-----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, IBT9AKI3uD4lluhhWFEHxXCPHYXer3F9T5ZEnlProGzOFOrWZt+s0XqPmttY394d JgFzyGbDjituDMiDJICXDQ== 0000950135-96-001574.txt : 19960401 0000950135-96-001574.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950135-96-001574 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES HERITAGE FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000829750 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 010137770 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16947 FILM NUMBER: 96541631 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-K 1 PEOPLES HERITAGE FINANCIAL GROUP, INC. 1 ========================================== FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [$250 FEE] For the fiscal year ended December 31, 1995 / / 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. [ ] As of March 19, 1996, the aggregate market value of the 17,028,129 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the 262,577 shares held by all directors and executive officers of the Registrant as a group (excluding the effects of unexercised stock options), was $356.3 million. This figure is based on the last sale price of $21.25 per share of the Registrant's Common Stock on March 19, 1996, as reported in The Wall Street Journal on March 20, 1996. Although directors of the Registrant and executive officers of the Registrant and its subsidiaries were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status. Number of shares of Common Stock outstanding as of March 19, 1996: 17,028,129 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, 1995 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 23, 1996 are incorporated by reference into Part III, Items 10-13 of this Form 10-K. ========================================== Exhibit Index appears on page 44. 2 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 and headquartered in Portland, Maine. The Company's direct subsidiaries, both of which are wholly-owned, are Peoples Heritage Bank (the "Bank") and First Coastal Banks, Inc. ("First Coastal"), a New Hampshire corporation which wholly-owns The First National Bank of Portsmouth ("FNB"). At December 31, 1995, the Company had total consolidated assets of $3.1 billion and total shareholders' equity of $270.5 million. The Company acquired all of the capital stock of the Bank upon consummation of the Bank's reorganization into the holding company form of organization in June 1988. The Bank conducts business from its headquarters and main office in Portland, Maine and 60 full-service offices located throughout the State of Maine. At December 31, 1995, the Bank had total assets of $2.5 billion and total shareholder's equity of $187.2 million. The Company acquired all of the capital stock of First Coastal and FNB in July 1989. FNB conducts business from its headquarters and main office in Portsmouth, New Hampshire and 20 full-service offices (inclusive of five offices purchased in February 1996) located in the east, southeast and central regions of New Hampshire. At December 31, 1995, FNB had $570.6 million of total assets and $41.9 million of shareholder's equity. Unless the context otherwise requires, references herein to the Company include the Bank and First Coastal and their respective subsidiaries. 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 ("residential real estate") and existing multi-family (over four units) residential and commercial real estate (together "commercial real estate"), construction loans, commercial business loans and leases and consumer loans. The Company also provides various mortgage banking, trust and investment advisory services and, through subsidiaries of the Bank, engages in equipment leasing, financial planning and securities 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, to a lesser extent, from interest and dividends earned on investments, fees received in connection with the sale and servicing of loans, deposit services and for other services and gains on the sale of assets. The Company's principal expenses are interest expense on deposits and borrowings, operating expenses, provisions for loan losses and income tax 1 3 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. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and as such is subject to regulation and examination by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The Company also is registered as a Maine financial institution holding company under Maine law and as such is subject to regulation and examination by the Superintendent of Banking of the State of Maine ("Superintendent"). As a Maine-chartered financial institution, the Bank is subject to regulation and examination by the Superintendent, and as a national bank, FNB is subject to regulation and examination by the Comptroller of the Currency ("Comptroller"). The deposit accounts of the Bank and FNB are insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law and, as a result, these entities are subject to examination by the FDIC. Each of these entities also is subject to certain requirements established by the Federal Reserve Board. RECENT AND PROSPECTIVE ACQUISITIONS For information about recent and prospective acquisitions of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Acquisitions" included in Item 7 hereof and Note 18 to the Consolidated Financial Statements included in Item 14 hereof. LENDING ACTIVITIES General. At December 31, 1995, the Company's net loan portfolio totalled $2.2 billion, representing approximately 70.4% of its $3.1 billion of total assets at that date. The principal categories of loans in the Company's portfolio are residential real estate loans, which are secured by single-family residences; commercial real estate loans, which are secured by multi-family residential and commercial real estate; commercial business loans and leases; and consumer loans. Substantially all of the Bank's mortgage loans are conventional loans, which are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Department of Veterans' Affairs ("VA"). Substantially all of the mortgage loans in the Company's loan portfolio are secured by properties located in Maine and New Hampshire. Moreover, substantially all of the Company's non-mortgage loan portfolio consists of loans made to residents of and businesses located in Maine and New Hampshire. 2 4 During 1994, the Company adopted a policy generally to limit loans to one borrower, including related entities, to $8.0 million. In addition, during 1994, the Company's largest banking subsidiary, the Bank, adopted a policy generally to limit loans to one borrower, including related entities, to $5.0 million. These limitations are substantially below the limitations set forth in applicable laws and regulations. 3 5 Loan Portfolio Composition and Maturity. The following table sets forth information concerning the Company's loan portfolio by type of loan at the dates indicated.
December 31, ----------------------------------------------------------------------------------------- 1995 1994 1993 1992 -------------------- -------------------- -------------------- -------------------- % of % of % of % of Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Residential real estate loans: Conventional $ 567,538 25.6% 589,826 28.1% $ 509,999 26.7% $ 447,447 23.9% FHA/VA 26,612 1.2 32,981 1.6 27,897 1.5 34,628 1.8 Construction 13,219 0.6 9,555 0.5 8,243 0.4 11,814 0.6 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total residential real estate loans(1) 607,369 27.4 632,361 30.1 546,139 28.6 493,889 26.4 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Commercial real estate loans: Permanent first mortgage loans(2) 584,806 26.4 572,298 27.3 543,418 28.4 565,744 30.2 Construction 38,880 1.7 23,057 1.1 18,885 1.0 23,138 1.2 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total commercial real estate loans 623,686 28.1 595,355 28.4 562,303 29.4 588,882 31.5 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Commercial business loans and leases(3) 332,755 15.0 265,644 12.7 248,164 13.0 252,761 13.5 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Consumer loans and leases: Home equity 256,813 11.6 217,889 10.4 188,823 9.9 183,565 9.8 Mobile home 196,408 8.8 201,297 9.6 185,454 9.7 160,000 8.5 Automobile 109,738 4.9 106,666 5.1 91,434 4.8 71,913 3.8 Home improvement, second mortgage and land 36,900 1.7 32,921 1.6 36,337 1.9 40,899 2.2 Boat and recreational vehicle 17,013 0.8 18,836 0.9 22,780 1.2 26,380 1.4 Other 36,955 1.7 27,309 1.3 29,456 1.5 53,573 2.9 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total consumer loans 653,827 29.5 604,918 28.8 554,284 29.0 536,330 28.7 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total loans receivable 2,217,637 100.0% 2,098,278 100.0% 1,910,890 100.0% 1,871,862 100.0% ---------- ===== ---------- ===== ---------- ===== ---------- ===== Allowance for loan losses (49,138) (50,484) (52,804) (54,604) ---------- ---------- ---------- ---------- Net loans receivable $2,168,499 $2,047,794 $1,858,086 $1,817,258 ========== ========== ========== ==========
December 31, --------------------- 1991 ---------------------- % of Amount Loans ------ ----- (Dollars in Thousands) Residential real estate loans: Conventional $ 475,613 23.3% FHA/VA 49,808 2.4 Construction 6,472 0.3 ---------- ----- Total residential real estate loans(1) 531,893 26.0 ---------- ----- Commercial real estate loans: Permanent first mortgage loans(2) 604,335 29.6 Construction 56,015 2.7 ---------- ----- Total commercial real estate loans 660,350 32.3 ---------- ----- Commercial business loans and leases(3) 339,007 16.6 ---------- ----- Consumer loans and leases: Home equity 176,904 8.7 Mobile home 134,709 6.6 Automobile 60,702 3.0 Home improvement, second mortgage and land 48,253 2.4 Boat and recreational vehicle 30,731 1.5 Other 61,664 3.0 ---------- ----- Total consumer loans 512,963 25.1 ---------- ----- Total loans receivable 2,044,213 100.0% ---------- ===== Allowance for loan losses (67,955) ---------- Net loans receivable $1,976,258 ==========
4 6 (1) At December 31, 1995, $402.7 million and $204.7 million of residential real estate loans had adjustable and fixed rates, respectively. (2) At December 31, 1995, permanent commercial real estate loans consisted of $524.2 million of permanent commercial real estate loans and $60.6 million of multi-family residential loans. (3) At December 31, 1995, commercial business loans and leases included $62.0 million of lines and letters of credit and $10.9 million of leases. The following table sets forth scheduled contractual amortization of loans in the Company's portfolio at December 31, 1995, as well as the dollar amount of loans which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdraft loans are reported as due in one year or less.
