of $12.4 million in customer services income, $7.8 million in bank owned life insurance ("BOLI") and $7.3 million in insurance commissions which were offset by a $10.9 million decrease in mortgage banking services primarily due to the discontinuation of the correspondent mortgage business. Customer services income of $53.4 million increased 30% from 1998 and was attributable to increased fees including ATM fees related to charging customers for using our ATMs. Mortgage banking services income of $16.3 million decreased 40% or $10.9 million during 1999. The decrease resulted from a $16.6 million, or 72%, decrease in mortgage sales income, primarily from the discontinuance of the correspondent mortgage lending business in January 1999 and a $5.2 million decrease in net mortgage servicing income due to a 33% decrease in the average total of mortgages serviced for others. See "Special Charges" below for a discussion of the cost to discontinue the correspondent mortgage lending business. The Company's portfolio of residential mortgages serviced for investors was $3.6 billion at December 31,1999 as compared to $4.2 billion and $6.1 billion at December 31, 1998 and 1997, respectively. Mortgage loans serviced for others decreased in 1998 primarily as a result of the sale of mortgage servicing rights of $75.9 million related to $2.8 billion of loans. Gains on the sales of mortgage servicing rights totaled $2.6 million and $1.6 million in 1999 and 1998, respectively. Capitalized mortgage servicing rights increased from $40.1 million at December 31, 1998 to $46.8 million at December 31, 1999 due primarily to lower impairment reserves as a result of rising interest rates. See Note 7 to the Consolidated Financial Statements. Because mortgage servicing rights are an interest-rate sensitive asset, the value of the Company's mortgage servicing rights and the related mortgage banking income may be adversely impacted if mortgage interest rates decline and actual or expected loan prepayments increase. To mitigate the prepayment risk associated with adverse changes in interest rates and the resultant impairment to capitalized mortgage servicing rights and effects on mortgage banking income, the Company has established a hedge program against a portion of its capitalized mortgage servicing rights to help protect its value and mortgage banking income. Notwithstanding the foregoing, there can be no assurance that significant declines in interest rates will not have a material impact on the Company's mortgage servicing rights and mortgage banking income or that the hedge program will be successful in mitigating the effects of such a decline. - -------------------------------------------------------------------------------- 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 indicated.
- ------------------------------------------------------------------------------------------- At or for the Year Ended December 31, - ------------------------------------------------------------------------------------------- (Dollars in Thousands) 1999 1998 1997 Residential mortgages serviced for investors $ 3,621,848 $ 4,243,181 $6,149,111 =========== =========== ========== Residential mortgage sales income $ 6,517 $ 23,123 $ 13,766 Residential mortgage servicing income, net 5,981 11,143 12,533 Impairment adjustment for mortgage servicing rights income (expense) 5,160 (11,086) -- Valuation adjustment -- -- interest rate floor income (expense) (3,950) 2,380 -- Gains on sale of mortgage servicing rights 2,634 1,642 2,380 ----------- ----------- ---------- Mortgage banking services income $ 16,342 $ 27,202 $ 28,679 =========== =========== ==========
Trust income of $14.6 million increased 15% during 1999 primarily due to increased assets under management. Assets under management were $3.2 billion and $3.0 billion at December 31, 1999 and 1998, respectively, an increase of 7%. Investment advisory services income of $5.3 million increased 37% during 1999. Insurance commission income was $20.3 million and $13.0 million in 1999 and 1998, respectively. This 56% increase reflects the Company's acquisitions of insurance agencies in Massachusetts and New Hampshire in the fourth quarter of 1998 and were accounted for using the purchase method. BOLI income was $11.5 million and $3.7 million in 1999 and 1998, respectively. The increase related to additional purchases of BOLI in the first quarter of 1999. The cash surrender value of BOLI was $228.4 million at December 31, 1999 compared to $66.9 million at December 31, 1998. This increase reflects both additional purchases of BOLI and increases in cash surrender value. BOLI covers certain employees of the Company's bank subsidiaries. Most of the Company's BOLI is invested in the 'general account' of quality insurance companies. Substantially all such companies were rated AA or better by Standard and Poors at December 31, 1999. Net securities gains amounted to $281 thousand and $5.9 million 19 22 during 1999 and 1998, 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 $7.5 million and $11.3 million during 1999 and 1998, respectively, and consisted primarily of loan fee income. Other noninterest income in 1998 included a $1.0 million gain on sale of a credit card portfolio Noninterest Expense Noninterest expense was $346.9 million in 1999 compared to $361.0 million in 1998. The $14.1 million or 3.9% decrease was largely attributable to a decrease in special charges ($9.8 million), a decrease in distributions on securities of subsidiary trust ($2.4 million) and a decrease in other noninterest expense ($4.4 million). These decreases were offset by increases in data processing expenses ($2.6 million) due primarily to Year 2000 costs. Excluding special charges, noninterest expense decreased 1%. The efficiency ratio improved to 54.05% during 1999 from 58.00% in 1998 primarily as a result of the efficiencies created by the assimilation of recent acquisitions, as well as operating improvements. Salaries and benefits expense of $163.6 million decreased 1% during 1999. This decrease was due primarily to the integration of the recent acquisitions. Data processing expense increased 10% to $28.0 million in 1999 from $25.4 million during 1998. The increase was attributable to the implementation of system upgrades to accommodate increased volumes and expenditures for Year 2000 initiatives. See "Impact of the Year 2000" for further discussion. Occupancy expense and equipment expense each increased 2% during 1999. Amortization of goodwill and deposit premiums increased 1% during 1999 due primarily to amortization of goodwill related to purchases of insurance agencies in late 1998. Advertising and marketing expense decreased 12% during 1999 reflecting the synergies from recent acquisitions. Other noninterest expense, which is comprised primarily of general and administrative expenses, decreased $3.0 million or 6% during 1999 through cost savings realized from the assimilation of recent acquisitions. Special Charges Special charges consist of merger-related expenses of $22.0 million, $39.2 million and $16.4 million during 1999, 1998 and 1997, respectively, as well as $7.4 million of costs related to the discontinuation of the correspondent mortgage lending business in 1999 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 $21.7 million, $28.9 million and $15.5 million for the years ended 1999, 1998 and 1997, respectively. See Note 9 to the Notes to the Consolidated Financial Statements. Taxes The Company's effective tax rate was 33.6% in 1999 compared to 33.5% in 1998. Comprehensive Income The Company's comprehensive income amounted to $38.9 million and $103.2 million during 1999 and 1998, respectively. Comprehensive income differed from the Company's net income in these periods because of a $103.5 million increase in net unrealized loss on securities during 1999 and a $9.6 million increase in net unrealized loss on securities during 1998. For additional information, see the Consolidated Financial Statements. COMPARISON OF 1998 AND 1997 The Company reported net income of $112.8 million for 1998, or $1.07 per diluted share, compared with net income of $103.7 million, or $0.99 per diluted share, reported in 1997. Return on average assets and return on average equity were 0.97% and 13.09%, respectively, for 1998, compared with 1.02% and 12.73%, respectively, in 1997. Excluding the impact of special charges, net income and diluted earnings per share were $141.8 million and $1.34, respectively, for 1998 and $119.2 million and $1.14, respectively, for 1997. Return on average assets and return on average equity were 1.22% and 16.45%, respectively, for 1998 and 1.18% and 14.64%, respectively, for 1997, excluding special charges. Net interest income on a fully taxable-equivalent basis totaled $429.6 million compared with $407.3 million in 1997. The 6% increase in 1998 reflected strong loan growth. The provision for loan and lease losses was $14.4 million in 1998 compared to a $6.4 million provision in 1997 as a result of significant loan growth in commercial and consumer loans and the Company's estimate of future potential losses. The ratio of the allowance to nonperforming loans at December 31, 1998 was 196% compared to 171% at December 31, 1997. The allowance for loan and lease losses represented 1.56% of total loans at December 31, 1998 compared to 1.52% 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. Noninterest income was $118.7 million and $94.4 million for the years ended December 31, 1998 and 1997, respectively. Increases of $6.5 million in customer services income and $11.1 million in insurance commissions contributed to the $24.3 million or 26% increase in 1998. Customer services income of $41.0 million reflected a 19% growth from 1997. In 1998, the Company recorded a full year of insurance commissions compared to 1997 since the Company entered the insurance business in the fourth quarter of 1997. Noninterest expense was $361.0 million for 1998 compared with $332.2 million for 1997, a 9% increase. The 1998 increase was primarily attributable to an increase in special charges, higher data processing expense and higher intangible amortization due to recent purchase acquisitions. The efficiency ratio, which excludes special charges and dividends on the capital securities of Peoples Heritage Capital Trust I, improved from 60.46% in 1997 to 58.00% in 1998. Average earning assets increased $1.3 billion or 14% in 1998 primarily due to internal growth in loans and loans held for sale. Average interest-bearing liabilities increased 15% in 1998 in order to fund the growth in assets. 20 23 FINANCIAL CONDITION The Company's consolidated total assets increased by $1.9 billion, or 16%, from $12.1 billion at December 31, 1998 to $14.0 billion at December 31, 1999. Shareholders' equity totaled $851 million at December 31, 1999 compared to $901 million at December 31, 1998, an decrease of 6%. The decrease is shareholders' equity was primarily due to a $103.5 million increase in net unrealized loss on available for sale securities. Excluding unrealized losses, equity increased $53.3 million, or 6%, due to net income for the period, which was offset in part by the cost of stock repurchases and dividends paid on common stock. Average earning assets increased $1.5 billion or 14% in 1999 primarily as a result of increased securities portfolio. Average loans decreased by 12% in 1999 mostly due to the securitization of $633 million of residential real estate loans which were classified as securities held to maturity at December 31, 1999. In 1998, average earning assets increased 15% excluding the impact of loan growth resulting from purchase acquisitions and required divestitures. See Table 1 for more information on loan growth. Average loans as a percentage of average earning assets was 57% in 1999 and 75% in 1998. Investment Securities and Other Earning Assets The average balance of the securities portfolio was $5.1 billion in 1999 and $2.6 billion in 1998. The increase was primarily in mortgage-backed securities and was due to a program undertaken by the Company to offset lower residential real estate loans and increase balance sheet leverage. 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 bonds and notes consist of asset-backed securities, corporate bonds and trust preferred securities. Other equity securities consist of corporate preferred stock with no stated maturity. - -------------------------------------------------------------------------------- TABLE 6 - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - -------------------------------------------------------------------------------- The following table sets forth the Company's investment securities at the dates indicated. - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government and federal agencies $ 534,720 $ 352,422 $ 522,742 Tax-exempt bonds and notes 19,570 36,461 28,865 Other bonds and notes 240,754 3,201 82,780 Mortgage-backed securities 3,823,658 2,232,978 1,272,696 Collateralized mortgage obligations 453,930 200,774 308,864 ----------- ----------- ---------- Total debt securities 5,072,632 2,825,836 2,215,947 Federal Home Loan Bank of Boston stock 221,335 123,706 99,565 Other equity securities 28,803 39,234 50,816 ----------- ----------- ---------- Total equity securities 250,138 162,940 150,381 ----------- ----------- ---------- Net unrealized gain (loss) (161,761) (2,645) 12,538 ----------- ----------- ---------- Fair value of securities available for sale $ 5,161,009 $ 2,986,131 $2,378,866 =========== =========== ========== Securities held to maturity: U.S. Government and federal agencies $ -- $ -- $ 10,121 Tax-exempt bonds and notes -- -- 13,470 Other bonds and notes -- 330 745 Asset-backed securities -- 65,350 46,046 Mortgage-backed securities -- 168,554 147,516 Real estate mortgage investment conduit 541,332 -- -- Collateralized mortgage obligations -- 10,999 3,293 ----------- ----------- ---------- Amortized cost of securities held to maturity $ 541,332 $ 245,233 $ 221,191 =========== =========== ========== Fair value of securities held to maturity $ 519,725 $ 245,555 $ 221,891 =========== =========== ========== Excess of fair value of securities held to maturity over recorded value (recorded value over fair value) ($ 21,607) $ 322 $ 700 =========== =========== ========== Fair value of securities held to maturity as a % of amortized cost 96.0% 100.1% 100.3%
21 24 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE 7 - MATURITIES OF SECURITIES - -------------------------------------------------------------------------------- The following table sets forth the scheduled maturities and fully-taxable equivalent weighted average yields of the Company's debt securities available for sale at December 31, 1999. - --------------------------------------------------------------------------------
Amortized Cost Maturing in - --------------------------------------------------------------------------------------------------------------------- More than One More than Five Less than One Year to Five Years to Ten Years - --------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Yield Amount Yield Amount Yield - --------------------------------------------------------------------------------------------------------------------- U.S. Government and federal agencies $45,408 4.86% $412,095 5.73% $ 9,000 7.99% Tax-exempt bonds and notes 2,630 6.56% 6,026 6.64% -- -- Other bonds and notes 675 6.89% 13,662 7.37% 98,910 7.22% Mortgage-backed securities 911 5.48% 12,519 6.42% 147,419 6.74% Collateralized mortgage obligations 106 5.01% 7,679 5.78% 12,756 6.48% ------- ---- -------- ---- -------- ---- Total $49,730 4.99% $451,981 5.81% $268,085 6.95% ======= ==== ======== ==== ======== ====
Amortized Cost Maturing in - ------------------------------------------------------------------------------------------------------- More than Ten Years Total - ------------------------------------------------------------------------------------------------------- Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------- U.S. Government and federal agencies $ 68,217 5.71% $ 534,720 5.69% Tax-exempt bonds and notes 10,914 8.01% 19,570 7.39% Other bonds and notes 127,507 7.81% 240,754 7.54% Mortgage-backed securities 3,662,809 6.48% 3,823,658 6.49% Collateralized mortgage obligations 433,389 6.43% 453,930 6.42% ---------- ---- ---------- ---- Total $4,302,836 6.51% $5,072,632 6.45% ========== ==== ========== ====
The following table sets forth the maturities and weighted average yields of the Company's debt securities held to maturity at December 31, 1999.