Commercial Residential Commercial Business Real Estate Real Estate Loans and Consumer Loans Loans Leases Loans Total ----------- ----------- ---------- --------- ---------- (In Thousands) Amounts due: Within one year $ 31,139 $ 79,233 $ 132,035 $ 68,129 $ 310,537 After one year through five years 76,738 316,142 149,185 170,031 712,096 Beyond five years 499,492 228,311 51,535 415,666 1,195,004 ---------- ---------- ---------- ---------- ---------- Total $ 607,369 $ 623,686 $ 332,755 $ 653,827 $2,217,637 ========== ========== ========== ========== ========== Interest rate terms on amounts due after one year: Fixed $ 255,102 $ 159,942 $ 45,989 $ 263,248 $ 724,281 ========== ========== ========== ========== ========== Adjustable $ 321,128 $ 384,511 $ 154,731 $ 322,449 $1,182,819 ========== ========== ========== ========== ==========
Scheduled contractual amortization does not reflect actual maturities of loans due to prepayments and in the case of single-family residential loans due-on-sale clauses, which give the Company the right to declare a loan due and payable in the event of a sale of the security property. Origination, Purchase and Sale of Loans. Historically, the Company has originated loans and engaged in other lending activities primarily through its banking subsidiaries. In addition, the Bank has a mortgage banking subsidiary which engages in mortgage banking activities outside of the primary market areas of the Company's banking subsidiaries in Maine and New Hampshire; the activities of this subsidiary have not been material to date. See "Subsidiaries - Mortgage Banking Activities" below. 5 7 Applications for all types of loans may be taken at most of the Company's branch offices. Residential loan applications are primarily attributable to correspondent lending institutions, referrals from real estate brokers, whom the Company actively solicits, and builders, existing customers and walk-in customers. Commercial real estate applications are obtained primarily from previous borrowers, direct contacts with the Company and referrals. Commercial business loan and lease applications are primarily obtained through existing customers, walk-in customers, solicitation by the Company and referrals. Consumer loans are primarily obtained through existing and walk-in customers who have been made aware of the Company's programs by advertising, phonebank and other means, as well as indirectly through a network of dealers in the various products financed by the Company. During 1995, the Company also utilized a marketing campaign to attract all types of loans. Applications also are obtained through several field loan originators who solicit and refer residential mortgage loan applications to the Company. These representatives are compensated in part on a commission basis and provide convenient origination services during banking and nonbanking hours. The Bank also operates a residential loan production office in Londonderry, New Hampshire, and the Bank's mortgage banking subsidiary maintains a residential loan office in Burlington, Massachusetts. See "Business Subsidiaries." During 1995, the Company significantly expanded its correspondent lending operations in order to leverage existing secondary market capabilities and add mortgage servicing income at a low marginal cost. Substantially all loans originated through the Company's correspondent lending network are sold in the secondary mortgage market. The vast majority of correspondent originations come from correspondent lenders located outside of New England. Residential real estate mortgage originations from correspondent lenders increased by $285.0 million, or 304.7%, from $93.5 million in 1994 to $378.5 million in 1995. Loans may be approved by branch managers, including assistants, and various lending officers of the Company within designated limits, which are established and modified from time to time to reflect expertise and experience. All loans in excess of an individual's designated limits are referred to the nearest officer with the requisite authority. Commercial business and commercial real estate loan relationships at the Bank in excess of $1.25 million and less than $3.0 million are reviewed and approved by a senior management loan committee, and relationships in excess of $3.0 million are reviewed and approved by the Board of Directors or a committee of the Board of Directors. The Company believes that its decentralized approach to approving loan applications allows it to process and approve applications faster than many of its competitors. The Company also believes that its decentralized approach to lending is conducive to providing direct and personal service to borrowers located in its market areas. The Company also has established a telephone application center for consumer loans, which the Company believes has further improved efficiencies and service to consumer borrowers. 6 8 The Company emphasizes residential mortgage loans that are made on terms, conditions and documentation which permit sale to the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA") and other institutional investors in the secondary market. Currently, substantially all of such long-term, fixed-rate mortgage loans originated by the Company are sold in the secondary market to the FHLMC and the FNMA and the Company both sells and retains adjustable-rate mortgage loans originated by it in its loan portfolio. In recent years, the Company also has held a portion of its originations of ten and 15 year fixed-rate residential loans for its loan portfolio. The Company has retained credit risk on certain residential mortgage loans sold with full or partial recourse, which amounted to $48.2 million at December 31, 1995. Loan sales in the secondary market provide additional funds for lending and other business activities. The long-term, fixed-rate loans originated by the Bank include loans which are originated for sale to the Maine State Housing Authority ("MSHA"). MSHA is an independent agency of the State of Maine which issues tax-exempt bonds in order to purchase low-rate mortgages made to eligible borrowers. The Company sold $11.7 million, $9.5 million and $10.7 million of loans to the MSHA in 1995, 1994 and 1993, respectively. For additional information relating to the Company's activities in the secondary market for loans, see "Loan Servicing Activities" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Loans and Leases" included in Item 7 hereof. Residential Real Estate Loans. At December 31, 1995, $607.4 million or 27.4% of the Company's total loan portfolio consisted of single-family residential loans, substantially all of which were conventional loans. The Company originates single-family residential loans which provide for periodic adjustments to the interest rate. The Company's ability to originate adjustable rate loans is dependent on market and economic conditions, including the level of interest rates. Approximately 16%, 38% and 24% of the permanent single-family residential loans originated by the Company in 1995, 1994 and 1993, respectively, had adjustable interest rates. At December 31, 1995, approximately $402.7 million or 66.3% of the single-family residential loans in the Bank's loan portfolio consisted of loans which provided for adjustable rates of interest. The Company's adjustable-rate loans have 15 to 30-year terms and an interest rate which adjusts annually in accordance with an index which is based on one-year securities issued by the United States government. There generally is a 2% cap on any increase or decrease in the interest rate per year, and various caps depending on when the loan was originated (currently 6%) on the interest rate over the life of the loan. The Company has not engaged in the practice of using a cap on the payments that could allow the loan 7 9 balance to increase rather than decrease, resulting in negative amortization. The Company often offers discounts on the initial interest rate on its adjustable-rate residential mortgage loans, as compared to the index plus its normal margin, for up to one year for competitive reasons, but evaluates the borrower's ability to pay at the rate which would be in effect without the discount. The Company originates long-term, fixed-rate loans, but generally only under terms, conditions and documentation which permit sale in the secondary market. At December 31, 1995, approximately $204.7 million or 33.7% of the permanent single-family residential loans in the Company's loan portfolio consisted of loans which provide for fixed rates of interest. Although these loans provide for repayments of principal over a fixed period of up to 30 years, it is the Company's experience that such loans have remained outstanding for a substantially shorter period of time. The Company will lend up to 95% of the appraised value of the property securing the loan (referred to as the loan-to-value ratio), and generally requires borrowers to obtain private mortgage insurance on the portion of the principal amount of the loan that exceeds 80% of the value of the security property. The Company's general policy is to emphasize loans with loan-to-value ratios of 80% or less (which may be higher in the case of sales of other real estate owned). The Company generally requires title insurance insuring the priority of its mortgage lien, as well as fire and extended coverage casualty insurance in order to protect the properties securing its residential and other mortgage loans. The properties securing all of the Company's mortgage loans are appraised by independent appraisers approved by senior lending officers of the Company. Commercial Real Estate Loans. The Company originates mortgage loans for acquisition, development and construction of commercial real estate properties. At December 31, 1995, $623.7 million or 28.1% of the Company's total loan portfolio consisted of such loans, including construction and development loans totalling $38.9 million or 1.7% of total loans. Commercial real estate loans originated by the Company are primarily secured by office buildings, industrial buildings, warehouses and various special purpose properties, including hotels, restaurants and nursing homes. Commercial real estate loans also include multi-family residential loans, which are primarily secured by townhouse condominiums and apartment buildings. Although terms vary, commercial real estate loans secured by existing properties generally have maturities of ten years or less and are amortized over a period of up to 30 years, thus requiring a balloon payment at maturity. Commercial real estate loans generally have interest rates which float in accordance with a designated prime lending rate or, to a lesser extent, adjust every one, three or five years in accordance with a designated index, 8 10 subject in some instances to ceilings and floors which may be negotiated at the time of origination. Permanent commercial real estate loans are also made with fixed rates of interest for terms of up to five years or longer if they can be funded with a comparably maturing liability at an acceptable positive interest rate spread. Construction loans, including loans for the acquisition and development of land for construction, generally have maturities of 12 to 18 months. Interest rates on construction loans generally float at a spread above a designated prime lending rate or adjust in accordance with a designated index, and occasionally may be made on a fixed-rate basis. Advances are generally made to cover actual construction costs. Loan proceeds are disbursed as inspections of construction progress warrant and as pre-construction sale and leasing requirements generally imposed by the Company are met. Loan-to-value ratios on the Company's commercial real estate loans generally range from 60% to 80% (which may be higher in the case of sales of other real estate owned), although in prior years the Company would finance a greater amount of the value of the property which secures the loan. In addition, as part of the criteria for underwriting permanent commercial real estate loans, the Company generally imposes a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of 115% to 125%. It is also the Company's general policy to obtain personal guarantees of its commercial real estate loans from the principals of the borrower. Commercial Business Loans and Leases. The Company is authorized to make secured or unsecured loans for commercial, corporate, business and agricultural purposes, including issuing letters of credit. At December 31, 1995, $332.8 million or 15.0% of the Company's total loan portfolio consisted of commercial business loans and leases. The Company's current strategy is to focus on lending to sound, small to medium business customers within its market areas. The Company's commercial business loans consist primarily of loans secured by various equipment, machinery and other corporate assets. Commercial business loans also are made to provide working capital to businesses in the form of lines of credit which may be secured by inventory, accounts receivable or other assets or unsecured and which are generally required to be paid out for 30 consecutive days annually, as well as for various other miscellaneous purposes. Commercial business loans are generally provided to closely-held businesses which are primarily located in Maine and New Hampshire, and the Company's commercial business loans are well distributed by type of business. Commercial business loans generally have terms of five years or less and are amortized over a period of up to 30 years, thus requiring a balloon payment at maturity. Commercial business loans generally have interest rates which float in accordance with a designated base lending rate, although the Company also originates commercial business loans with adjustable and fixed rates of interest. Loan-to-value ratios generally are 80% or less. The Company generally obtains personal guarantees of its commercial business loans from the principals of the borrower. 9 11 The Company originates commercial business leases through Peoples Heritage Leasing Company, Inc. (the "Leasing Company"), which was formerly known as Northeast Leasing Company, Inc. The Leasing Company is a wholly-owned subsidiary of the Bank. For a further description of the activities of this subsidiary, which had $10.9 million of leases outstanding at December 31, 1995, see "Subsidiaries" below. At December 31, 1995, commitments under unused commercial lines and standby letters of credit amounted to $120.8 million. Consumer Loans. The Company also is authorized to make loans for a wide variety of personal or consumer purposes. At December 31, 1995, $653.8 million or 29.5% of the Company's total loan portfolio consisted of consumer loans. The Company has been emphasizing a wide variety of consumer loans in recent years in order to provide a full range of financial services to its customers and because such loans generally have shorter terms and higher interest rates than mortgage loans. The consumer loans offered by the Company include home improvement loans, home equity credit lines and loans that are secured by personal property, including automobiles, boats, mobile homes and recreational vehicles. Originations of consumer loans increased substantially in recent years primarily as a result of increased originations of loans indirectly obtained by the Company through various dealers in products financed by the Company. In general, each such loan is underwritten by the Company prior to its acquisition of the loan. Indirect consumer loans accounted for approximately 23.2%, 35% and 40% of the Company's total originations of consumer loans in 1995, 1994 and 1993, respectively, and amounted to $300.1 million or 45.9% of the Company's consumer loan portfolio at December 31, 1995. The following table sets forth information regarding the Company's indirect consumer loan portfolio at the dates indicated.