- ---------------------------------------------------------------------------------------------------------------------------------- Amortized Cost Maturing in - ---------------------------------------------------------------------------------------------------------------------------------- More than One More than Five More than Less than One Year to Five Years to Ten Years Ten Years Total - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Real estate mortgage investment conduit $0 0.00% $0 0.00% $0 0.00% $541,332 7.30% $541,332 7.30% == ==== == ==== == ==== ======== ==== ======== ====
Securities available for sale are carried at fair value and had an unrealized loss of $161.8 million at December 31, 1999 as compared to an unrealized loss of $2.6 million at December 31, 1998. These unrealized losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders' equity, net of related deferred income taxes. Unrealized 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. The Company does not consider any of the unrealized losses to be other than temporary. The assets in the REMIC generally consist of residential mortgages with original maturities in excess of 10 years. Although the REMIC has a five year term, the REMIC security has been included in the above table based on the maturity characteristics of the underlying assets. Loans Residential real estate loans (including loans held for sale) averaged $1.9 billion in 1999 compared to $3.2 billion in 1998, a decrease of 42%. The decrease in the 1999 average balance resulted primarily from the discontinuation of the correspondent mortgage business in January 1999 and the securitization of $633 million of residential real estate loans. Commercial real estate loans averaged $1.7 billion in 1999 and $1.6 billion in 1998, an 8% 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 $1.2 billion in 1999 and $1.1 billion in 1998, an increase of 13%. All of these loans are originated through subsidiaries. Commercial business leases are direct equipment leases, primarily office equipment, and amounted to $51.2 million at December 31, 1999. Consumer loans and leases averaged $2.2 billion in 1999 and $2.0 billion in 1998, an increase of 7%. The growth in consumer loans was primarily in indirect automobile 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 automobile lease receivables. Automobile lease receivables acquired through the CFX acquisition totaled $59.8 million at December 31, 1999 compared to $96.9 million at December 31, 1998. The Company had classified these 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. 22 25 Peoples Heritage Financial Group, Inc. and Subsidiaries TABLE 8 - SCHEDULED CONTRACTUAL AMORTIZATION OF LOANS AT DECEMBER 31, 1999 The following table sets forth the scheduled contractual amortization of the Company's loan portfolio at December 31, 1999, 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.
Residential Commercial Commercial Consumer Real Estate Real Estate Business Loans Loans and (Dollars in Thousands) Loans Loans and Leases Leases Total - ---------------------- ----- ----- ---------- ------ ----- Amounts due: Within one year $ 113,798 $ 773,287 $ 727,551 $ 793,658 $2,408,294 After one year through five years 179,951 551,962 372,103 1,268,375 2,372,391 Beyond five years 1,116,745 470,514 191,717 284,998 2,063,974 ---------- ---------- ---------- ---------- ---------- Total $1,410,494 $1,795,763 $1,291,371 $2,347,031 $6,844,659 ========== ========== ========== ========== ========== Interest rate terms on amounts due after one year Fixed $ 807,116 $ 758,009 $ 385,989 $1,402,042 $3,353,156 Adjustable 489,580 264,467 177,831 151,331 1,083,209
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, ------------ 1999 1998 1997 ---- ---- ---- % of % of % of (Dollars in Thousands) Amount Loans Amount Loans Amount Loans - ---------------------- ------ ----- ------ ----- ------ ----- Residential real estate loans $1,410,494 20.60% $2,230,615 31.47% $2,908,834 39.47% Commercial real estate loans: Permanent first mortgage loans 1,674,369 24.46 1,463,222 20.64 1,459,330 19.80 Construction and development 121,394 1.78 158,668 2.24 131,275 1.78 ---------- ------ ---------- ------ ---------- ------ Total 1,795,763 26.24 1,621,890 22.88 1,590,605 21.58 ---------- ------ ---------- ------ ---------- ------ Commercial loans and leases 1,291,371 18.87 1,146,242 16.17 1,003,129 13.61 Consumer loans and leases 2,347,031 34.29 2,089,284 29.48 1,868,056 25.34 ---------- ------ ---------- ------ ---------- ------ Total loans receivable 6,844,659 100.00% 7,088,031 100.00% 7,370,624 100.00% ====== ====== ====== Allowance for loan and lease losses 107,871 110,561 112,064 ---------- ---------- ---------- Net loans receivable $6,736,788 $6,977,470 $7,258,560 ========== ========== ==========
December 31, ------------ 1996 1995 ---- ---- % of % of (Dollars in Thousands) Amount Loans Amount Loans - ---------------------- ------ ----- ------ ----- Residential real estate loans $2,340,743 38.89% $1,838,423 38.19% Commercial real estate loans: Permanent first mortgage loans 1,316,450 21.88 1,144,794 23.78 Construction and development 85,078 1.41 64,092 1.33 ---------- ------ ---------- ------ Total 1,401,528 23.29 1,208,886 25.11 ---------- ------ ---------- ------ Commercial loans and leases 827,766 13.75 686,129 14.25 Consumer loans and leases 1,448,718 24.07 1,080,577 22.45 ---------- ------ ---------- ------ Total loans receivable 6,018,755 100.00% 4,814,015 100.00% ====== ====== Allowance for loan and lease losses 106,769 98,833 ---------- ------------- Net loans receivable $5,911,986 $ 4,715,182 ========== =============
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 21% of the total loan portfolio at December 31, 1999, down from 31% at the end of 1998. The decrease in 1999 resulted primarily from the securitization of $633 million of residential real estate loans, as well as increased levels of prepayments, particularly early in the year. 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, 1999, 0.78% of the Company's residential loans were nonperforming, as compared to 0.44% at December 31, 1998. In dollar terms, residential nonperforming loans have only increased $1.1 million. However, many of the higher quality loans have been sold, securitized or have prepaid. The Company's commercial real estate loan portfolio accounted for 26% of the total loan portfolio at December 31,1999, compared to 23% at December 31, 1998. 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. At December 31, 1999, 0.82% of the Company's commercial real estate loans were nonperforming, as compared to 1.23% at December 31, 1998. 23 26 Peoples Heritage Financial Group, Inc. and Subsidiaries The Company's commercial business loan portfolio accounted for 19% of the total loan portfolio at December 31, 1999, compared to 16% at December 31, 1998. 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 economy of New England. 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, 1999, 1.16% of the Company's commercial business loans were nonperforming, as compared to 1.38% at December 31, 1998. Consumer loans and leases accounted for 34% of the Company's total loan portfolio at December 31, 1999, compared to 29% at December 31, 1998. The Company has a diversified consumer loan portfolio which included $910.0 million of automobile loans and leases, $930.0 million of home equity loans, $167.2 of mobile home loans, $137.9 million of education loans and $35.1 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, 1999, 0.22% of the Company's consumer loans were nonperforming, as compared to 0.52% at December 31, 1998. 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 0.40% at December 31, 1999 compared to 0.56% at December 31, 1998. In addition, total nonperforming assets as a percentage of total loans and other nonperforming assets was 0.82% and 0.95% at December 31, 1999 and 1998, 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 collectibility of interest and/or principal is doubtful. At December 31, 1999, the Company had $10.5 million of accruing loans which were 90 days or more delinquent, as compared to $22.0 million and $8.8 million of such loans at December 31, 1998 and 1997, respectively. The increase at year end 1998 was primarily attributable to an increase in residential real estate loans over 90 days delinquent, which were well secured and in the process of collection. 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 $16.8 million during 1999, as compared to $15.9 million in 1998. Net charge-offs in 1999 represented 0.24% of average loans and leases outstanding, as compared to 0.20% in 1998. Decreased gross charge-offs in 1999 compared to 1998 were primarily due to real estate loans, while decreased recoveries related primarily to commercial real estate loans. See Table 3. TABLE 10 - NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING The following table sets forth net charge-offs to average loans outstanding by type of loan during the periods indicated.
Net Charge-offs to Average Loans Outstanding ------------------------- 1999 1998 ---- ---- Real estate loans 0.08% 0.07% Commercial business loans and leases 0.14 0.28 Consumer loans and leases 0.56 0.49 Total 0.24 0.20
See Table 3 for more information concerning charge-offs and recoveries during each of the past five years. 24 27 Peoples Heritage Financial Group, Inc. and Subsidiaries TABLE 11 - FIVE YEAR SCHEDULE OF NON-PERFORMING ASSETS The following table sets forth information regarding nonperforming assets at the dates indicated.
December 31, ----------------------------------------------------------------------------- (Dollars in Thousands) 1999 1998 1997 1996 1995 - ---------------------- ---- ---- ---- ---- ---- Residential real estate loans: Nonaccrual loans $11,046 $ 9,917 $16,534 $12,098 $15,451 Troubled debt restructurings - - - - - ------- ------ ------- ------- ------- Total 11,046 9,917 16,534 12,098 15,451 ------- ------ ------- ------- ------- Commercial real estate loans: Nonaccrual loans 13,699 19,944 21,124 21,928 25,570 Troubled debt restructurings 1,002 6 3,428 4,332 7,925 ------- ------ ------- ------- ------- Total 14,701 19,950 24,552 26,260 33,495 ------- ------ ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 14,944 14,920 15,669 11,400 9,892 Troubled debt restructurings 82 874 114 615 1,897 ------- ------ ------- ------- ------- Total 15,026 15,794 15,783 12,015 11,789 ------- ------ ------- ------- ------- Consumer loans: Nonaccrual loans 5,115 10,865 8,658 5,618 4,143 Troubled debt restructurings - - - - - ------- ------ ------- ------- ------- Total 5,115 10,865 8,658 5,618 4,143 ------- ------ ------- ------- ------- Total nonperforming loans: Nonaccrual loans 44,804 55,646 61,985 51,044 55,056 Troubled debt restructurings 1,084 880 3,542 4,947 9,822 ------- ------ ------- ------- ------- Total 45,888 56,526 65,527 55,991 64,878 ------- ------ ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 7,642 7,030 8,367 14,611 15,997 Repossessions, net of related reserves 2,826 3,624 3,218 2,107 1,553 ------- ------ ------- ------- ------- Total 10,468 10,654 11,585 16,718 17,550 ------- ------ ------- ------- ------- Total nonperforming assets $56,356 $67,180 $77,112 $72,709 $82,428 ======= ======= ======= ======= ======= Accruing loans 90 days overdue $10,484 $21,962 $8,786 $8,466 $4,999 ======= ======= ====== ======= ======= Total nonperforming loans as a percentage of total loans 0.67% 0.80% 0.89% 0.93% 1.35% Total nonperforming assets as a percentage of total assets 0.40% 0.56% 0.68% 0.78% 1.10% Total nonperforming assets as a percentage of total loans and other non-performing assets 0.82% 0.95% 1.04% 1.20% 1.71%
25 28 Peoples Heritage Financial Group, Inc. and Subsidiaries Deposits Average interest-bearing deposits decreased 2% during 1999 to $6.9 billion. Average retail certificates of deposit decreased $123 million during 1999 to $3.3 billion. The average rate paid on certificates of deposit decreased in 1999 from 5.43% in 1998 to 4.99%. 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 $180 million and $283 million in 1999 and 1998, respectively. The average rate paid on brokered deposits was 5.37% in 1999 compared to 5.83% in 1998. Other interest-bearing deposits (savings, NOW and money market accounts) increased 3% in 1999 to $3.4 billion from $3.3 billion in 1998. The average rate paid on these deposits declined from 2.47% in 1998 to 2.25% in 1999. Average demand deposit accounts increased 7% in 1999 to $1.3 billion from $1.2 billion in 1998. The increase in demand deposits was 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, 1999-1998 Change ----------------------------------------------- ------------------------- (Dollars in Thousands) 1999 1998 1997 Amount Percent - ---------------------- ---- ---- ---- ------ ------- Demand deposits $1,311,112 $1,305,737 $1,155,327 $ 5,375 0.41% Money market access/NOW accounts 2,232,891 2,073,793 1,824,397 159,098 7.67% Savings accounts 1,237,092 1,284,074 1,353,249 (46,982) (3.66%) Certificates of deposit 3,159,864 3,455,541 3,451,813 (295,677) (8.56%) Brokered deposits 173,798 257,570 249,990 (83,772) (32.52%) ---------- ---------- ---------- --------- ------ Total deposits $8,114,757 $8,376,715 $8,034,776 ($261,958) (3.13%) ========== ========== ========== ========= ======
TABLE 13 - MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 1999 The following table sets forth the scheduled maturity of certificates of deposit of $100,000 or more at December 31, 1999.
(Dollars in Thousands) Balance Percent - ---------------------- ------- ------- 3 months or less $252,580 38.21% Over 3 to 6 months 181,092 27.39 Over 6 to 12 months 144,229 21.82 More than 12 months 83,167 12.58 -------- ------ $661,068 100.00% ======== ======
Other Funding Sources Average borrowed funds for 1999 were $4.0 billion, compared with $2.3 billion in 1998. The increase funded higher levels of investment securities. The Company's primary sources of funds, other than deposits, are securities sold under repurchase agreements and advances from the Federal Home Loan Bank of Boston ("FHLB"). Average FHLB borrowings increased because growth in average earning assets 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, 1999, FHLB borrowings amounted to $3.7 billion. The Company's additional borrowing capacity with the FHLB at December 31, 1999 was approximately $842 million. See Note 11 to the Consolidated Financial Statements. At December 31, 1999 and 1998, securities sold under repurchase agreements amounted to $1.1 billion and $592.0 million, respectively, and were collaterallized by mortgage-backed securities and U.S. Government obligations. See Note 10 to the Consolidated Financial Statements. 26 29 Peoples Heritage Financial Group, Inc. and Subsidiaries RISK MANAGEMENT The Company considers risk management to be an utmost priority. The primary goal of the risk management program is to determine how certain existing or emerging issues facing the Company or the financial services industry affect the nature and extent of risks. Based on a periodic self-evaluation, the Company determines key issues and develops plans and or objectives to address risk. The Board and management believe that there are seven applicable "risk categories," consisting of credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk perspective. In addition, an aggregate level of risk is assigned to the Company as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the Board of Directors (the "Board") with an accompanying explanation as to why any differences exist. The risk program includes risk identification, risk measurement, risk control and risk monitoring. The Board has established the overall strategic direction of the Company. It approves the overall risk policies of the Company and oversees the overall risk management process for the Company. The Board has delegated authority to three Board Committees consisting of Audit, Board Risk Management and Asset Review Committees and has charged each Committee with overseeing key risks. The Executive Risk Management Committee, which reports to the Board, evaluates the seven key risk areas of the Company and makes recommendations to the Board Risk Management Committee. 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 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 and 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 thus 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, (iv) the rate of amortization of capitalized mortgage servicing rights and premiums paid on securities, (v) the amount of unrealized gains and losses on securities available for sale and (vi) 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 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 primarily 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 an interest-rate floor with a notional amount of $10 million, expiring in 2000, which was purchased to protect certain rate sensitive assets against falling interest rates. The Company has no direct or contingent liability as a result of this floor. The Board's policy on interest-rate risk simulation specifies that if interest rates were to shift immediately up or down 200 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, 1999. The Company also monitors gradual changes in market interest rates, which it believes better represents its exposure to net interest income. The following table reflects the estimated percentage exposure of the Company's net interest income for the 12 months following the date indicated assuming a gradual shift in market interest rates of 100 and 200 basis points, respectively. 27 30 Peoples Heritage Financial Group, Inc. and Subsidiaries
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Increase Rate Increase Rate Decrease Rate Decrease ------------- ------------- ------------- ------------- December 31, 1999 (3.11%) (2.22%) 1.65% 0.90% ======== ======= ======= ======= December 31, 1998 (0.27%) 0.03% (0.70%) (1.61%) ======== ======= ======== ========
The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, savings, money market and NOW accounts have implied interest rate floors and it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be less than the simulated increase in interest expense as the Company's fixed-rate earning assets exceed its fixed-cost paying liabilities. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. The Company uses interest rate floors and various cash instruments to mitigate the prepayment risk associated with mortgage servicing rights (see "Non-Interest Income" for further details). At December 31, 1999, the Company had $200 million notional amount in CMT floors and $20 million in U.S. Treasury obligations and $20 million in principal only strips. 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. The following table sets forth the net exposure at the date indicated of the carrying value of mortgage servicing rights and identified hedge instruments 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, 1999 Mortgage servicing rights ($20,400) ($7,700) $6,100 $8,600 Interest rate floors 8,000 2,600 (1,000) (1,100) Other cash instruments 14,380 5,400 (3,700) (6,664) -------- ------- ------- ------ Net exposure $1,980 $300 $1,400 $836 ======== ======= ======= ======
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 and hedge instruments 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 1999 were (i) the increases in market interest rates, (ii) changes in the composition of mortgage assets, (iii) increase and diversification of assets and off-balance sheet interest-rate instruments used to hedge mortgage servicing rights and (iv) changes in the composition of interest-bearing deposits and borrowings. 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 U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses. 28 31 Peoples Heritage Financial Group, Inc. and Subsidiaries LIQUIDITY On a parent-only basis, the Company does not have substantial commitments or debt service requirements. At December 31, 1999, such commitments consisted primarily of $68.8 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, 1999, shareholders' equity totaled $851.0 million or 6.11% of total assets, as compared to $901.1 million or 7.48% at December 31, 1998. The 6% decrease was primarily due to the $103.5 million net unrealized loss on securities available for sale, $54 million of stock repurchases (2,941,800 shares) and $49 million in dividends to shareholders, which were partially offset by the Company's net income during 1999. 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 $912.5 million or 6.60% of average assets at December 31, 1999, compared to $875.7 million or 7.50% of average assets at December 31, 1998. 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, 1999, 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. YEAR 2000 The Company has not experienced any significant disruptions to its financial or operating activities caused by a failure of its computerized systems resulting from Year 2000 issues. Management does not expect Year 2000 issues to have a material adverse effect on the Company's operations or financial results in 2000. The Company does not separately track the internal costs incurred for the Year 2000 expenses, except for the dedicated salary of the project coordinator. The vast majority of internal costs related 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 $2.0 million in incremental costs in 1999 for Year 2000 work. All Year 2000 costs were expensed as incurred and were funded out of the Company's operating cash flow. IMPACT ON NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("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. In May 1999, the FASB issued an exposure draft to amend SFAS No. 133 to defer the effective date to January 1, 2001. 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. 29 32 Peoples Heritage Financial Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, ------------ (In Thousands, Except Number of Shares and Per Share Data) 1999 1998 - ---------------------------------------------------------- ---- ---- ASSETS Cash and due from banks $ 398,759 $ 415,435 Federal funds sold and other short-term investments 203,789 283,878 Securities available for sale, at market value 5,161,009 2,986,131 Securities held to maturity, market value $519,725 in 1999 and $245,555 in 1998 541,332 245,233 Loans held for sale, market value $67,220 in 1999 and $518,299 in 1998 67,220 517,754 Loans and leases 6,844,659 7,088,031 Less: Allowance for loan and lease losses 107,871 110,561 ----------- ----------- Net loans and leases 6,736,788 6,977,470 ----------- ----------- Premises and equipment 141,739 144,574 Goodwill and other intangibles 113,264 124,363 Mortgage servicing rights 46,829 40,088 Bank owned life insurance 228,423 66,944 Other assets 280,376 248,369 ----------- ----------- Total assets $13,919,528 $12,050,239 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Savings accounts $ 1,237,092 $ 1,284,074 Money market access and NOW accounts 2,232,891 2,073,793 Certificates of deposit (including certificates of $100 or more of $661,068 in 1999 and $679,330 in 1998) 3,159,864 3,455,541 Brokered deposits 173,798 257,570 Demand deposits 1,311,112 1,305,737 ----------- ----------- Total deposits 8,114,757 8,376,715 Securities sold under repurchase agreements 1,089,316 591,970 Borrowings from the Federal Home Loan Bank of Boston 3,667,399 1,936,585 Other borrowings 31,849 25,659 Other liabilities 96,455 118,182 ----------- ----------- Total liabilities 12,999,776 11,049,111 ----------- ----------- Company obligated, mandatorily redeemable securities of subsidiary trust holding solely parent junior subordinated debentures 68,775 100,000 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, 106,647,389 issued in 1999 and 106,648,585 in 1998 1,066 1,066 Paid-in capital 509,009 509,473 Retained earnings 530,002 447,438 Unearned compensation (1,690) (2,027) Accumulated other comprehensive income (loss): Net unrealized loss on securities available for sale (105,149) (1,651) Treasury stock at cost (4,465,600 shares in 1999 and 2,845,731 shares in 1998) (82,261) (53,171) ----------- ----------- Total shareholders' equity 850,977 901,128 ----------- ----------- $13,919,528 $12,050,239 =========== ===========