December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Mobile home loans $188,201 $197,634 $180,669 Auto loans 88,532 100,884 70,422 Boat, home improvement and other loans 23,391 18,391 46,504 -------- -------- -------- Total indirect loans $300,124 $316,909 $297,595 ======== ======== ========
The largest category of loans in the Company's consumer loan portfolio consists of home equity lines, which are a form of revolving credit and are secured by the underlying equity in the borrower's home. Home equity lines amounted to $256.8 million or 39.3% of the Company's total consumer loan portfolio at December 31, 1995. Credit generally is 10 12 extended for up to 90% of the appraised value of the home, less any loans outstanding secured by such collateral. The second largest category of loans in the Company's consumer loan portfolio is loans secured by mobile homes. Mobile home loans amounted to $196.4 million or 30.0% of the Company's total consumer loan portfolio at December 31, 1995. In recent years, the Company's originations of mobile home loans have been obtained primarily through two mobile home loan brokers who have been selected by the Company based on their experience in the industry, market area and experience with the Company. The mobile homes which secure these loans are primarily located in Maine, New Hampshire, Massachusetts and upstate New York. A loss reserve deposit account funded by the broker is maintained at the Company to cover any future losses and prepayments on mobile home loans. (The loss and prepayment reserve for each loan is calculated based on a percentage of the difference between the total finance charge to be paid by the borrower compared to the total finance charge retained by the Company (assuming no prepayments); this percentage generally ranges from 50% to 55%). During 1995 and 1994, the Company charged net credit losses of $883,668 or .46% of average indirect mobile home loans and $743,000 or .39% of average indirect mobile home loans, respectively, against the dealer reserve deposit accounts. In addition, during 1995 and 1994, the Company charged $2.4 million and $2.2 million, respectively, of prepayment losses against the dealer reserve deposit accounts. At December 31, 1995, dealer reserve deposit accounts amounted to $3.0 million. Additionally, the Company has established a credit loss reserve for its mobile home loans as part of its allowance for loan losses, which amounted to $5 million at December 31, 1995. The third largest category of loans in the Company's consumer loan portfolio is loans secured by new and used automobiles. Automobile loans amounted to $109.7 million or 16.8% of the Company's total consumer loan portfolio at December 31, 1995. These loans have fixed rates of interest and terms up to five years, depending on the age of the automobile. Such loans are obtained primarily indirectly through a network of new car dealers located within the States of Maine and New Hampshire, who are selected based on their stability and location, among other factors. The dealer generally retains a reserve on each loan originated. Indirect loans are generally made under terms which do not allow the Company to seek recourse from the dealer in the event of default. During 1995 and 1994, the Company charged net credit losses against its allowance for loan losses of $266,000 or .30% of its average indirect auto loans and $180,000 or .19% of its average indirect auto loans, respectively. Together, home improvement, second mortgage and land loans and boat and recreational vehicle loans amounted to $53.9 million or 8.3% of the Company's total consumer loan portfolio at December 31, 1995. Home improvement loans, etc. and boat and recreational vehicle loans generally have a fixed rate of interest and a term of five to 15 years, or terms of up to 20 years and provisions which provide for adjustment of the interest rate every one or three years in accordance with a designated prime lending rate. 11 13 Such loans generally have loan-to-value ratios of 80% or less. Some of these loans are obtained by the Company through various dealers in products financed by the Company. Collectively, during 1995 and 1994, the Company charged-off $296,000 and $307,000, respectively, of these types of loans against the allowance for loan and lease losses. Loan Fee Income. In addition to interest earned on loans, the Company receives income through servicing of loans, unamortized loan fees in connection with loan sales and fees in connection with loan modifications, late payments, prepayments and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans made and competitive conditions. In its lending, the Company often charges loan origination fees which are calculated as a percentage of the amount borrowed. Loan origination fees generally are not obtained in connection with consumer loans and may or may not be obtained in connection with commercial business and commercial real estate loans. The Company's policy is to defer all loan fees net of direct origination costs and amortize those fees over the estimated remaining lives of the related loans. Amortization of loan fees is included in interest income. Loan Servicing Activities. Residential real estate mortgages are originated by the Company primarily for sale into the secondary market. Such loans generally are sold to institutional investors such as the FNMA and the FHLMC. Under loan sale and servicing agreements with these investors, the Company generally continues to service the residential real estate mortgages. Servicing includes collecting and remitting loan payments, accounting for principal and interest, holding escrow funds for the payment of real estate taxes and insurance premiums, contacting delinquent borrowers, supervising foreclosures in the event of unremedied defaults and generally administering the loans. The Company pays the investor an agreed-upon rate on the loan, which, including a guarantee fee paid to FNMA and FHLMC, 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. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights -- An Amendment of FASB Statement No. 65," which changed the method of accounting for certain mortgage banking activities. The Company elected early adoption of SFAS No. 122 and as a result capitalized $2.5 million of originated mortgage servicing rights in 1995. For additional information regarding SFAS No. 122 and the mortgage banking activities of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Noninterest Income" and "- Risk Management Interest Rate Risk and Asset Liability Management" included in Item 7 hereof and Note 9 to the Consolidated Financial Statements included in Item 14 hereof. 12 14 The Company periodically purchases residential mortgage servicing rights through a closed bid process from brokers representing financial institutions with mortgage servicing portfolios available for sale. The payment made to purchase such mortgage servicing rights is capitalized by the Company upon consummation of the purchase. During 1995, 1994 and 1993, the Company paid $707,000, $11.4 million and $5.9 million, respectively, to acquire the servicing rights related to approximately $76 million, $780 million and $700 million of mortgages secured by real estate located primarily in New England. Although the Company currently intends to continue to expand its loan servicing portfolio primarily through the origination and sale of loans on a servicing-retained basis, the Company from time to time may evaluate additional purchases of loan servicing portfolios. In addition, depending on current mortgage origination volumes and other factors, from time to time, the Company may sell a portion of newly-originated loans on a servicing-released basis or sell a portion of its servicing portfolio. During 1995, the Company sold the servicing rights related to approximately $158 million of loans for a gain of $642,000. 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 and to ensure that the carrying value of the remaining mortgage servicing rights does not exceed the present value of estimated future net servicing income. Mortgage servicing rights generally are adversely affected by accelerated prepayments resulting primarily from decreasing interest rates. In evaluating the realizability of the carrying value of mortgage servicing rights, the Company assesses the estimated life of its servicing portfolio based on data which is disaggregated to reflect the coupon rates on the underlying loans whose servicing rights have been acquired in connection with the Company's lending activities or as a result of purchases of servicing rights from third parties. Included in the amortization of mortgage servicing rights charged to service fee income were writedowns of $0, $0 and $400,000 during 1995, 1994 and 1993, respectively, to adjust for changes in prepayment experience. The following table sets forth an analysis of the Company's mortgage servicing rights during the periods indicated.
Year Ended December 31, -------------------------------------- 1995 1994 1993 -------- -------- -------- (In Thousands) Balance at beginning of period $ 17,275 $ 6,483 $ 1,985 Mortgage servicing rights capitalized 9,101 12,535 6,764 Amortization charged against mortgage servicing fee income (3,483) (1,743) (2,266) Mortgage servicing rights sold (2,584) -- -- -------- -------- -------- Balance at end of period $ 20,309 $ 17,275 $ 6,483 ======== ======== ========
13 15 The following table presents information regarding the loans serviced by the Company for investors at the dates indicated.
December 31, ------------------------------------------ 1995 1994 1993 ---------- ---------- ---------- (In Thousands) Mortgage loans serviced for investors $2,511,795 $2,001,208 $1,512,974 ========== ========== ==========
At December 31, 1995, the $2.5 billion of loans serviced by the Company for others consisted of approximately 35,750 loans with an average loan balance of approximately $70,300, a weighted average service fee of approximately .46% per annum (inclusive of excess servicing) and a weighted average remaining term of approximately 23 years. The following table sets forth the coupon distribution of the loans serviced by the Company for investors at December 31, 1995.
Coupon Principal Balance - ------------------------------------------ ------------------------------- (Dollars in Thousands) 4.99% or less $ 4,131 5.00% - 5.99% 39,054 6.00% - 6.99% 284,262 7.00% - 7.99% 1,095,984 8.00% - 8.99% 752,070 9.00% - 9.99% 250,997 10.00% - 10.99% 71,799 11.00% and greater 13,497 ---------- $2,511,795 ==========
The following table sets forth the geographic locations of properties securing the Company's portfolio of loans serviced for investors at December 31, 1995.
Percentage of Total State Principal Balance Principal Balance - ------------------------------- ----------------------------------- -------------------------------------- (In Thousands) Maine $1,035,270 41.2% New Hampshire 157,556 6.3 Massachusetts 638,899 25.4 Connecticut 152,740 6.1 Rhode Island 46,422 1.8 Other 480,908 19.1 ---------- ----- Total $2,511,795 100.0% ========== =====
14 16 Nonperforming Loans and Other Real Estate Owned. The following table sets forth information regarding nonperforming loans and leases and other nonperforming assets held by the Company at the dates indicated.