See accompanying notes to Consolidated Financial Statements. 30 33 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) 1999 1998 1997 - ---------------------------------------------------------- ---- ---- ---- Interest and dividend income: Interest and fees on loans and leases $ 579,196 $ 669,991 $ 590,000 Interest and dividends on securities 328,739 167,468 171,270 ----------- ---------- ---------- Total interest and dividend income 907,935 837,459 761,270 ----------- ---------- ---------- Interest expense: Interest on deposits 252,195 284,935 261,478 Interest on borrowed funds 209,493 126,051 94,868 ----------- ---------- ---------- Total interest expense 461,688 410,986 356,346 ----------- ---------- ---------- Net interest income 446,247 426,473 404,924 Provision for loan and lease losses 14,100 14,430 6,391 ----------- ---------- ---------- Net interest income after provision for loan and lease losses 432,147 412,043 398,533 ----------- ---------- ---------- Noninterest income: Customer services 53,402 40,982 34,525 Mortgage banking services 16,342 27,202 28,679 Trust services 14,605 12,713 10,365 Investment advisory services 5,318 3,877 2,256 Insurance commissions 20,289 13,006 1,899 Bank owned life insurance 11,479 3,705 2,251 Net securities gains 281 5,904 2,571 Other noninterest income 7,472 11,297 11,825 ----------- ---------- ---------- 129,188 118,686 94,371 ----------- ---------- ---------- Noninterest expense: Salaries and employee benefits 163,621 164,888 156,197 Data processing 28,043 25,399 19,833 Occupancy 27,278 26,811 24,741 Equipment 21,068 20,621 21,641 Amortization of goodwill and deposit premiums 11,778 11,611 8,743 Distributions on securities of subsidiary trust 6,678 9,060 8,351 Advertising and marketing 9,456 10,805 10,998 Special charges 29,346 39,172 23,559 Other noninterest expense 49,606 52,631 58,176 ----------- ---------- ---------- 346,874 360,998 332,239 ----------- ---------- ---------- Income before income tax expense 214,461 169,731 160,665 Applicable income tax expense 72,039 56,907 56,993 ----------- ---------- ---------- Net income $ 142,422 $ 112,824 $ 103,672 =========== =========== ========== Weighted average shares outstanding: Basic 102,988,690 103,637,875 102,219,049 Diluted 104,112,038 105,767,728 104,722,008 Earnings per share: Basic $1.38 $1.09 $1.01 Diluted 1.37 1.07 0.99
See accompanying notes to Consolidated Financial Statements. 31 34 Peoples Heritage Financial Group, Inc. and Subsidiaries - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Accumulated (In Thousands, Except Compen- Other Number of Shares Par Paid-in Retained sation Treasury Comprehensive and Per Share Data) Value Capital Earnings ESOP Stock Income(Loss) Total - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1996 $ 1,044 $ 483,508 $ 319,253 $ (3,693) $ (5,758) $ 1,360 $ 795,714 Net income -- -- 103,672 -- -- 103,672 Unrealized gains on securities, net of reclassification adjustment (1) -- -- -- -- -- 6,578 6,578 Comprehensive income 110,250 Common stock issued for employee benefit plans 7 4,846 -- -- -- -- 4,853 Treasury stock issued for employee benefit plans -- 23 (1,042) (98) 9,474 -- 8,357 Treasury stock purchased -- -- -- -- (40,110) -- (40,110) Common stock issued for acquisitions -- -- 2,572 -- 6,731 -- 9,303 Payment in lieu of fractional shares -- (5) -- -- -- -- (5) Decrease in unearned compensation -- 901 -- 668 -- -- 1,569 Cash dividends paid -- -- (43,669) -- -- -- (43,669) Common stock dividends declared 1 1,761 (1,769) -- -- -- (7) --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1997 1,052 491,034 379,017 (3,123) (29,663) 7,938 846,255 Net income -- -- 112,824 -- -- -- 112,824 Unrealized losses on securities, net of reclassification adjustment (1) -- -- -- -- -- (9,589) (9,589) Comprehensive income 103,235 Cancellation of CFX treasury shares at acquisition (1) (1,879) -- -- 1,880 -- -- Common stock issued for employee benefit plans 11 10,387 -- (545) -- -- 9,853 Treasury stock issued for employee benefit plans -- -- (2,244) -- 12,615 -- 10,371 Treasury stock purchased -- -- -- -- (38,003) -- (38,003) Common stock issued for acquisitions 5 8,601 -- -- -- -- 8,606 Payment in lieu of fractional shares (1) (46) -- -- -- -- (47) Decrease in unearned compensation -- 1,376 -- 1,641 -- -- 3,017 Cash dividends paid -- -- (42,159) -- -- -- (42,159) --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1998 1,066 509,473 447,438 (2,027) (53,171) (1,651) 901,128 Net income -- -- 142,422 -- -- -- 142,422 Unrealized losses on securities net of reclassification adjustment (1) -- -- -- -- -- (103,498) (103,498) Comprehensive income 38,924 Premium on repurchase of trust preferred securities -- (1,801) -- -- -- -- (1,801) Treasury stock issued for employee benefit plans -- -- (11,258) -- 24,655 -- 13,397 Treasury stock purchased -- -- -- -- (53,745) -- (53,745) Payment in lieu of fractional shares -- (4) -- -- -- -- (4) Decrease in unearned compensation -- 1,341 -- 337 -- -- 1,678 Cash dividends paid -- -- (48,600) -- -- -- (48,600) --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1999 $ 1,066 $ 509,009 $ 530,002 ($ 1,690) ($ 82,261) ($105,149) $ 850,977 ========= ========= ========= ========= ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (1) Disclosure of reclassification amount (all amounts net of tax): 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the period ($103,315) ($5,751) $8,249 Less: reclassification adjustment for net gains included in net income 183 3,838 1,671 --------- ------- ------ Net unrealized gains (losses) on securities ($103,498) ($9,589) $6,578 ========= ======= ======
See accompanying notes to Consolidated Financial Statements. 32 35 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 142,422 $ 112,824 103,672 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan and lease losses 14,100 14,430 6,391 Provision for depreciation 19,538 19,196 19,025 Amortization of goodwill and other intangibles 11,778 11,611 8,743 Provision for deferred tax expense 1,363 21,450 13,295 ESOP and restricted stock expense 1,678 3,017 1,569 Net (gains) losses realized from sales of securities and consumer loans (281) (5,904) (2,484) Net (gains) losses realized from sales of loans held for sale (a component of mortgage banking services) 2,532 (18,500) (11,796) Earnings from bank owned life insurance (11,479) (3,705) (2,251) Net decrease (increase) in mortgage Servicing rights (6,741) 20,550 (19,268) Proceeds from sales of loans held for sale 901,164 5,196,974 3,225,097 Residential loans originated and purchased or sale (453,162) (5,289,607) (3,420,896) Net decrease (increase) in interest and dividends receivable and other assets (21,058) (31,032) (56,156) Net increase (decrease) in other liabilities 21,476 (17,281) (11,801) ----------- ----------- ----------- Net cash provided (used) by operating activities 623,330 34,023 (146,860) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from maturities and principal repayments of securities held to maturity 91,403 96,327 103,499 Purchase of securities held to maturity -- (148,553) (72,018) Proceeds from sales of securities available for sale 27,461 632,328 331,535 Proceeds from maturities and principal repayments of securities available for sale 1,441,536 1,099,653 909,318 Purchases of securities available for sale (3,558,053) (2,320,488) (1,535,534) Net (increase) decrease in loans and leases (406,153) 266,310 (1,109,716) Proceeds from sales of loans -- -- 36,502 Net additions to premises and equipment (16,703) (18,011) (18,342) Purchase of bank owned life insurance (150,000) -- -- Payment for acquisitions, net of cash acquired -- -- (28,261) ----------- ----------- ----------- Net cash used in investing activities (2,570,509) (392,434) (1,383,017) ----------- ----------- ----------- Cash flows from financing activities: Net increase (decrease) in deposits (261,958) 341,939 551,062 Net increase in securities sold under repurchase agreements 497,346 28,490 80,472 Proceeds from Federal Home Loan Bank of Boston borrowings 4,760,000 3,585,930 1,884,655 Payments on Federal Home Loan Bank of Boston borrowings (3,029,187) (3,228,212) (1,174,560) Net increase (decrease) in other borrowings 6,190 750 (8,584) Proceeds from issuance (repurchase) of securities of subsidiary trust (33,026) -- 98,361 Issuance of common stock 13,394 18,563 13,198 Purchase of treasury stock (53,745) (38,003) (40,110) Cash dividends paid to shareholders (48,600) (42,159) (43,669) ----------- ----------- ----------- Net cash provided by financing activities 1,850,414 667,298 1,360,825 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (96,765) 308,887 (169,052) Cash and cash equivalents at beginning of period 699,313 390,426 559,478 Cash and cash equivalents at end of period $ 602,548 $ 699,313 $ 390,426 =========== =========== ===========
In conjunction with the purchase acquisitions detailed in Note 2 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired $ 0 $10,615 $21,424 Less liabilities assumed -- 2,009 12,122 --- ------- ------- Net effect on capital $ 0 $8,606 $ 9,302 === ======= =======
- -------------------------------------------------------------------------------- For the years ended December 31, 1999, 1998 and 1997, interest of $458,913, $418,509 and $349,112 and income taxes of $53,285, $35,273 and $43,026 were paid, respectively. During 1999, $632,735 of loans were transferred to securities held to maturity. During 1999 and 1998, $245,233 and $28,184 of investment securities were transferred to securities available for sale, respectively. - -------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements. 33 36 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, Massachusetts and Connecticut, consisting of Peoples Heritage Bank, Bank of New Hampshire, Family Bank, FSB and Glastonbury Bank & Trust, 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. The Consolidated Financial Statements have been restated to reflect the Company's acquisition of SIS Bancorp, Inc. on January 1, 1999 which was accounted for as a pooling-of-interests. In accordance with accounting requirements for pooling-of-interests business combinations, the financial statements of PHFG and SIS have been combined based on historical financial statements as previously reported by each company. See Note 2 - "Acquisitions". 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 and comprehensive income. 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. 34 37 Peoples Heritage Financial Group, Inc. and Subsidiaries 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 uncollectable. 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 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 impairment. An assessment of recoverability is performed prior to any writedown of the asset. If circumstances suggest that their value may be 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 that 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 which are accounted for as trading instruments and are carried at fair value. 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 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, 401(k), and Other Employee Benefit 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 35 38 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. The Company has 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. The Company sponsors a leveraged employee stock ownership plan (the "ESOP"). The Company is required to make annual contributions to the ESOP equal to the ESOP's debt service and the unallocated shares are pledged as collateral for the debt. As the debt is repaid, shares are released from collateral and allocated to eligible employees. The Company accounts for this ESOP in accordance with AICPA SOP 93-6 "Employers' Accounting for Employee Stock Ownership Plans." Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation on the balance sheet. As shares are released from collateral, the Company records compensation expense equal to the current market price of the shares, and the shares are treated as outstanding for purposes of calculating earnings per share. 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. 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 adjusted to exclude the weighted average number of unallocated shares held by the ESOP. 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 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. The Company's primary business is banking, which provides over 90% of its revenues and profits. Banking services are provided within the framework of four community banks which have similar economic characteristics, products and services, distribution channels and regulatory environments. Accordingly disaggregated segment information is not presented. 36 39 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. 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 have been 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. 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 $29.3 million, $39.2 million and $23.6 million in 1999, 1998 and 1997, respectively. For additional information, see Note 9 - Special Charges. Pending Acquisition On June 1, 1999 the Company entered into a definitive agreement to acquire Banknorth Group, Inc. ("Banknorth"). Banknorth is headquartered in Burlington, Vermont and has 100 offices located throughout Vermont, Massachusetts, New Hampshire and upstate New York. At December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. Under the terms of the definitive agreement, shareholders of Banknorth will receive 1.825 newly issued shares of the Company's common stock (subject to adjustment as provided in the agreement) for each share of Banknorth common stock, plus cash in lieu of any fractional share interests. The definitive agreement is subject to the approval of the shareholders of both Banknorth and the Company, the receipt of requisite regulatory approvals and other customary closing conditions. The acquisition is expected to be accounted for using the pooling-of-interests method and close in the second quarter of 2000. 37 40 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 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE DECEMBER 31, 1999 U. S. Government obligations and obligations of U.S. Government agencies and corporations $ 534,720 $ 18 ($ 16,494) $ 518,244 Tax-exempt bonds and notes 19,570 71 (149) 19,492 Other bonds and notes 240,754 42 (5,930) 234,866 Mortgage-backed securities 3,823,658 1,089 (121,976) 3,702,771 Collateralized mortgage obligations 453,930 176 (15,718) 438,388 ---------- ---------- ---------- ---------- Total debt securities 5,072,632 1,396 (160,267) 4,913,761 Federal Home Loan Bank of Boston stock 221,335 -- -- 221,335 Other equity securities 28,803 65 (2,955) 25,913 ---------- ---------- ---------- ---------- Total equity securities 250,138 65 (2,955) 247,248 ---------- ---------- ---------- ---------- Total securities available for sale $5,322,770 $ 1,461 ($ 163,222) $5,161,009 ========== ========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998: U. S. Government obligations and obligations of U.S. Government agencies and corporations $ 352,422 $ 701 ($ 815) $ 352,308 Tax-exempt bonds and notes 36,461 895 -- 37,356 Other bonds and notes 3,201 42 -- 3,243 Mortgage-backed securities 2,232,978 3,439 (7,863) 2,228,554 Collateralized mortgage obligations 200,774 882 (679) 200,977 ---------- ---------- ---------- ---------- Total debt securities 2,825,836 5,959 (9,357) 2,822,438 Federal Home Loan Bank of Boston stock 123,706 -- -- 123,706 Other equity securities 39,234 1,311 (558) 39,987 ---------- ---------- ---------- ---------- Total equity securities 162,940 1,311 (558) 163,693 ---------- ---------- ---------- ---------- Total securities available for sale $2,988,776 $ 7,270 ($ 9,915) $2,986,131 ========== ========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------------------- HELD TO MATURITY: DECEMBER 31, 1999: Real Estate investment conduit $541,332 $ 0 ($21,607) $519,725 -------- -------- -------- -------- Total securities held to maturity $541,332 $ 0 ($21,607) $519,725 ======== ======== ======== ======== DECEMBER 31, 1998: Other bonds and notes $ 330 $ 0 ($ 4) $ 326 Asset backed securities 65,350 328 (104) 65,574 Mortgage-backed securities 168,554 541 (521) 168,574 Collateralized mortgage obligations 10,999 90 (8) 11,081 -------- -------- -------- -------- Total securities held to maturity $245,233 $ 959 ($ 637) $245,555 ======== ======== ======== ======== - -------------------------------------------------------------------------------------------------------------------
38 41 Peoples Heritage Financial Group, Inc. and Subsidiaries The amortized cost and market values of debt securities available for sale at December 31, 1999 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, 1999, the Company had $251.4 million of securities available for sale with call provisions.
- ------------------------------------------------------------------------------------------------------------------- Available for Sale Held to Maturity Amortized Cost Market Value Amortized Cost Market Value - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999: Due in one year or less $ 49,730 $ 49,613 $ 0 $ 0 Due after one year through five years 451,981 445,068 -- -- Due after five years through ten years 268,085 259,807 -- -- Due after ten years 4,302,836 4,159,273 541,332 519,725 ---------- ---------- ---------- ---------- Total debt securities $5,072,632 $4,913,761 $ 541,332 $ 519,725 ========== ========== ========== ==========
- ------------------------------------------------------------------------------ A summary of realized gains and losses on securities available for sale for 1999, 1998 and 1997 follows: - ------------------------------------------------------------------------------ Gross Realized -----------------------------------------------------------------------------
Gains Losses - ------------------------------------------------------------------------------------------------------------------- 1999 $633 $352 1998 5,927 23 1997 5,322 2,751 - -------------------------------------------------------------------------------------------------------------------
4. LOANS AND LEASES The Company's lending activities are conducted principally in New England. 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, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Residential real estate mortgages $1,410,494 $2,230,615 Commercial real estate mortgages: Commercial real estate 1,750,942 1,463,222 Construction and development 44,821 158,668 ---------- ---------- 1,795,763 1,621,890 Commercial business loans and leases 1,291,371 1,146,242 Consumer loans and leases 2,347,031 2,089,284 ---------- ---------- Total loans and leases $6,844,659 $7,088,031 ========== ==========
- ------------------------------------------------------------------------------- Loans and leases include unearned income and net deferred loan costs of $12.8 million and $11.4 million at December 31, 1999 and 1998, respectively. 39 42 Peoples Heritage Financial Group, Inc. and Subsidiaries The following table sets forth information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:
- ------------------------------------------------------------------------------------------------------------------- December 31, - ------------------------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Residential real estate mortgages: Nonaccrual loans $11,046 $ 9,917 Commercial real estate loans: Nonaccrual loans 13,699 19,944 Troubled debt restructurings 1,002 6 ------- ------- Total 14,701 19,950 Commercial business loans and leases: Nonaccrual loans 14,944 14,920 Troubled debt restructurings 82 874 ------- ------- Total 15,026 15,794 Consumer loans: Nonaccrual loans 5,115 10,865 Total nonperforming loans: Nonaccrual loans 44,804 55,646 Troubled debt restructurings 1,084 880 ------- ------- Total $45,888 $56,526 ======= ======= Accruing loans which are 90 days overdue $10,484 $21,962 ======= ======= - -------------------------------------------------------------------------------------------------------------------
The ability and willingness of 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 1999 if nonperforming loans at December 31, 1999 had been performing in accordance with their original terms approximated $4.4 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, 1999 and 1998, total impaired loans were $44.0 million and $47.2 million, of which $20.4 million and $21.9 million had related allowances of $3.6 million and $7.6 million, respectively. During the years ended December 31, 1999 and 1998, the income recognized related to impaired loans was $3.9 million and $3.7 million respectively, and the average balance of outstanding impaired loans was $50.6 million and $44.0 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 the loan. 40 43 Peoples Heritage Group, Inc. and Subsidiaries 5. ALLOWANCE FOR LOAN AND LEASE LOSSES A summary of changes in the allowance for loan and lease losses follows:
- -------------------------------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 110,561 $ 112,064 $ 106,769 Allowance on acquired loans -- -- 7,361 Provisions charged to operations 14,100 14,430 6,391 Loans and leases charged off (23,909) (26,680) (22,848) Recoveries 7,119 10,747 14,391 --------- --------- --------- Balance at end of period $ 107,871 $ 110,561 $ 112,064 ========= ========= ========= - -------------------------------------------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- -------------------------------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------- Land $ 15,701 $ 17,537 Buildings and leasehold improvements 140,697 148,762 Furniture, fixtures and equipment 139,896 137,450 -------- -------- 296,294 303,749 Less accumulated depreciation and amortization 154,555 159,175 -------- -------- $141,739 $144,574 ======== ======== - --------------------------------------------------------------------------------------------------------
7. MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights for the years ended December 31, 1999, 1998 and 1997 follows:
- ------------------------------------------------------------------------------------------------------------------- Mortgage Valuation Total Servicing Allowance Rights - ------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1996 $ 41,370 $ 0 $ 41,370 Mortgage servicing rights capitalized 55,952 -- 55,952 Mortgage servicing rights acquired through acquisition 586 -- 586 Amortization charged against mortgage servicing fee income (8,093) -- (8,093) Impairment reserve charged against mortgage servicing fee income -- -- -- Mortgage servicing rights sold (29,177) -- (29,177) -------- -------- -------- Balance as of December 31, 1997 $ 60,638 -- $ 60,638 Mortgage servicing rights capitalized 80,816 -- 80,816 Amortization charged against mortgage servicing fee income (14,370) -- (14,370) Impairment reserve charged against mortgage servicing fee income -- (11,086) (11,086) Mortgage servicing rights sold (75,910) -- (75,910) -------- -------- -------- Balance as of December 31, 1998 $ 51,174 (11,086) $ 40,088 Mortgage servicing rights capitalized 14,268 -- 14,268 Amortization charged against mortgage servicing fee income (11,021) -- (11,021) Reduction of impairment reserve (credit to mortgage servicing fee income) -- 5,160 5,160 Mortgage servicing rights sold (1,666) -- (1,666) -------- -------- -------- Balance as of December 31, 1999 $ 52,755 ($ 5,926) $ 46,829 ======== ======== ========
- ---------------------------------------------------------------------------------------------------- December 31, - ---------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Residential real estate loans serviced for investors $3,621,848 $4,243,181 $6,149,111 ========== ========== =========== - -----------------------------------------------------------------------------------------------------
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. 41 44 Peoples Heritage Financial Group, Inc. and Subsidiaries 8. INCOME TAXES The current and deferred components of income tax expense follow:
- --------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------- Current Federal $66,416 $31,209 $38,183 State 4,260 2,338 3,700 Deferred Federal 1,337 19,448 14,060 State 26 3,912 1,050 -------- --------- ------- $72,039 $56,907 $56,993 ======== ========= ======= - -------------------------------------------------------------------------------------------------------------------
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:
- ---------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Computed federal tax expense $ 75,061 $ 59,406 $ 56,233 State income tax, net of federal benefits 2,786 4,063 3,088 Benefit of tax-exempt income (1,847) (1,778) (1,440) Nondeductible merger expenses 1,635 2,691 1,854 Amortization of goodwill and other intangibles 3,270 2,785 2,131 Low income/rehabilitation credits (3,000) (2,994) (2,890) Restructuring of legal entities within affiliated group -- (5,069) -- Increase in cash surrender value of life insurance (4,018) (1,297) (765) Other, net (1,848) (900) (1,218) -------- -------- -------- Recorded income tax expense $ 72,039 $ 56,907 $ 56,993 ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------
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, 1999 and 1998 follow:
- ------------------------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan and lease losses $ 39,305 $ 40,115 Reserve for mobile home dealers 806 1,404 Accrued pension expense 1,115 4,902 Difference of tax and book basis of OREO 129 229 Interest accrued and payments received on non-performing loans for tax purposes 760 1,408 Compensation and employee benefits 6,143 3,840 Book reserves not yet realized for tax purposes 478 1,629 Unrealized depreciation on securities 56,612 995 Employee stock awards -- 501 Investment tax credit carryforward -- 2,245 Other 158 1,134 -------- -------- Total gross deferred tax assets 105,506 58,402 ======== ======== Deferred tax liabilities: Leases 16,896 16,753 Premises and equipment 7,817 784 Partnership investments 5,364 8,223 Loans 6,790 7,198 Mortgage servicing 10,362 13,648 Tax bad debt reserve 977 8,660 Other 350 440 -------- -------- Total gross deferred tax liabilities 48,556 55,706 -------- -------- Net deferred tax asset (liability) $ 56,950 $ 2,696 ======== ======== - ---------------------------------------------------------------------------------------------------------------------
42 45 Peoples Heritage Financial Group, Inc. and Subsidiaries 9. SPECIAL CHARGES Special charges include merger expenses of $22.0 million, $39.2 million and $16.4 million in 1999, 1998 and 1997, respectively, and $7.4 million of costs to discontinue the correspondent mortgage lending business in 1999 and $7.2 million of charges related to exiting the lease securitization business (conducted through CFX Funding) in 1997. Special charges recorded in 1999 totaled $29.4 million (pre-tax) and $21.7 million (post-tax). The total pre-tax charges consisted of $33.2 million recorded in the first quarter of 1999 less reversal of previous merger charges of $3.9 million recorded in the fourth quarter of 1999. The $3.9 million reversal relates mainly to lower than anticipated payments for: severance, losses on lease residuals, legal fees and claims related to guarantees on a securitized lease portfolio and to higher than anticipated pension curtailment gain in connection with the SIS and CFX acquisitions. The following table summarizes special charges recorded in 1999 by type and shows the balance in the accrued liability account as of December 31, 1999 and 1998. These special charges related to the acquisitions of CFX and SIS and the discontinuance of the correspondent mortgage business.