December 31, -------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (Dollars in Thousands) Residential real estate loans: Non-accrual loans $ 4,990 $ 1,799 $ 1,819 $ 4,167 $ 5,690 Accruing loans 90 days overdue 2,274 2,883 2,930 3,281 5,229 Troubled debt restructurings -- -- 111 1,097 -- -------- -------- -------- -------- -------- Total 7,714 4,682 4,860 8,545 10,919 -------- -------- -------- -------- -------- Commercial real estate loans: Non-accrual loans 13,247 20,413 24,453 36,239 59,176 Accruing loans 90 days overdue -- -- 279 1,631 1,424 Troubled debt restructurings 2,595 5,704 14,406 16,633 28,862 -------- -------- -------- -------- -------- Total 15,842 26,117 39,138 54,503 89,462 -------- -------- -------- -------- -------- Commercial business loans and leases: Non-accrual loans 6,235 6,270 12,232 20,767 32,099 Accruing loans 90 days overdue -- -- 318 1,113 2,491 Troubled debt restructurings 1,859 2,013 2,404 1,543 1,224 -------- -------- -------- -------- -------- Total 8,094 8,283 14,954 23,423 35,814 -------- -------- -------- -------- -------- Consumer loans: Non-accrual loans 2,846 2,727 1,828 2,012 1,098 Accruing loans 90 days overdue 532 468 633 656 2,560 Troubled debt restructurings -- -- 26 -- 70 -------- -------- -------- -------- -------- Total 3,378 3,195 2,487 2,668 3,728 -------- -------- -------- -------- -------- Total nonperforming loans: Non-accrual loans 27,318 31,209 40,332 63,185 98,063 Accruing loans 90 days overdue 3,256 3,351 4,160 6,681 11,704 Troubled debt restructurings 4,454 7,717 16,947 19,273 30,156 -------- -------- -------- -------- -------- Total 35,028 42,277 61,439 89,139 139,923 -------- -------- -------- -------- -------- Other nonperforming assets: Other real estate owned, net of related reserves 5,073 6,658 19,002 30,370 30,678 In-substance foreclosures, net of related reserves -- 2,096 8,224 28,013 33,289 Repossessions, net of related reserves 1,528 1,976 1,961 2,566 2,664 -------- -------- -------- -------- -------- Total 6,601 10,730 29,187 60,949 66,631 -------- -------- -------- -------- -------- Total nonperforming assets $ 41,629 $ 53,007 $ 90,626 $150,088 $206,554 ======== ======== ======== ======== ======== Total nonperforming loans as a percentage of total loans 1.58% 2.01% 3.22% 4.76% 6.84% Total nonperforming assets as a percentage of total assets 1.35 1.90 3.43 5.89 7.55 Total nonperforming assets as a percentage of total loans and total other nonperforming assets 1.87 2.51 4.67 7.77 9.79
15 17 For additional information about the Company's nonperforming assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition - Nonperforming Assets" included in Item 7 hereof and Notes 5 and 10 to the Consolidated Financial Statements included in Item 14 hereof. 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 deemed uncollectible and losses on loans sold with recourse. The allowance for loan and lease losses is increased by provisions charged to operating expense and by recoveries on loans previously charged off. Arriving at an appropriate level of the allowance for loan and lease losses necessarily involves a high degree of judgment. The following table sets forth information concerning the activity in the Company's allowance for loan and lease losses during the periods indicated.
Year Ended December 31, ------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Average loans and leases outstanding $2,209,900 $2,009,372 $1,900,105 $1,990,672 $2,119,394 ========== ========== ========== ========== ========== Allowance at the beginning of the year $ 50,484 $ 52,804 $ 54,604 $ 68,055 $ 62,854 Additions due to acquisitions and purchases 2,314 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Charges-offs: Residential real estate mortgages 1,467 1,857 2,438 8,867 4,500 Commercial real estate mortgages 7,339 5,168 6,254 17,058 42,795 Commercial business loans and leases 1,914 3,023 8,594 15,665 11,171 Consumer loans and leases 2,262 1,714 3,084 4,529 4,151 ---------- ---------- ---------- ---------- ---------- Total loans charged off 12,982 11,762 20,370 46,119 62,617 ---------- ---------- ---------- ---------- ---------- Recoveries: Residential real estate mortgages 245 408 540 613 403 Commercial real estate mortgages 4,626 4,184 5,676 2,430 1,080 Commercial business loans and leases 1,615 2,506 1,260 2,663 4,450 Consumer loans and leases 406 487 1,315 1,737 2,947 ---------- ---------- ---------- ---------- ---------- Total loans recovered 6,892 7,585 8,791 7,443 8,880 ---------- ---------- ---------- ---------- ---------- Net charge-offs 6,090 4,177 11,578 38,676 53,737 Additions charged to operating expenses 2,430 1,857 9,779 25,225 58,938 ---------- ---------- ---------- ---------- ---------- Allowance at end of year $ 49,138 $ 50,484 $ 52,804 $ 54,604 $ 68,055 ========== ========== ========== ========== ========== Ratio of net charge-offs to average loans and leases outstanding 0.28% 0.21% 0.61% 1.94% 2.54% Ratio of allowance to end of period loans and leases 2.22 2.41 2.76 2.74 3.32 Ratio of allowance to nonperforming loans and leases at end of period 140.28 119.41 85.95 61.26 48.57
16 18 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. For information about the percent of total loans in each category to total loans, see "Loan Portfolio Composition and Maturity."
December 31, ------------------------------------------------------------------------------------------ 1995 1994 1993 ------------------------ ----------------------------- ---------------------------- Allowance to Allowance to Allowance to Percent of Percent of Percent of Total Loans Total Loans Total Loans Amount by Category Amount by Category Amount by Category ------ ----------- ------ ----------- ------ ----------- (Dollars in Thousands) Residential real estate $ 2,872 0.5% $ 3,078 0.5% $ 5,425 1.0% Commercial real estate 29,240 4.7 30,545 5.1 32,916 5.9 Commercial business loans and leases 8,201 2.5 8,219 3.1 5,833 2.4 Consumer 8,824 1.4 8,642 1.4 8,630 1.6 ------- ------- ------- $49,138 2.2 $50,484 2.4 $52,804 2.8 ======= ======= =======
December 31, ---------------------------------------------------------- 1992 1991 ----------------------------- --------------------------- Allowance to Allowance to Percent of Percent of Total Loans Total Loans Amount by Category Amount by Category ------ ----------- ------ ----------- (Dollars in Thousands) Residential real estate $ 8,112 1.6% $ 7,700 1.4% Commercial real estate 33,624 5.7 41,884 6.3 Commercial business loans and leases 9,607 3.8 14,721 4.3 Consumer 3,261 0.6 3,750 0.7 ------- ------- $54,604 2.9 $68,055 3.3 ======= =======
For additional information relating to the Company's allowance for loan and lease losses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Allowance for Loan and Lease Losses" included in Item 7 hereof. 17 19 INVESTMENT ACTIVITIES The Company invests in investment securities in accordance with the requirements of federal and state law. The Company's investment securities portfolio is managed in accordance with a written investment policy adopted by the Board of Directors. Investments may be made by individual officers of the Company within specified limits and must be approved in advance by the Investment Committee for transactions over certain limits. The Company's investment securities portfolio currently consists primarily of U.S. Government and federal agency securities and mortgage-backed securities which are insured or guaranteed by the FHLMC, the FNMA or the GNMA. Mortgage-backed securities increase the quality of the Company's assets by virtue of the guarantees that back them, require less capital under risk-based capital rules than non-insured or guaranteed mortgage loans, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which the Company adopted effective December 31, 1993, debt and equity securities that an institution has the positive intent and ability to hold to maturity are to be reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling them in the near term are to be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and other debt and equity securities are to be classified as securities available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. At December 31, 1995, all of the Company's investment securities were classified as available for sale and an aggregate of $2.2 million of net unrealized gains (net of related taxes) on investment securities available for sale was included in the Company's shareholders' equity. The following table sets forth the Company's investment securities available for sale at the dates indicated.
December 31, ------------------------------------ 1995 1994 1993 -------- -------- -------- (In Thousands) Bonds and other debt securities: U.S. Government and federal agencies $249,697 $219,220 $201,607 Tax-exempt bonds and notes 10,299 11,085 6,779 Other bonds and notes 5,417 2,706 7,581 Mortgage-backed securities 195,823 172,466 225,609 -------- -------- -------- Total debt securities 461,236 405,477 441,576 -------- -------- -------- Equities: FHLB stock 23,793 23,236 17,321 Other securities 189 290 178 -------- -------- -------- Total equity securities 23,982 23,526 17,499 -------- -------- -------- Total investment securities $485,218 $429,003 $459,075 ======== ======== ========
18 20 The following table sets forth the scheduled maturities and weighted average yields of the Company's debt securities available for sale at December 31, 1995, based on amortized cost.
Amortized Cost Maturing in -------------------------------------------------------------------------------------------- One Year or Less More than One to Five Years More than Five to Ten Years ------------------------ --------------------------- --------------------------- Amount Yield(1) Amount Yield(1) Amount Yield(1) ------ ----- ------ ----- ------ ----- (Dollars in Thousands) U.S. Government and federal agencies $125,088 5.86% $120,263 6.19% $ 2,076 5.57% Tax-exempt bonds and notes 5,390 4.81 4,881 4.29 -- -- Other bonds and notes 3,157 6.86 2,106 7.07 104 7.19 Mortgage-backed securities 256 8.14 1,993 6.29 32,537 6.98 -------- -------- -------- Total $133,891 5.85 $129,243 6.14 $ 34,718 6.89 ======== ======== ========
Amortized Cost Maturing in --------------------------- More than Ten Years Total ----------------------- --------------------------- Amount Yield(1) Amount Yield(1) ------ ----- ------ ----- (Dollars in Thousands) U.S. Government and federal agencies $ 670 7.55% $248,096 6.03% Tax-exempt bonds and notes -- -- 10,271 4.57 Other bonds and notes -- -- 5,368 6.95 Mortgage-backed securities 159,231 6.91 194,018 6.91 -------- --------- Total $159,901 6.91 457,753(2) 6.38 ======== =========
- -------------------- (1) Fully-taxable equivalent basis. (2) The market value of these securities amounted to $461.2 million at December 31, 1995. 19 21 Actual maturities of debt securities 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, 1995, investments in the debt and/or equity securities of any one issuer (excluding U.S. Government and federal agencies) did not exceed more than 1.7% of the Company's total shareholders' equity. For additional information, see Notes 3 and 12 to the Consolidated Financial Statements included in Item 14 hereof. SOURCES OF FUNDS Deposits. Deposits obtained through offices of the Company have traditionally been the principal source of the Company's funds for use in lending and for other general business purposes. The Company's current deposit products include regular savings and club accounts, personal and commercial demand accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit accounts and certificates of deposit ranging in terms from three months to ten years. Included among these deposit products are Individual Retirement Account certificates and Keogh retirement certificates (collectively "retirement accounts"), as well as negotiable-rate certificates of deposit with balances of $100,000 or more ("negotiated-rate jumbo certificates"). The Company's deposits are obtained primarily from residents of the State of Maine and, to a lesser extent, the State of New Hampshire. Management of the Company estimates that an insignificant amount of the Company's deposits are obtained from customers residing outside of these states. The Company attracts deposit accounts primarily by offering a wide variety of services and accounts, competitive interest rates, and convenient office locations and service hours. The Company does not rely on brokered deposits. See "Regulation - Banking Subsidiaries - Brokered Deposits." The Company's office locations and service hours are supplemented by the Company's BankCard, which may be used to conduct various deposit and/or withdrawal transactions at the 77 automated teller machines ("ATMs") maintained by the Company at December 31, 1995. The BankCard also may be used in the "Passkey," "NYCE," "Yankee 24," "TX" and the "Exchange" regional ATM networks, as well as in the nationwide ATM network known as "Plus." These networks provide the Company's customers with access to over 200 ATMs in the State of Maine and thousands of ATMs across the United States. 20 22 The following table shows the distribution of the Company's deposits by type of deposit as of the dates indicated.