- --------------------------------------------------------------------------------------------------------------------------------- SIS MERGER - --------------------------------------------------------------------------------------------------------------------------------- Non-Cash Original Amount Reductions Balance Expense Expense Included in Cash Applied Balance at 12/31/98 Recorded Adjustment Expense Reallocations Payments to Reserve 12/31/99 - --------------------------------------------------------------------------------------------------------------------------------- Severance costs $ -- $ 10,890 $ (500) $ 10,390 $ (613) $ (9,777) $ -- $ -- Pension curtailment gain (4,000) (869) (4,869) -- 4,869 -- Data processing/ systems integration -- 4,669 -- 4,669 (395) (4,274) -- -- Professional fees -- 2,978 -- 2,978 219 (3,197) -- -- Asset write-downs/ lease terminations -- 1,800 -- 1,800 749 (577) (1,612) 360 Customer communications -- 1,100 -- 1,100 13 (1,113) -- -- Fund charitable foundation -- 3,000 -- 3,000 -- (3,000) -- -- Other exit costs -- 1,621 -- 1,621 27 (1,648) -- -- -------- -------- -------- -------- -------- -------- -------- -------- $ -- $ 22,058 $ (1,369) $ 20,689 $ -- $(23,586) $ 3,257 $ 360 ======== ======== ======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------- CFX MERGER - --------------------------------------------------------------------------------------------------------------------------------- Non-Cash Original Amount Reductions Balance Expense Expense Included in Cash Applied Balance at 12/31/98 Recorded Adjustment Expense Reallocations Payments to Reserve 12/31/99 - --------------------------------------------------------------------------------------------------------------------------------- Severance costs $ 32 $455 $ -- $455 $(385) $(102) $ -- $ -- Pension curtailment gain -- -- (515) (515) -- -- 515 -- Data processing/ systems integration -- 507 -- 507 -- (507) -- -- Professional fees -- 336 -- 336 -- (336) -- -- Asset write-downs/ lease terminations -- 2,267 (1,156) 1,111 (100) (308) (297) 406 Customer communications -- 48 -- 48 -- (48) -- -- Other exit costs 1,131 200 (849) (649) 485 (105) -- 862 -------- -------- -------- -------- -------- -------- -------- -------- $ 1,163 $3,813 $(2,520) $1,293 $-- $(1,406) $218 $1,268 ======== ======== ======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------- DISCONTINUANCE OF THE CORRESPONDENT LENDING BUSINESS - --------------------------------------------------------------------------------------------------------------------------------- Non-Cash Original Amount Reductions Balance Expense Expense Included in Cash Applied Balance at 12/31/98 Recorded Adjustment Expense Reallocations Payments to Reserve 12/31/99 - --------------------------------------------------------------------------------------------------------------------------------- Severance and salary costs $ -- $1,986 $ -- $1,986 $264 $(2,250) $ -- $ -- Professional fees -- 1,793 -- 1,793 (678) (1,115) -- -- Asset write-downs -- 1,293 -- 1,293 -- -- (1,293) -- Correspondent losses -- 957 -- 957 988 (1,945) -- -- Other exit costs -- 1,335 -- 1,335 (574) (761) -- -- -------- -------- -------- -------- -------- -------- -------- -------- $ -- $7,364 $ -- $7,364 $ -- $(6,071) $(1,293) $ -- ======== ======== ======== ======== ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------------------
43 46 Peoples Heritage Financial Group, Inc. and Subsidiaries The severance payments made in connection with the SIS merger covered approximately 100 employees whose positions were eliminated as a result of the merger. Property and asset write-downs related to the SIS merger related mainly to duplicate facilities and fixed assets. Special charges were also recorded by SIS during the fourth quarter of 1998 totaling $3.8 million, which were related mainly to certain employee benefits which were fully vested as a result of the merger and certain professional fees. The special charges recorded in 1999 for CFX related mainly to higher write-downs of duplicate facilities and fixed assets and additional systems integration costs. The special charges recorded in connection with discontinuing the correspondent mortgage business included severance payments to terminated employees, professional and legal fees, write-off of remaining goodwill applicable to a prior acquisition of a mortgage company, and losses on sales of certain loans orginated by correspondents. Write-downs to estimated fair value were based on independent appraisals where practical and on management estimates for the remaining assets. 10. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The details of securities sold under short term repurchase agreements follows:
At or for the Year Ended December 31, --------------------------------------------- 1999 1998 1997 Balance outstanding at end of period $1,089,316 $ 591,970 $ 566,988 Market value of collateral at end of period 1,241,053 642,697 616,905 Amortized cost of collateral at end of period 1,284,438 643,512 645,431 Average balance outstanding 567,100 571,834 541,545 Maximum outstanding at any month end during the period 1,089,316 619,866 666,669 Average interest rate during the period 4.45% 4.74% 4.80% Average interest rate at end of period 4.75% 4.51% 5.06%
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. 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, 1999 - ----------------------------------------------------------- Maturity Dates Principal Amounts Interest Rates 2000 $ 524,445 4.70% - 6.49% 2001 522,000 5.38% - 6.36% 2002 2,090,120 5.12% - 6.97% 2003 140,201 5.00% - 5.69% 2004 235,268 5.30% - 7.11% 2005-2018 155,365 3.60% - 7.72% ---------- $3,667,399 ==========
December 31, 1998 - ----------------------------------------------------------- Maturity Dates Principal Amounts Interest Rates 1999 $ 230,352 4.84% - 8.13% 2000 439,444 4.70% - 6.49% 2001 968,044 4.98% - 6.23% 2002 10,415 6.70% - 6.97% 2003 115,201 5.00% - 5.69% 2004-2016 173,129 3.60% - 7.72% ---------- $1,936,585 ==========
Callable borrowings of $50 million are shown in their respective periods assuming that the callable debt is redeemed at the initial call date while other borrowings are shown in the periods corresponding to their scheduled maturity date. 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 had existing lines of credit with the Federal Home Loan Bank of Boston of $155.6 million, none of which was outstanding at December 31, 1999. 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 (the "Common Securities"). 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 Trust's 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. 44 47 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. Certain of these standards relate capital to level of risk by assigning different weightings 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, 1999 TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $1,015,125 12.38% $ 656,097 8.00% $ 359,028 4.38% TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS) 912,544 11.13% 328,048 4.00% 584,496 7.13% TIER 1 LEVERAGE CAPITAL RATIO (TO AVERAGE ASSETS) 912,544 6.60% 552,173 4.00% 360,371 2.60% As of December 31, 1998 Total capital (to risk weighted assets) 968,974 13.02% 595,426 8.00% 373,548 5.02% Tier 1 capital (to risk weighted assets) 875,723 11.77% 297,713 4.00% 578,010 7.77% Tier 1 leverage capital ratio (to average assets) 875,723 7.50% 467,096 4.00% 408,627 3.50%
At December 31, 1999 and 1998, 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. On July 27, 1999 the Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. Earnings per share The following table presents a reconciliation of earnings per share as of the dates indicated:
(Dollars in thousands, except For the Year Ended December 31, per share amounts) 1999 1998 1997 Net income $ 142,422 $ 112,824 $ 103,672 ============ ============ ============ Weighted average shares outstanding Basic: 102,998,690 103,637,875 102,219,049 Effect of dilutive securities: Stock options 1,113,348 2,129,853 2,502,959 ------------ ------------ ------------ Diluted 104,112,038 105,767,728 104,722,008 ============ ============ ============ Net income per share: Basic $ 1.38 $ 1.09 $ 1.01 Diluted 1.37 1.07 0.99
45 48 Peoples Heritage Financial Group, Inc. and Subsidiaries 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. Financial instruments with off-balance sheet risk at December 31, 1999 and 1998 follow:
Contract or Notional Amount at December 31, 1999 1998 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 $2,066,735 $2,044,542 Loans serviced with recourse 22,295 24,176 Loans sold with credit enhancements 706 3,294 Leases serviced with credit enhancements 4,933 6,227 Financial instruments with notional or contract amounts which exceed the amount of credit risk: Forward commitments to sell loans 48,000 266,227 Interest rate floors - notional amount 200,000 120,000 fair value 1,355 3,433
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, 1999, the Company was committed to invest up to $12.1 million in real estate development limited partnerships. At December 31, 1999 and 1998 the Company had $20.6 million and $18.8 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, 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 $11.7 million, $9.4 million, and $7.5 million for the years ended 1999, 1998 and 1997, respectively. Approximate minimum lease payments over the remaining terms of the leases at December 31, 1999 follow:
2000 $ 10,328 2001 10,194 2002 8,966 2003 6,298 2004 5,919 2005 and after 30,347 ------- $72,052 =======
46 49 Peoples Heritage Financial Group, Inc. and Subsidiaries 15. STOCK-BASED COMPENSATION PLANS Employee Stock Ownership Plans 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 1999, 1998 and 1997, the Company contributed 2%, 3% and 4% of eligible compensation, respectively. The approximate expense of this contribution for 1999, 1998 and 1997 was $1.8 million, $2.1 million and $1.3 million, respectively. Stock Option Plans In 1995, the Company adopted a stock option plan for non-employee directors which was amended and restated in 1997. The maximum number of shares which may be granted under the plan is 530,000 shares, of which 114,000 were granted in 1999 at $18.06 per share, 110,000 were granted in 1998 at $24.31 per share and 59,000 were granted in 1997 at $15.82 per share. A total of 26,500 shares had been issued upon exercise of the stock options granted pursuant to this plan through December 31, 1999. 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 and other stock awards covering 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, 1999, there were 2,959,705 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 1999, 1998 and 1997 was $8.35, $5.69 and $9.63 and on the date of the grants using the Black Scholes option-pricing model with the following average assumptions:
1999 1998 1997 Expected dividend yield 2.74% 2.50% 2.50% Risk-free interest rate 5.53% 5.50% 5.82% Expected life 5.00 YEARS 5.00 Years 5.00 Years Volatility 61.92% 32.87% 32.90%
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:
1999 1998 1997 Net income As reported $ 142,422 $ 112,824 $ 103,672 Proforma $ 138,152 $ 108,684 $ 99,949 Basic earnings per share As reported $ 1.38 $ 1.09 $ 1.01 Proforma $ 1.34 $ 1.05 $ 0.98 Diluted earnings per share As reported $ 1.37 $ 1.07 $ 0.99 Proforma $ 1.33 $ 1.03 $ 0.95
Proforma 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 is as follows:
Number of Weighted Average Shares Exercise Price Balance at December 31, 1997 6,363,599 $ 8.56 Granted 1,328,813 18.92 Exercised 1,835,985 6.64 Forfeited 49,845 16.60 --------- Balance at December 31, 1998 5,806,582 $ 12.19 Granted 1,137,720 $ 17.56 Exercised 1,205,901 7.70 Forfeited 204,725 16.60 --------- BALANCE AT DECEMBER 31, 1999 5,533,676 $ 14.09 =========
47 50 Peoples Heritage Financial Group, Inc. and Subsidiaries The range of per share prices for outstanding and exercisable stock options at December 31, 1999 was as follows:
Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Outstanding Weighted Average Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price up to $5.00 295,788 2.6 years $ 2.73 290,788 $2.78 $5.01 - $10.00 848,442 4.5 6.80 848,442 6.80 $10.01 - $15.00 1,238,712 6.0 11.12 923,712 11.02 $15.01 - $20.00 2,842,334 8.2 17.75 1,519,901 17.94 Over $20.00 308,400 7.1 23.26 214,075 23.53 --------- --------- 5,533,676 6.8 14.09 3,796,918 12.92 ========= =========
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, 1999, 893,591 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 7,376, 6,420 and 3,840 in 1999, 1998 and 1997, respectively. 16. RETIREMENT AND OTHER BENEFIT PLANS Pension Plans 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 also has 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 51 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, 1999 and 1998 for the pension plans and other post retirement benefit plans:
Pension Plans Other Post Retirement Benefits 1999 1998 1999 1998 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 67,388 $ 60,145 $ 6,540 $ 5,973 Service cost 4,857 3,754 131 88 Interest cost 4,938 4,308 495 425 Assumption changes (12,921) 3,654 (833) 299 Actuarial (gain) loss 7,543 459 1,248 269 Curtailment gain (6,358) (446) -- 0 Acquisitions 3,253 -- -- 0 Benefits paid (5,507) (4,486) (616) (514) -------- -------- -------- -------- Benefit obligation at end of year $ 63,193 $ 67,388 $ 6,965 $ 6,540 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 69,231 $ 64,412 -- -- Actual return on plan assets 12,115 8,817 -- -- Employer contribution 481 488 616 514 Benefits paid (5,507) (4,486) (616) (514) Administrative expenses (232) -- -- -- -------- -------- -------- -------- Fair value of plan assets at end of year $ 76,088 $ 69,231 -- -- ======== ======== ======== ======== Funded status $ 12,895 $ 1,843 ($ 6,965) ($ 6,540) Unrecognized net actuarial (gain) loss (20,689) (8,751) 127 (276) Unrecognized prior service cost 1,181 1,529 1,585 1,725 Unrecognized net transition obligation (1,664) (2,008) 2,092 2,241 -------- -------- -------- -------- Prepaid (accrued) benefit cost ($ 8,277) ($ 7,387) ($ 3,161) ($ 2,850) ======== ======== ======== ======== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 7.75% 6.50% 7.75% 6.50% Expected return on plan assets 8.50% 8.50% -- -- Rate of compensation increase 4.50% 4.50% -- --
Year Ended December 31, 1999 1998 1997 1999 1998 1997 COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 4,857 $ 3,754 $ 2,995 $ 131 $ 88 $ 58 Interest cost 4,938 4,308 3,631 495 425 418 Expected return on plan assets (5,712) (5,288) (4,201) -- -- -- Net amortization and deferral (420) (564) (511) 302 290 258 Curtailment gain -- (446) -- -- -- -- ------- ------- ------- ------- ------- ------- Net periodic benefit cost $ 3,663 $ 1,764 $ 1,914 $ 928 $ 803 $ 734 ======= ======= ======= ======= ======= =======
Curtailment gains of $5.4 million in 1999 were recorded as a reduction of special charges relating to the SIS and CFX acquisitions Multi-Employer Pension Plan An acquired company participated in a multi-employer pension plan in 1998 and 1997. The plan was fully funded in 1998 and there is no future obligation relative to the plan. Pension expense attributable to the plan for the years ended December 31, 1999, 1998 and 1997 was $0, $377,000 and $396,000, 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 1999, 1998 and 1997 was $2.4 million, $2.6 million, and $2.3 million, respectively. 49 52 Peoples Heritage Financial Group, Inc. and Subsidiaries 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 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 origination fees and servicing rights recognizable upon sale of loans net of any cost to the Company if it fails to meet its sale obligation. Of the $48 million of forward sales commitments at December 31, 1999, the Company had $67.2 million in loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 1999 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. 50 53 Peoples Heritage Financial Group, Inc. and Subsidiaries A summary of the fair values of the Company's significant financial instruments at December 31, 1999 and 1998 follows:
1999 1998 CARRYING FAIR Carrying Fair VALUE VALUE Value Value Assets: Cash and cash equivalents $ 602,548 $ 602,548 $ 699,313 $ 699,313 Securities - available for sale 5,161,009 5,161,009 2,986,131 2,986,131 Securities - held to maturity 541,332 519,725 245,233 245,555 Loans held for sale 67,220 67,220 517,754 518,299 Loans and leases, net 6,736,788 6,654,369 6,977,470 7,026,124 Mortgage servicing rights 46,829 51,654 40,088 41,177 Liabilities: Deposit (with no stated maturity) 4,905,178 4,905,178 4,861,555 4,861,555 Time deposits 3,209,579 3,215,771 3,515,160 3,530,573 Borrowings 4,788,564 4,762,295 2,554,214 2,559,940
51 54 Peoples Heritage Financial Group, Inc. and Subsidiaries 18. CONDENSED PARENT INFORMATION Condensed Financial Statements of the Parent Company
December 31, Balance Sheets 1999 1998 Assets: Cash and due from banks $ 5,455 $ 7,605 Interest bearing deposits with subsidiaries 55,669 21,857 Securities available for sale 32,357 39 Investment in subsidiaries 812,779 946,414 Goodwill and other intangibles 12,888 14,689 Amounts receivable from subsidiaries 61,485 13,767 Other assets 29,063 14,280 ---------- ---------- Total assets $1,009,696 $1,018,651 ========== ========== Liabilities and shareholders' equity Amounts payable to subsidiaries $ 28,720 $ 8,953 Subordinated debentures supporting mandatory redeemable trust securities 103,093 105,705 Other liabilities 26,906 2,865 Shareholders' equity 850,977 901,128 ---------- ---------- Total liabilities and shareholders' equity $1,009,696 $1,018,651 ========== ==========
Year Ended December 31, Statements of Income 1999 1998 1997 Operating income: Dividends from subsidiaries $ 180,948 $ 69,532 $ 69,873 Other operating income 3,588 2,324 4,336 --------- --------- --------- Total operating income 184,536 71,856 74,209 --------- --------- --------- Operating expenses: Interest on borrowings 9,544 9,375 9,070 Amortization of intangibles 1,842 1,838 1,864 Merger expenses 13,778 19,006 354 Other operating expenses 1,286 6,947 7,432 --------- --------- --------- Total operating expenses 26,450 37,166 18,720 --------- --------- --------- Income before income taxes and equity in undistributed net income of subsidiaries 158,086 34,690 55,489 Income tax benefit (8,688) (9,894) (3,097) --------- --------- --------- Income before equity in undistributed net income of subsidiaries 166,774 44,584 58,586 Equity in undistributed net income of subsidiaries (1) (24,352) 68,240 45,086 --------- --------- --------- Net income $ 142,422 $ 112,824 $ 103,672 ========= ========= =========
(1) Amounts in parenthesis represent the excess of dividends over net income from subsidiaries. 52 55 Peoples Heritage Financial Group, Inc. and Subsidiaries
Year Ended December 31, Statements of Cash Flows 1999 1998 1997 Cash flows from operating activities: Net income $ 142,422 $ 112,824 $ 103,672 Adjustments to reconcile net income to net cash (used) provided by operating activities: Undistributed net income from subsidiaries 24,352 (68,240) (45,086) Amortization of goodwill and other intangibles 1,842 1,839 1,864 Securities losses (gains) -- (23) (113) Decrease in unearned compensation 1,678 -- -- (Increase) decrease in amounts receivable from subsidiaries (47,718) (6,773) 7,330 Decrease (increase) in other assets (14,824) 297 (3,822) Increase (decrease) in amounts payable to subsidiaries 19,767 8,928 (163) Increase (decrease) in other liabilities 24,041 (9,252) 6,617 Other, net -- 37 (3,309) --------- --------- --------- Net cash provided by operating activities $ 151,560 $ 39,637 $ 66,990 --------- --------- --------- Cash flows from investing activities: Net decrease (increase) in interest bearing deposits with subsidiaries ($ 33,812) $ 9,370 ($ 9,818) Sales of available for sale securities -- 16 185 Purchase of available for sale securities (34,119) -- (7) Sales of held to maturity securities -- -- 4,337 Purchase of held to maturity securities -- -- (4,017) Capital contribution from (to) subsidiary 5,785 (12,000) (55,000) --------- --------- --------- Net cash (used) provided by investing activities ($ 62,146) ($ 2,614) ($ 64,320) --------- --------- --------- Cash flows from financing activities: Issuance of notes payable (net) $ 0 $ 0 $ 103,093 Payment of notes payable (2,612) (1,741) (2,177) Other shareholders' equity, net -- -- 1,687 Dividends paid to shareholders (48,600) (42,159) (43,669) Treasury stock acquired (53,745) (38,003) (40,110) Common stock issued 13,393 14,181 12,609 --------- --------- --------- Net cash provided (used) by financing activities ($ 91,564) ($ 67,722) $ 31,433 --------- --------- --------- Net increase (decrease) in cash due from banks ($ 2,150) ($ 30,699) $ 34,103 Cash and due from banks at beginning of year 7,605 38,304 4,201 --------- --------- --------- Cash and due from banks at end of year $ 5,455 $ 7,605 $ 38,304 ========= ========= ========= Supplemental disclosure information: Interest paid on borrowings $ 9,544 $ 9,060 $ 5,156
53 56 Peoples Heritage Financial Group, Inc. and Subsidiaries 19. SUBSEQUENT EVENT (UNAUDITED) As discussed in Note 2, the Company has entered into an agreement to acquire Banknorth Group, Inc., which will be accounted for as a pooling-of-interests. The transaction is expected to be completed in the second quarter of 2000. The following proforma condensed consolidated balance sheet was prepared as if the pending acquisition noted above had been completed at December 31, 1999 and the proforma condensed consolidated statement of income was prepared as if the pending acquisition had been completed as of January 1, 1999. The 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 anticipated cost savings or revenue enhancements in connection with the merger.
December 31, 1999 ----------------- Proforma PHFG Banknorth Adjustments Combined ----------- ----------- ----------- ----------- Assets: Investments $ 5,702,341 $ 1,170,841 $ -- $ 6,873,182 Total loans and leases, net 6,736,788 2,962,820 -- 9,699,608 Other assets 1,480,399 455,075 -- 1,935,474 ----------- ----------- ----------- ----------- Total assets $13,919,528 $ 4,588,736 $ -- $18,508,264 =========== =========== =========== =========== Liabilities and equity: Deposits $ 8,114,757 $ 3,595,744 $ -- $11,710,501 Borrowings 4,788,564 578,914 -- 5,367,478 Other liabilities 96,455 42,781 30,972(1) 170,208 ----------- ----------- ----------- ----------- Total liabilities 12,999,776 4,217,439 30,972(1) 17,248,187 ----------- --------- ----------- ----------- Securities of subsidiary trust 68,775 30,000 -- 98,775 Shareholders' equity 850,977 341,297 (30,972)(1) 1,161,302 ----------- --------- ----------- ----------- Total liabilities and shareholders' equity $13,919,528 4,588,736 $ -- $18,508,264 =========== ========= =========== ===========
(1) The adjustment reflects estimated one-time reorganization and restructuring costs related to the merger, net of taxes.