December 31, ---------------------------------------------------------------------------------------------- 1995 1994 1993 --------------------------- ----------------------------- ---------------------- % of % of % of Amount Deposits Amount Deposits Amount Deposits ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Non-brokered deposits: Regular savings $ 303,504 12.9% $ 361,657 17.5% $ 248,069 12.0% Money market deposit accounts 448,998 19.0 276,064 13.4 389,191 18.8 NOW accounts 215,529 9.1 195,161 9.5 192,916 9.3 Demand accounts 269,830 11.4 218,559 10.6 199,815 9.6 Certificates: 3 - 5 months 12,728 0.5 19,293 0.9 30,430 1.5 6 - 8 months 109,161 4.6 90,505 4.4 325,594 15.7 9 - 11 months 907 0.0 1,115 0.1 1,789 0.1 12 - 23 months 225,631 9.6 113,596 5.5 148,424 7.1 24 - 35 months 118,737 5.0 85,742 4.1 117,738 5.7 36 - 47 months 192,436 8.1 280,029 13.6 68,813 3.3 48 - 59 months 14,679 0.6 14,684 0.7 16,360 0.8 60 - 120 months 212,774 9.0 202,803 9.8 126,870 6.1 Negotiated-rate jumbo certificates 30,094 1.3 19,623 0.9 18,564 0.9 ---------- ----- ---------- ----- ---------- ----- Total certificates 917,147 38.8 827,390 40.0 854,582 41.2 ---------- ----- ---------- ----- ---------- ----- Retirement accounts 206,957 8.8 184,936 9.0 174,918 8.4 ---------- ----- ---------- ----- ---------- ----- Total non-brokered deposits 2,361,965 100.0 2,063,767 100.0 2,059,491 99.3 ---------- ----- ---------- ----- ---------- ----- Brokered deposits -- -- -- 0.0 15,000 0.7 ---------- ----- ---------- ----- ---------- ----- Total deposits at end of period $2,361,965 100.0% $2,063,767 100.0% $2,074,491 100.0% ========== ===== ========== ===== ========== =====
At December 31, 1995, the Company had $103.7 million of certificates of deposit in amounts of $100,000 or more outstanding maturing as follows: $24.1 million within three months; $16.8 million over three months through six months; $13.3 million over six months through 12 months; and $49.5 million thereafter. The ability of the Company to attract and maintain deposits and the Company's cost of funds on these deposits have been, and will continue to be, significantly affected by economic and competitive conditions. 21 23 Borrowings. The following table sets forth certain information concerning the Company's borrowings at the dates indicated.
December 31, ------------------------------------ 1995 1994 1993 -------- -------- -------- (In Thousands) FHLB advances $252,446 $362,450 $251,760 Repurchase agreements 139,942 86,631 68,450 Federal funds purchased 1,500 4,404 1,600 Other 18,928 7,902 2,859 -------- -------- -------- Total $412,816 $461,387 $324,669 ======== ======== ========
Each of the Bank and FNB is a member of the Federal Home Loan Bank System ("FHLB System"), which consists of 12 regional Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. Each member of the FHLB of Boston is required to hold shares of common stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 5% of its advances (borrowings) from the FHLB of Boston, whichever is greater. The Bank and FNB had an aggregate investment of $23.8 million in stock of the FHLB of Boston at December 31, 1995. For additional information, see Note 13 to the Consolidated Financial Statements included in Item 14 hereof. The Company's borrowings also include funds received from sales of securities under agreements to repurchase ("repurchase agreements"), which are considered for reporting purposes borrowings secured by the securities sold. These agreements generally have maturities of 180 days or less. The following table presents certain information regarding the Company's repurchase agreements at the dates and for the periods indicated.
At or For the Year Ended December 31, -------------------------------------- 1995 1994 1993 -------- -------- -------- (Dollars in Thousands) Average balance outstanding $113,599 $ 75,870 $ 45,655 Maximum outstanding at any month-end during the period 167,618 110,176 68,450 Balance outstanding at end of period 139,942 86,631 68,450 Average interest rate during the period 5.13% 3.62% 2.47% Average interest rate at end of period 4.78 4.82 2.43
22 24 For additional information relating to the Company's borrowings, see Notes 12 and 13 to the Consolidated Financial Statements included in Item 14 hereof. TRUST ACTIVITIES FNB and, commencing in February 1995, the Bank, provide full trust services to their customers. Each of the Bank and FNB 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, each of the Bank and FNB 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 by the Bank and FNB. At December 31, 1995, the Company had $401.3 million of investments held by the trust departments of its banking subsidiaries, which are not included in the Company's consolidated balance sheet for financial reporting purposes. SUBSIDIARIES At December 31, 1995, the Company's only direct subsidiaries were the Bank and First Coastal. A description of certain indirect non-banking subsidiaries follows. Mortgage Banking Activities. During 1993, the Bank formed Peoples Heritage Mortgage Company (the "Mortgage Company") for the purpose of expanding its residential real estate mortgage origination business outside of the Company's principal lending areas of Maine and New Hampshire. At December 31, 1995, the Mortgage Company had only one office, which was located in Burlington, Massachusetts. Currently, the activities of the Mortgage Company are not material. Investments in Real Estate. The Bank holds certain investments in real estate primarily through Four-Eighty-One Corp. and Apex, Inc., each of which is a wholly-owned subsidiary of the Bank, and, to a lesser degree, other wholly-owned subsidiaries of the Bank. Exclusive of other real estate owned and investments in office properties and facilities, which are discussed under Item 2 hereof, at December 31, 1995 the Bank's 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, 1995, the Bank's investments in these limited partnerships had a carrying value of $1.5 million and the largest single limited partnership investment was $1.1 million. For information relating to federal laws and regulations which limit the authority of FDIC-insured, state-chartered banks such as the Bank to engage in real estate investment and other activities, see "Regulation - Banking Subsidiaries - Activities and Investments of Insured State-Chartered Banks." 23 25 Equipment Leasing Activities. The Bank conducts equipment leasing activities through the Leasing Company, which it acquired in June 1987. In July 1988, the Leasing Company acquired substantially all of the assets of Emerald Leasing Co. of Keene, New Hampshire. The Leasing Company 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, 1995, the Leasing Company had $10.9 million of leases outstanding. Financial Planning and Securities Brokerage Activities. The Bank also conducts financial planning, investment planning and securities brokerage activities through Heritage Investment Planning Group, Inc. ("Heritage"), a subsidiary of the Bank. The Company also offers through Heritage investments in mutual funds and annuities throughout the Company's market areas. Heritage 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 and New Hampshire. Sales professionals at Heritage are registered representatives of Royal Alliance, a registered broker/dealer, and all securities brokerage activities are conducted through Royal Alliance. The sales professionals receive referrals from the Company's branch offices throughout its market areas. The Company believes that it will benefit from the growth in the mutual fund area by offering this service through Heritage to its customers. COMPETITION The Company encounters strong competition both in the attraction of deposits and in the making of real estate and other loans. Its most direct competition for deposits has historically come from savings institutions, commercial banks and credit unions with offices in the metropolitan areas of Maine and southeastern New Hampshire. The Company also encounters competition for deposits from money market funds, as well as corporate and government securities. The principal methods used by the Company to attract deposit accounts include the variety of services offered, the competitive interest rates offered and the convenience of office locations, ATMs and expanded banking hours. The Company's competition for real estate and other loans comes principally from savings institutions, credit unions, commercial banks, mortgage banking companies, insurance companies and other institutional lenders. The Company competes for loans through interest rates, branch locations, loan maturities, loan fees and the quality of service extended to borrowers and brokers. In recent years, Maine laws have given Maine-chartered savings banks virtually the same powers as commercial banks, and both Maine laws and New Hampshire laws have enabled the acquisition of Maine-chartered and New Hampshire-chartered financial institutions, respectively, by financial institution holding companies based outside of these states. As a result, the Company has encountered substantial competition in its market areas, particularly from out-of-state banking organizations that have entered the Maine and 24 26 New Hampshire banking markets, and the Company expects to continue to encounter such competition in the future. EMPLOYEES The Company had approximately 1500 full-time employees as of December 31, 1995. 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 references to laws and regulations which are applicable to the Company and its banking subsidiaries are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such laws and regulations. BHCA - General. The Company, as a bank holding company, is subject to regulation and supervision by the Federal Reserve Board. Under the BHCA, a bank holding company is required to file annually with the Federal Reserve Board a report of its operations and, with its subsidiaries, is subject to examination by the Federal Reserve Board. BHCA - Activities and Other Limitations. The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. As a result of recent amendments to the BHCA, the Federal Reserve Board generally may approve an application by a bank holding company that is adequately capitalized and adequately managed to acquire control of, or to acquire all or substantially all of the assets of, a bank located in a state other than the home state of such bank holding company, without regard to whether such transaction is prohibited under the law of any state, provided, however, that the Federal Reserve Board may not approve any such application that would have the effect of permitting an out-of-state bank holding company to acquire a bank in a host state that has not been in existence for any minimum period of time, not to exceed five years, specified in the statutory law of the host state. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as 25 27 undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. The Federal Reserve Board also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not closely related to banking and a proper incident thereto. Capital Requirements. For a description of the capital adequacy guidelines adopted by the Federal Reserve Board to assess the adequacy of capital of bank holding companies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment - Regulatory Capital Requirements" included in Item 7 hereof. Affiliated Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank in circumstances when it might not do so absent such policy. The Federal Reserve 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. The legality and precise scope of this policy is unclear, however, in light of recent judicial precedent. A bank holding company is a legal entity separate and distinct from its subsidiary bank or banks. Normally, the major source of a holding company's revenue is dividends a holding company receives from its subsidiary banks. The right of a bank holding company to participate as a stockholder in any distribution of assets of its subsidiary banks upon their liquidation or reorganization or otherwise is subject to the prior claims of creditors of such subsidiary banks. The subsidiary banks are subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, in the event of a loss suffered by the FDIC in connection with a banking subsidiary of a bank holding company (whether due to a default or the provision of FDIC assistance), other banking subsidiaries of the holding company could be assessed for such loss. 26 28 Maine law provides for the enforcement of any pro rata assessment of stockholders of a Maine-chartered financial institution to cover impairment of capital by sale, to the extent necessary, of the stock of any assessed stockholder failing to pay the assessment. Similarly, the National Bank Act provides for such assessment with respect to the stockholders of national banks. The Company, as the sole stockholder of its banking subsidiaries, is subject to these requirements. Federal laws limit the transfer of funds by a subsidiary bank to its holding company in the form of loans or extensions of credit, investments or purchases of assets. Transfers of this kind are limited to 10% of a bank's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions between a subsidiary bank and its holding company, also must be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies. Limitations of Acquisitions of Common Stock. The federal Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been given 60 days' prior written notice of such proposed acquisition and within that time period the Federal Reserve Board has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to expiration of the disapproval period if the Federal Reserve Board issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of more than 10% of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any "company" would be required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding Common Stock of, or such lesser number of shares as constitute control over, the Company. Maine Law. Under Maine law, the prior approval of the Superintendent is required in any case where any person or company proposes to acquire more than 5% of the voting shares of any Maine financial institution holding company or Maine financial institution. In addition, the prior approval of the Superintendent is required for the acquisition of more than 5% of the voting shares of the financial institution, the operations of which are principally conducted outside the State of Maine, by a Maine financial institution or Maine financial institution holding company. 27 29 In addition, any person or company which directly or indirectly acquires more than 5% of the voting shares of a Maine financial institution or a Maine financial institution holding company is required within five days of the acquisition to file with the Superintendent a statement containing specified information, including the background and identity of the person or company, the source and amount of funds or other consideration for the purchase and any plans or proposals which the acquiring person may have to liquidate the financial institution or financial institution holding company, to sell its assets or merge it with any company or to make any other major change in its business, corporate structure or management. Any person or company also must file a notice with the Superintendent when there is a material change in ownership. Under Maine law, the acquisition of an aggregate of more than another 5% of the voting shares is a material change. A Maine financial institution holding company may not engage in any activity other than managing or controlling financial institutions or other activities deemed permissible by the Superintendent. The Superintendent has by regulation determined that, with the prior approval of the Superintendent, a financial institution holding company may engage in those activities which are permissible for bank holding companies under the BHCA and those activities which are permissible for savings and loan holding companies under the Home Owners' Loan Act, and additional activities as specified by regulations. New Hampshire Law. New Hampshire law generally prohibits a bank holding company organized under the laws of New Hampshire or doing business in the State of New Hampshire from directly or indirectly acquiring ownership or control of any voting stock of any bank or national bank, if upon such acquisition (i) the bank holding company would have more than twelve bank affiliates in New Hampshire, or (ii) the dollar volume of the total of time, savings and demand deposits in New Hampshire of the bank holding company and all its affiliates would exceed 20% of the dollar volume of the total of time, savings and demand deposits of all banks, national banks and federal savings and loan associations in the State New Hampshire as determined by the New Hampshire Bank Commissioner. The above-referenced 20% limitation may be waived by the New Hampshire Bank Commissioner and the New Hampshire Attorney General if both determine that it is in the best interests of the State of New Hampshire, provided that under no circumstances shall the total dollar volume of total deposits exceed 30%. REGULATION OF BANKING SUBSIDIARIES General. The Bank is subject to extensive regulation and examination by the Bureau of Banking of the State of Maine and FNB is subject to extensive regulation and examination by the Comptroller. 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 requirements established by the Federal Reserve Board. In addition, FNB is subject to regulation by the Federal Reserve Board as a result of its membership in the Federal Reserve System and the 28 30 Bank is subject to regulation incidental to its membership in the FHLB System. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for loans. The laws and regulations governing the Company's banking subsidiaries generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. Capital Requirements. For a description of regulatory capital requirements which are applicable to the Company's banking subsidiaries, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment Regulatory Capital Requirements" included in Item 7 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" 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 29 31 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. Each of the Bank and FNB had capital levels which qualified it as a "well-capitalized" institution at December 31, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment - Regulatory Capital Requirements" in Item 7 of this report. FDIC Insurance Premiums. Each of the Bank and FNB are members of the Bank Insurance Fund ("BIF") administered by the FDIC, although certain deposits of each of these entities acquired in acquisitions are insured by the Savings Association Insurance Fund ("SAIF") administered by the FDIC. As an FDIC-insured institution, each of the Bank and FNB is required to pay deposit insurance premiums to the FDIC. On November 14, 1995, the FDIC adopted a new assessment rate schedule of zero to .27% (subject to a $2,000 minimum) for BIF members beginning on January 1, 1996, while retaining the existing assessment rate schedule for SAIF-member institutions, which currently range from .23% for well capitalized, healthy institutions to .31% for undercapitalized institutions with substantial supervisory concerns. The Balanced Budget Act of 1995, which was vetoed by the President of the United States in December 1995, provided for a recapitalization of the SAIF by a one-time assessment on the deposits of all SAIF-insured institutions and an eventual merger of the SAIF and the BIF. The deposit assessment rate was to be determined by the FDIC and set at a level which was sufficient to recapitalize the SAIF to the designated statutory reserve ratio. This assessment rate was estimated to be approximately $.85 for every $100 of assessable deposits as of March 31, 1995, with payment due on January 1, 1996. The Balanced Budget Act of 1995 provided certain relief for institutions, such as the Bank and FNB, which are members of the BIF but have acquired SAIF insured deposits as a result of acquisitions of savings institutions in transactions effected pursuant to Section 5(d)(3) of the FDIA. Such institutions do not pay SAIF assessments based on the actual amount of the SAIF deposits acquired, as adjusted to reflect increases or decreases in such deposits subsequent to the date of acquisition, but on the actual amount of the SAIF deposits acquired as adjusted by a growth attribution rule set forth in Section 5(d)(3) of the FDIA. Pursuant to the proposed legislation the amount of any deposits which are treated as insured by SAIF under Section 5(d)(3) of the FDIA was to be reduced by ten percent if the adjusted attributable amount of SAIF deposits of the BIF member was less than fifty percent of the total deposits of that member as of June 30, 1995 (which was the case for both the Bank and FNB). The Company currently is unable to predict the likelihood of legislation effecting the foregoing changes, although a consensus among legislators, regulators and bankers appears to be developing in this regard. 30 32 At December 31, 1995, the adjusted attributable amount of SAIF deposits of the Company's banking subsidiaries amounted to $381.3 million or 16.0% of the Company's total deposits. If an assessment of $.85 per $100 of assessable deposits was effected on these deposits (and assuming no downward adjustment on the assessment rate for institutions such as the Bank and FNB), the one-time assessment which would be payable by the Company's banking subsidiaries would aggregate approximately $3.2 million on a pre-tax basis. 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 Bank and FNB currently do not accept brokered deposits, and had no such deposits outstanding at December 31, 1995. Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA and regulations thereunder generally limit the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under the regulations dealing with equity investments, an insured state bank generally may not acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors' and officers' liability insurance and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. Under the regulations dealing with activities and investments, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as "principal" in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory 31 33 capital requirements. The foregoing regulations have not had a material adverse effect on the Company's banking operations. Community Investment and Consumer Protection Laws. In connection with its lending activities, each of the Bank and FNB is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act ("CRA"). The CRA requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a "Community Reinvestment Act Statement" pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator (in the case of the Bank and FNB, the FDIC and the OCC, respectively) must conduct regular CRA examinations of insured financial institutions and assign to them a CRA rating of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In 1995, the Bank's CRA rating was "outstanding" and FNB's CRA rating was "satisfactory." Safety and Soundness. Other regulations which were recently adopted or are currently proposed to be adopted pursuant to recent legislation include: (i) real estate lending standards for insured institutions, which provide guidelines concerning loan-to-value ratios for various types of real estate loans; (ii) revisions to the risk-based capital rules to account for interest rate risk, concentration of credit risk and the risks posed by "non-traditional activities;" (iii) rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and settlement exposure to their correspondent banks; and (iv) rules addressing various "safety and soundness" issues, including operations and managerial standards, standards for asset quality, earnings and stock valuations, and compensation standards for the officers, directors, employees and principal stockholders of the insured institution. 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. Maine law generally provides that institutions such as the Bank may pay dividends to stockholders from their undistributed earnings. The Bank cannot declare or pay any dividend, however, which would reduce its capital below (i) the amount required to be maintained by federal and state laws and regulations, or (ii) the amount in the liquidation account established in connection with the Bank's conversion from mutual to stock form. Under the National Bank Act, the approval of the Comptroller is required for any dividend by a national bank such as FNB if the total of all dividends declared by the bank 32 34 in any calendar year would exceed the total of its net profits, as defined, for that year, combined with its retained net profits for the preceding two years. In addition, a national bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts generally are defined to include the principal amount of loans which are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Miscellaneous. The Company's banking subsidiaries are subject to certain restrictions on loans to the Company or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company or its non-bank subsidiaries. The Company's banking subsidiaries also are subject to certain restrictions on most types of transactions with the Company or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms. Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators is substantial and includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. TAXATION Federal Taxation. The Company and its banking subsidiaries are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code of 1986, as amended ("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. In addition to regular corporate income tax, corporations are subject to an alternative minimum tax which generally is equal to 20% of alternative minimum taxable income (taxable income, increased by tax preference items and adjusted for certain regular tax items). The preference items generally applicable to savings associations include an amount equal to 75% of the amount by which a savings association's adjusted current earnings (generally alternative minimum taxable income computed without regard to this preference and prior to reduction for net operating losses) exceeds its alternative minimum taxable income without regard to this preference. Alternative minimum tax paid can be credited against regular tax due in later years. 33 35 State Taxation. As a financial institution holding company, the Company is subject to a separate state franchise tax in lieu of state corporate income tax. The amount of the tax is the sum of 1% of Maine net income and $.08 per $1,000 of Maine assets as defined in Maine law. Maine assets are the Company's total end of the year assets as reported to the United States Government on the federal income tax return. Maine net income is the Company's net income or loss as reported by the Company on its consolidated financial statements which is apportioned to Maine under Maine law. The Company is subject to New Hampshire business profits tax based on federal taxable income attributable to its New Hampshire affiliates. The tax is essentially computed by excluding from taxable income any interest on U.S. Government obligations, adding back New Hampshire business profits taxes used in computing federal taxable income, and then multiplying the resulting New Hampshire taxable income by 7.0%. The computed tax is offset by a credit for any New Hampshire enterprise tax assessed on the affiliates' compensation, interest and dividends paid. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Review of Financial Statements - Results of Operations - Income Tax Expense (Benefit)" included in Item 7 hereof. ITEM 2. PROPERTIES At December 31, 1995, the Company conducted its business from its headquarters and main office at One Portland Square, Portland, Maine, and 76 other branch offices located throughout the State of Maine and in east and southeast New Hampshire. The Company owns 48 of its branch offices and leases 29 of its branch offices. In addition, the Company owns four operational offices and leases five operational offices. At December 31, 1995, the net book value of the property and leasehold improvements of the offices of the Company amounted to $44.4 million. For additional information regarding the Company's lease obligations, see Note 15 to the Consolidated Financial Statements included in Item 14 hereof. 34 36 The following tables set forth certain information with respect to the offices of the Company as of December 31, 1995. STATE OF MAINE