Year ended December 31, 1999 ---------------------------- Proforma PHFG Banknorth Adjustments Combined ---- --------- ----------- -------- Interest income $ 907,935 $ 319,584 $ -- $ 1,227,519 Interest expense 461,688 141,602 -- 603,290 ------------ ------------ --------------- ------------ Net interest income 446,247 177,982 -- 624,229 Provision for loan and lease losses 14,100 9,475 -- 23,575 ------------ ------------ --------------- ------------ Net interest income after provision for loan and lease losses 432,147 168,507 -- 600,654 Non-interest income 129,188 55,105 -- 184,293 Non-interest expense 346,874 145,517 -- 492,391 ------------ ------------ --------------- ------------ Income before income taxes 214,461 78,095 -- 292,556 Income tax expense 72,039 23,559 -- 95,598 ------------ ------------ --------------- ------------ Net income $ 142,422 $ 54,536 -- $ 196,958 ============ ============ =============== ============ Earnings per share: Basic $ 1.38 $ 2.33 $ 1.35 Fully diluted $ 1.37 $ 2.30 $ 1.34 Weighted average shares outstanding: Basic 102,988,690 23,435,122 145,757,788 Fully diluted 104,112,038 23,734,591 147,427,667
54 57 Peoples Heritage Financial Group, Inc. and Subsidiaries 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 1998 ---- ---- FOURTH THIRD SECOND FIRST Fourth Third Second First QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Interest income $240,596 $236,741 $220,350 $210,248 $208,955 $210,211 $208,614 $209,679 Interest expense 126,216 121,938 111,224 102,310 102,722 102,742 102,395 103,127 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income 114,380 114,803 109,126 107,938 106,233 107,469 106,219 106,552 Provision for loan and lease losses 3,405 3,565 3,565 3,565 3,973 3,973 3,235 3,249 Net interest income after provision for loan and lease losses 110,975 111,238 105,561 104,373 102,260 103,496 102,984 103,303 Noninterest income 33,854 32,120 33,780 29,434 30,745 28,956 30,274 28,716 Special charges (3,889) -- -- 33,235 3,798 -- 34,474 900 Noninterest expenses 80,945 79,502 79,312 77,769 79,574 78,296 79,873 84,088 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes 67,773 63,856 60,029 22,803 49,633 54,156 18,911 47,031 Income tax expense 22,192 21,275 19,263 9,309 17,703 16,914 6,375 15,915 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 45,581 $ 42,581 $ 40,766 $ 13,494 $ 31,930 $ 37,242 $ 12,536 $ 31,116 ======== ======== ======== ======== ======== ======== ======== ======== Earnings per share Basic $ 0.45 $ 0.41 $ 0.39 $ 0.13 $ 0.31 $ 0.36 $ 0.12 $ 0.30 Diluted 0.44 0.41 0.39 0.13 0.30 0.35 0.12 0.29 Operating earnings per share (1): Basic $ 0.42 $ 0.41 $ 0.39 $ 0.36 $ 0.35 $ 0.36 $ 0.35 $ 0.31 Diluted 0.42 0.41 0.39 0.36 0.34 0.35 0.35 0.30
(1) Earnings before special charges. 55 58 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. [KPMG LLP] Boston, Massachusetts January 18, 2000 56 59 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CORPORATE DIRECTORY - -------------------------------------------------------------------------------- PEOPLES HERITAGE FINANCIAL GROUP, INC. BOARD OF DIRECTORS WILLIAM J. RYAN Chairman of the Board President & CEO Peoples Heritage Financial Group, Inc. PAMELA P. PLUMB Vice Chairman of the Board Pamela Plumb & Associates GARY G. BAHRE President & CEO New Hampshire International Speedway P. KEVIN CONDRON President & CEO The Granite Group LLC KATHERINE M. GREENLEAF Senior Vice President Wright Express DOUGLAS S. HATFIELD, JR. Attorney, President & Treasurer Hatfield, Moran & Barry, PA DAVID D. HINDLE Retired President & Chief Executive Officer Family Bank DANA S. LEVENSON Principal Levenson Business Group President Quatro Realty Group PHILIP A. MASON Attorney Mason & Martin, L.L.P. JOHN M. NAUGHTON Retired Executive Massachusetts Mutual Life Insurance Company MALCOLM W. PHILBROOK, JR. Attorney & President Crockett, Philbrook & Crouch, P.A. SETH A. RESNICOFF, MD Surgeon & President Concord Surgical Associates, P.A. CURTIS M. SCRIBNER Principal C. M. Scribner & Co. PAUL R. SHEA Retired President & CEO Bank of New Hampshire Corp. JOHN E. VEASEY President Cedardale Athletic Club - -------------------------------------------------------------------------------- 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 R. SCOTT BACON Executive Vice President President & CEO Bank of New Hampshire STEPHEN J. BOYLE Executive Vice President Controller CHRISTOPHER W. BRAMLEY Executive Vice President President & CEO Family/SISBank JOHN W. FRIDLINGTON Executive Vice President Lending ANDREW W. GREENE Executive Vice President Insurance and Investments CYNTHIA HAMILTON Executive Vice President Human Resources JOSEPH W. HANSON Executive Vice President Operations EMERY F. HILL Executive Vice President Information Technology THOMAS P. HOGAN Executive Vice President Consumer Lending CAROL L. MITCHELL, ESQ. Executive Vice President General Counsel, Clerk & Secretary DAVID J. OTT Executive Vice President President & CEO Peoples Heritage Bank EDWARD P. SCHREIBER Executive Vice President Risk Management WENDY P. SUEHRSTEDT Executive Vice President Retail Delivery HALL THOMPSON Executive Vice President Investments ELIZABETH K. WARN Executive Vice President Residential Mortgage Lending BRIAN WOOD Executive Vice President Marketing 57 60 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PEOPLES HERITAGE BANK BOARD OF DIRECTORS MALCOLM W. PHILBROOK, JR. Chairman of the Board Attorney & President Crockett, Philbrook & Crouch P.A. WILLIAM J. RYAN Chairman, President & Chief Executive Officer Peoples Heritage Financial Group, Inc. DAVID J. OTT President Peoples Heritage Bank MEG BAXTER President United Way of Greater Portland CHARLES BELLEGARDE, JR. Consultant & President Charles Bellegarde & Son, Inc. CYNTHIA FOSS BOWMAN, M.D. Medical Director, Clinical Lab Pen Bay Medical Center SCOTT B. BULLOCK President & Chief Executive Officer Maine General Medical Center PETER B. CHAPMAN President & Chief Executive Officer Paris Farmers Union GUY A. HARTNETT President, Treasurer, Owner One-Right Systems, Inc. President Lydimap Corp. GALEN N. HOGAN President, Treasurer & Chief Executive Officer Hogan Tire Co. TIMOTHY B. HUSSEY President & CEO Hussey Seating Co. DAVID M. MACMAHON President Gates Formed-Fibre Products, Inc. CURTIS M. SCRIBNER Principal C.M. Scribner & Company PETER G. VIGUE President Cianbro Corporation SHELTON S. WHITE, JR. Retired President H.E. Callahan Construction Co. - -------------------------------------------------------------------------------- BANK OF NEW HAMPSHIRE BOARD OF DIRECTORS PAUL R. SHEA Chairman of the Board ELIZABETH S. HAGER Vice Chairman of the Board Executive Director United Way of Merrimack R. SCOTT BACON President & Chief Executive Officer 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. 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. PETER PRUDDEN, JR. Senior Account Executive Moore Business Forms, Inc. L. WILLIAM SLANETZ President (Retired) Perkins Lumber Co., Inc. GERRY S. WEIDEMA Partner Weidema & Lavin, CPAs 58 61 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FAMILY BANK / SIS BANK BOARD OF DIRECTORS 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 NELSON D. BLINN, CPA Principal Blinn & Farrell, CPAs MARY E. BOLAND, ESQ. Senior Partner Egan, Flanagan & Cohen, P.C. P. KEVIN CONDRON President and CEO The Granite Group WILLIAM B. HART, JR. Chairman National Trust for Historic Preservation THOMAS O'BRIEN Dean, Eugene M. Isenberg School of Management, University of Massachusetts KENNETH L. PAUL Vice President Chart Industries, 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. - -------------------------------------------------------------------------------- GLASTONBURY BANK & TRUST COMPANY BOARD OF DIRECTORS JOHN J. CARSON Chairman of the Board University of Hartford J. GILBERT SOUCIE President Glastonbury Bank & Trust LOREN J. ANDREO Andy's Foodtown RONALD E. BOURBEAU REB Realty CHRISTOPHER BRAMLEY President and CEO Family Bank CAMILLE S. BUSHNELL The Prudential CT Realty GRACE C. NOME Connecticut Foods JOHN G. PINONE 150 Trumbull Street Associates MARK A. SHEPTOFF Sheptoff & Reuber Co., P.C. JAMES UCCELLO First Realty of Glastonbury 59 62 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- ANNUAL MEETING The 2000 Annual Meeting of the Shareholders of Peoples Heritage Financial Group, Inc. will be held at 10:30 a.m. on Tuesday, April 25, 2000 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. It is anticipated that immediately following the merger of Banknorth with and into Peoples Heritage that the combined Company's symbol will change to BKNG. FORM 10-K AND OTHER REPORTS Peoples Heritage will send a copy of its 1999 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 LLP 99 High Street Boston, MA 02110 RESEARCH COVERAGE Recent research coverage on Peoples Heritage Financial Group, Inc. is available from: A.G. Edwards & Sons, Inc., CIBC Oppenheimer, Inc., First Albany Corp., Fox-Pitt, Kelton, Inc., Friedman Billings Ramsey & Co., Johnston, Lemon & Co., Keefe, Bruyette & Woods, Inc., Lehman Brothers, Inc., Maine Securities Corp., Merrill Lynch, Pierce, Fenner & Smith, Parker/Hunter Incorporated, Salomon Smith Barney Inc., Sandler O'Neill & Partners, L.P., Tucker Anthony Cleary Gull MARKET MAKERS The following companies have generally been market makers for Peoples Heritage Financial Group, Inc. Common Stock as of December 31, 1999: Advest, Inc. Bear, Stearns & Co., Inc. Cantor Fitzgerald & Co. Carl P. Sherr & Co. CIBC Oppenheimer & Co., Inc. Deutsche Bank Securities, Inc. First Albany Corporation Fox-Pitt Kelton, Inc. Friedman Billings Ramsey & Co. Gruntal & Co., Inc. 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. Merrill Lynch, Pierce, Fenner Midwest Stock Exchange Moors & Cabot, Inc. PaineWebber, Inc. Ryan Beck & Co., Inc. Salomon Securities Corp. Sandler O'Neill & Partners, L.P. Sherwood Securities Corp. Spear, Leeds & Kellogg 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 1999 and 1998 are as follows:
DIVIDENDS DECLARED MARKET PRICES 1999 QUARTERS PER SHARE HIGH LOW - -------------------------------------------------------------------------------- FIRST $ .115 $20.25 $16.50 SECOND .115 20.13 15.75 THIRD .12 19.81 16.06 FOURTH .12 19.56 14.31 1998 Quarters - -------------------------------------------------------------------------------- First $ .11 $24.66 $18.69 Second .11 26.75 21.56 Third .11 26.25 15.69 Fourth .11 21.25 12.81
- -------------------------------------------------------------------------------- As of December 31, 1999, the Company had approximately 11,600 shareholders of record and 102,181,789 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. 60 63 PEOPLES HERITAGE FINANCIAL GROUP, INC. ONE PORTLAND SQUARE P.O. BOX 9540 PORTLAND, MAINE 04112-9540 EX-21 4 SUBSIDIARIES 1 EXHIBIT 21 Information relating to certain of the subsidiaries of Peoples Heritage Financial Group, Inc. as of December 31, 1999 is set forth below. All of the indicated subsidiaries are directly or indirectly wholly-owned by Peoples Heritage Financial Group, Inc. Direct Subsidiaries: Name Jurisdiction of Incorporation - ---- ----------------------------- Peoples Heritage Bank Maine Bank of New Hampshire New Hampshire Family Bank, FSB United States Glastonbury Bank & Trust Company Connecticut Peoples Heritage Capital Trust I Delaware Indirect Subsidiaries: Name Jurisdiction of Incorporation - ---- ----------------------------- Heritage Investment Planning Group, Inc.(1) Maine Peoples Heritage Leasing Corp.(1) Maine MPN Holdings (holding company for Maine insurance brokerage subsidiaries)(1) - ---------- (1) Subsidiary of Peoples Heritage Bank. EX-23 5 CONSENT OF KPMG LLP 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 18, 2000, incorporated by reference in the December 31, 1999 Annual Report on Form 10-K of Peoples Heritage Financial Group, Inc. /s/ KPMG LLP Boston, Massachusetts March 23, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 398,759 12,718 191,071 0 5,161,009 541,332 0 6,844,659 107,871 13,919,528 8,114,757 1,645,610 96,455 3,142,954 68,775 0 1,066 849,911 13,919,528 579,196 328,737 0 907,935 252,195 209,493 446,247 14,100 281 346,874 214,461 214,461 0 0 142,422 1.38 1.37 3.67 44,804 10,484 1,084 0 110,561 23,909 7,119 107,871 107,871 0 0
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