Net Book Value of Number of Property and Leasehold County Offices Improvements Deposits - ------------------ ---------- ---------------------- ----------- (Dollars in Thousands) Androscoggin 7 $ 7,852 $ 244,766 Aroostook 13 2,776 188,975 Cumberland 17 15,165 705,101 Franklin 2 545 38,325 Hancock 1 416 48,930 Kennebec 3 2,439 143,960 Knox 3 707 105,011 Oxford 2 385 39,865 Penobscot 5 1,506 154,359 Somerset 2 435 55,059 Waldo 1 79 17,489 York 5 2,213 150,555 -- ---------- ---------- Total 61 $ 34,518 $1,892,395 == ========== ==========
STATE OF NEW HAMPSHIRE
Net Book Value of Number of Property and Leasehold County Offices Improvements Deposits - --------------- -------- ------------------ -------- (Dollars in Thousands) Carroll 5 $ 1,780 $116,285 Rockingham 8 7,167 284,665 Strafford 3 893 68,620 -- -------- -------- 16 $ 9,840 $469,570 == ======== ========
In early 1988, the Company moved into new headquarters constructed in One Portland Square, which is a mixed-use development involving six acres of land in the Old Port area adjacent to the financial district in downtown Portland, Maine. The first phase of the project involved the construction of a 185,000 square foot, ten-story office building. The Company is leasing 52,000 square feet of the building, which bears its name, for its corporate headquarters and a retail branch on the street level. In 1988, the Company purchased a 15% limited partnership interest in One Portland Square for $500,000 and received Federal Reserve Board concurrence that this is a permissible investment under the BHCA. 35 37 ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition and results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information contained under the section captioned "Common Stock Prices" on the inside back cover of the Company's Annual Report to Stockholders for the year ended December 31, 1995 ("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 14 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 15 through 29 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 51 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. 36 38 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to pages 2 through 4 and pages 7 through 8 of the definitive Proxy Statement of the Company, dated March 22, 1996 ("Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to pages 11 through 17 of the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to pages 9 through 10 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to pages 18 through 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 Stockholders included herein as Exhibit 13: Consolidated balance sheets at December 31, 1995 and 1994 Consolidated statements of operations for each of the years in the three-year period ended December 31, 1995 Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1995 Consolidated statements of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1995 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence 37 39 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) Articles of Incorporation of the Company (1) 3(b) Bylaws of the Company (1) 4(a) Specimen Common Stock certificate (1) 4(b) Form of Indenture between the Company and Mellon Bank, N.A., as trustee (2) 4(c) Form of Debenture due 2000 (2) 10(a) Amended and Restated Severance Agreement between the Company and William J. Ryan 10(b) Amended and Restated Severance Agreement between the Company and Peter J. Verrill 10(c) Severance Agreement between the Company and John W. Fridlington (3) 10(d) Severance Agreement between the Company and Henry G. Beyer (3) 10(e) Employment Agreement between the Company and John E. Menaro, including the Severance Agreement included as Attachment A 10(f) Supplemental Retirement Agreement among the Company, its subsidiaries and William J. Ryan (4) 10(g) Supplemental Retirement Agreement among the Company, its subsidiaries and John E. Menario (4) 10(h) Supplemental Retirement Agreement among the Company, its subsidiaries and Peter J. Verrill (4) 10(i) Supplemental Retirement Agreement among the Company, its subsidiaries and Henry G. Beyer (3) 10(j) Supplemental Retirement Agreement among the Company, its subsidiaries and John W. Fridlington 38 40 Exhibit No. Exhibit Location - ----------- ------- -------- 10(k) Senior Officers' Deferred Compensation Plan, as amended (5) 10(l) Directors' Deferred Compensation Plan, as amended (5) 10(m) 1986 Stock Option and Stock Appreciation Rights Plan, as amended (1)(6) 10(n) 1986 Employee Stock Purchase Plan, as amended (1)(6) 10(o) Restricted Stock Plan for Non-Employee Directors (7) 10(p) 1995 Stock Option Plan for Non-Employee Directors (8) 10(q)(1) Thrift Incentive Plan (9) 10(q)(2) First Amendment to Thrift Incentive Plan 10(q)(3) Second Amendment to Thrift Incentive Plan 10(r)(1) Profit Sharing Employee Stock Ownership Plan (9) 10(r)(2) First Amendment to Profit Sharing Employee Stock Ownership Plan 10(r)(3) Second Amendment to Profit Sharing Employee Stock Ownership Plan 10(s) 1996 Equity Incentive Plan (10) 10(t) Agreement, dated January 1, 1989, by and among the Company and Robert P. Bahre (5) 10(u) Stockholders Rights Agreement, dated September 12, 1989, between the Company and Mellon Securities Trust Company, as Rights Agent (11) 13 Certain sections of the Company's Annual Report to Stockholders for 1995 21 Subsidiaries of the Company 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule 99 Annual Report on Form 10-K for the Company's Thrift Incentive Plan (12) 39 41 - ----------------- (1) Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-20243) filed by the Company with the Securities and Exchange Commission ("SEC") on February 22, 1988. (2) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on February 28, 1995. (3) 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 and amended on April 28, 1995. (4) 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. (5) 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. (6) 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. (7) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 16, 1990. (8) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 24, 1995. (9) 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. (10) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 20, 1996. (11) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on September 13, 1989. (12) To be filed by amendment on or before April 30, 1996. The Company's management contracts or compensatory plans or arrangements consist of Exhibit Nos. 10(a)-(t). 40 42 (b) The Company filed a report on Form 8-K on October 25, 1995, reporting under Item 5 thereof the execution of an agreement to acquire Bank of New Hampshire Corporation. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders which are required to be included herein. 41 43 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 organized. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ William J. Ryan Date: March 26, 1996 ------------------------------------------------- William J. Ryan Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /s/ Robert P. Bahre Date: March 26, 1996 - ---------------------------------------------------- Robert P. Bahre Director /s/ Everett W. Gray Date: March 26, 1996 - ---------------------------------------------------- Everett W. Gray Director /s/ Andrew W. Greene Date: March 26, 1996 - -------------------------------------------------- Andrew W. Greene Director /s/ Katherine M. Greenleaf Date: March 26, 1996 - -------------------------------------------------- Katherine M. Greenleaf Director
42 44 /s/ Dana Levenson Date: March 26, 1996 - ---------------------------------------------------- Dana Levenson /s/ Robert A. Marden, Sr. Date: March 26, 1996 - ---------------------------------------------------- Robert A. Marden, Sr. Vice Chairman /s/ Malcolm W. Philbrook, Jr. Date: March 26, 1996 - --------------------------------------------------- Malcolm W. Philbrook, Jr. Director /s/ Pamela P. Plumb Date: March 26, 1996 - ----------------------------------------------------- Pamela P. Plumb Vice Chairman /s/ William J. Ryan Date: March 26, 1996 - ------------------------------------------------------ William J. Ryan Chairman, President and Chief Executive Officer (principal executive officer) /s/ Curtis M. Scribner Date: March 26, 1996 - ------------------------------------------------------ Curtis M. Scribner Director /s/ Peter J. Verrill Date: March 26, 1996 - -------------------------------------------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer (principal financial and accounting officer)
43 45 EXHIBIT INDEX Exhibit No. Exhibit Location - ----------- ------- -------- 3(a) Articles of Incorporation of the Company (1) 3(b) Bylaws of the Company (1) 4(a) Specimen Common Stock certificate (1) 4(b) Form of Indenture between the Company and Mellon Bank, N.A., as trustee (2) 4(c) Form of Debenture due 2000 (2) 10(a) Amended and Restated Severance Agreement between the Company and William J. Ryan 10(b) Amended and Restated Severance Agreement between the Company and Peter J. Verrill 10(c) Severance Agreement between the Company and John W. Fridlington (3) 10(d) Severance Agreement between the Company and Henry G. Beyer (3) 10(e) Employment Agreement between the Company and John E. Menaro, including the Severance Agreement included as Attachment A 10(f) Supplemental Retirement Agreement among the Company, its subsidiaries and William J. Ryan (4) 10(g) Supplemental Retirement Agreement among the Company, its subsidiaries and John E. Menario (4) 10(h) Supplemental Retirement Agreement among the Company, its subsidiaries and Peter J. Verrill (4) 10(i) Supplemental Retirement Agreement among the Company, its subsidiaries and Henry G. Beyer (3) 10(j) Supplemental Retirement Agreement among the Company, its subsidiaries and John W. Fridlington 10(k) Senior Officers' Deferred Compensation Plan, as amended (5) 10(l) Directors' Deferred Compensation Plan, as amended (5) 46 Exhibit No. Exhibit Location - ----------- ------- -------- 10(m) 1986 Stock Option and Stock Appreciation Rights Plan, as amended (1)(6) 10(n) 1986 Employee Stock Purchase Plan, as amended (1)(6) 10(o) Restricted Stock Plan for Non-Employee Directors (7) 10(p) 1995 Stock Option Plan for Non-Employee Directors (8) 10(q)(1) Thrift Incentive Plan (9) 10(q)(2) First Amendment to Thrift Incentive Plan 10(q)(3) Second Amendment to Thrift Incentive Plan 10(r)(1) Profit Sharing Employee Stock Ownership Plan (9) 10(r)(2) First Amendment to Profit Sharing Employee Stock Ownership Plan 10(r)(3) Second Amendment to Profit Sharing Employee Stock Ownership Plan 10(s) 1996 Equity Incentive Plan (10) 10(t) Agreement, dated January 1, 1989, by and among the Company and Robert P. Bahre (5) 10(u) Stockholders Rights Agreement, dated September 12, 1989, between the Company and Mellon Securities Trust Company, as Rights Agent (11) 13 Certain sections of the Company's Annual Report to Stockholders for 1995 21 Subsidiaries of the Company 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule 99 Annual Report on Form 10-K for the Company's Thrift Incentive Plan (12) - -------------- (1) Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-20243) filed by the Company with the Securities and Exchange Commission ("SEC") on February 22, 1988. 2 47 (2) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on February 28, 1995. (3) 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 and amended on April 28, 1995. (4) 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. (5) 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. (6) 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. (7) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 16, 1990. (8) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 24, 1995. (9) 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. (10) Exhibit is incorporated by reference to the proxy statement filed by the Company with the SEC on March 20, 1996. (11) Exhibit is incorporated by reference to the Form 8-K report filed by the Company with the SEC on September 13, 1989. (12) To be filed by amendment on or before April 30, 1996. 3 EX-10.(A) 2 WILLIAM J. RYAN SEVERANCE AGREEMENT 1 EXHIBIT 10(a) AMENDED & RESTATED WILLIAM J. RYAN SEVERANCE AGREEMENT This AGREEMENT, made and entered into as of the 1st day of January, 1995, by and among PEOPLES HERITAGE FINANCIAL GROUP, INC. (the "Company") and WILLIAM J. RYAN (the "Executive"); W I T N E S S E T H: WHEREAS, the Executive is employed by the Company in a key executive capacity and possesses intimate knowledge of the business and affairs of the Company; and WHEREAS, the Company desires to ensure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill; and WHEREAS, the Company recognizes that circumstances may arise in which a change in the control of the Company occurs, thereby causing uncertainty of employment without regard to the Executive's competence or past contributions; and WHEREAS, the Company and the Executive wish to provide reasonable security to the Executive against changes in the Executive's relationship with the Company in the event of such change in control; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 2 1. Definitions (a) Accrued Benefit means: (i) All salary earned or accrued through the date the Executive's employment is terminated; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the date the Executive's employment is terminated; (iii) any and all other compensation previously earned and deferred at the election of the Executive or pursuant to any deferred compensation plans then in effect together with any interest or desired earnings thereon; (iv) annual bonus, if any, accrued for a Year prior to the Year in which employment terminates, but not yet paid to the Executive, under any bonus or incentive compensation plan or plans in which the Executive is a participant; (v) a pro rata portion of the maximum bonus payable to the Executive for the Year in which employment terminates under any bonus or incentive compensation plan or plans in which the Executive is a participant, determined as if the Executive had remained in employment for the full Year and prorated based upon weeks, partial weeks, of employment during that Year; 2 3 (vi) all other payments and benefits to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit plan or program of the Company. (b) Act means the Securities Exchange Act of 1934, as amended. (c) Affiliate of any specified persons means any other person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under direct or indirect common control with such specified person. For the purposes of this definition, "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (d) Annual Compensation. Annual compensation shall mean the sum of: (i) the Executive's annual salary at the rate in effect on the date of a termination of employment as described in Section 3 or in Section 7(d) (or, in the event of a termination for Good Reason under Section l (k) (i) (A) below, the annual salary as in effect immediately before the actions giving rise to Good Reason); plus (ii) the greatest of the bonuses either paid or accrued in either the Year of the Change in Control or the immediately preceding Year. (e) Base Amount means an amount equal to the Executive's Annualized Includable Compensation for the Base Period as defined in Section 28OG (d) (1) and (2) of the Code (as hereinafter defined). 3 4 (f) Cause means (i) the executive's conviction of, or plea of nolo contendere to, a felony; or (ii) willful and intentional misconduct, willful neglect, or gross negligence, in the performance of the Executive's duties, which has caused a demonstrable and serious injury to the Company, monetary or otherwise. The Executive shall be given written notice that the Company intends to terminate his employment for Cause. Such written notice shall specify the particular acts, or failures to act, on the basis of which the decision to so terminate employment was made. In the case of a termination for Cause as described in Clause (ii), above, the Executive shall be given the opportunity within 30 days of the receipt of such notice to meet with the Board to defend such acts, or failures to act, prior to termination. The Company may suspend the Executive's title and authority pending such meeting, and such suspension shall not constitute "Good Reason," as defined in subsection (k) below. (g) Change in Control of the Company shall mean a Change in Control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Act or any successor thereto, provided that without limiting the foregoing, a Change in Control of the Company also shall be deemed to have occurred if: (i) any "person" (as defined under Section 3 (a) (9) of the Act) or "group" of persons (as provided under Rule 13d-3 of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 or otherwise under the Act), directly or indirectly (including as provided in Rule 13d-3 (d) (1) of the Act), of capital stock of the Company the holders of which are 4 5 entitled to vote for the election of directors ("voting stock") representing that percentage of the Company's then outstanding voting stock (giving effect to the deemed ownership of securities by such person or group, as provided in Rule 13d-3 (d) (1) of the Act, but not giving effect to any such deemed ownership of securities by another person or group) equal to or greater than thirty-five percent (35%) of all such voting stock; (ii) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof. Any person becoming a director subsequent to such date whose election, or nomination for election, is, at any time, approved by a vote of at least a majority of the directors comprising the Incumbent Board shall be considered as though he were a member of the Incumbent Board; (iii) The Company combines with another person or entity, whether through a merger, asset sale, reorganization or otherwise, and (A) any person or group of persons holds at any time after such combination, voting stock equal to or greater than thirty-five percent (35%) determined by reference to the voting securities of the surviving entity, or (B) the Company's directors, as of the date immediately before such combination, constitute less than a majority of the Board of Directors of the combined entity. 5 6 (h) Code means the Internal Revenue Code of 1986, including any amendments thereto. (i) Effective Date means the date this Agreement is executed by the parties. (j) Employment Period means a period commencing on the date of a Change in Control of the Company and ending on the earlier of (i) the last day of the twenty-fourth month following the month in which the Change in Control occurs, or (ii) the Executive's Normal Retirement Date. (k) Good Reason means: (i) any breach of this Agreement by the Company, including without limitation (A) any reduction during the employment period in the amount of the Executive's base salary or aggregate benefits as in effect from time to time, (B) failure to provide the Executive with the same fringe benefits that were provided to the Executive immediately prior to a Change in Control of the Company, or with a package of fringe benefits (including paid vacations) that, though one or more of such benefits may vary from those in effect immediately prior to such a Change in Control, is substantially comparable in all material respects to such fringe benefits taken as a whole, or (C) any other breach by the Company of its obligations contained in Section 6 below; (ii) without the Executive's express written consent, the assignment to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status immediately 6 7 prior to the Change in Control of the Company, a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to the Change in Control, or a significant reduction, in the Executive's title, duties or responsibilities, or in the level of his support services; (iii) the relocation of the Executive's principal place of employment, without the Executive's written consent, to a location outside the same metropolitan area in which the Executive was employed at the time of such Change in Control, or the imposition of any requirement that the Executive spend more than ninety business days per year at a location other than such principal place of employment; (iv) any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (m) below; or (v) a change in the ownership of the Company (either accompanying or following the Change in Control), such that the Executive's duties, reporting responsibilities, or authority is no longer consistent with those of an executive of an independent company. Upon the occurrence of any of the events described in (i), (ii), (iii), (iv) or (v) above, the Executive shall give the Company written notice that such event constitutes Good Reason, and the Company shall thereafter have thirty (30) days in which to cure. If the Company has not cured in that time, the event shall constitute Good Reason. 7 8 (1) Normal Retirement Date means Normal Retirement Date as defined in the Peoples Heritage Financial Group, Inc. Retirement Plan. (m) Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision relied upon in this Agreement and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (n) Person or Group means a "Person" or "group," as defined in Section i (g) (i) hereof. (o) Year means a calendar year unless otherwise specifically provided. 2. Term of Agreement. This Agreement shall begin on the date first set forth above and shall continue until the third anniversary of such date, provided that, on such third anniversary, and each succeeding anniversary, the term shall be renewed for an additional period of one year unless either party has given written notice that the term is not so renewed, which notice must be delivered to the other party at least one year prior to the date of any such renewal, and further provided that if a Change in Control of the Company occurs during such term, the term shall in all events continue through the last day of the Employment Period. This Agreement is also subject to earlier termination as provided in Section 3 below. All rights and obligations hereunder shall survive to the extent necessary to the intended enforcement thereof. 3. Termination of Employment Prior to a Change in Control,. (a) The Company and the Executive shall each retain the right to terminate 8 9 the employment of the Executive at any time prior to a Change in Control of the Company. In the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall, except as provided in Subsection (b) below, be terminated and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. (b) If the Executive's employment is terminated by the Company prior to the occurrence of a Change in Control of the Company, and if it can be shown that the Executive's termination (i) was at the direction or request of a third party that had taken steps reasonably calculated to effect the Change in Control of the Company thereafter, or (ii) otherwise occurred in connection with, or in anticipation of, the Change in Control of the Company, the Executive shall have the rights described in Section 7(d) below, as if a Change in Control of the Company had occurred on the date immediately preceding such termination. 4. Employment Following a Change in Control. If a Change in Control of the Company occurs when the Executive is employed by the Company, the Company will continue thereafter to employ the Executive, and the Executive will remain in the employ of the Company, during the Employment Period, in accordance with the terms and provisions of this Agreement. 5. Duties. During the Employment Period, the Executive shall serve in such capacities and positions as may be assigned by the Company consistent with the Executive's capacities and positions on the Effective Date and shall devote the Executive's best efforts and all of the Executive's business time, attention and skill to the business and affairs of the 9 10 Company, as such business and affairs now exist and as they may hereafter be conducted. 6. Compensation. During the Employment Period, the Executive shall be compensated by the Company as follows: (a) the Executive shall receive, at such intervals and in accordance with such standard policies as in effect on the date of the Change in Control of the Company, an annual salary not less than the Executive's annual salary as in effect on the date of the Change in Control of the Company, subject to adjustment as hereinafter provided; (b) the Executive shall be included in all plans providing incentive compensation to executives, including but not limited to bonus, deferred compensation, annual or other incentive compensation, supplemental pension, stock ownership, stock option, stock appreciation, stock bonus and similar or comparable plans as any such plans are extended by the Company from time to time to senior corporate officers, key employees and other employees of comparable status; (c) the Executive shall be reimbursed, at such intervals and in accordance with such standard policies as may be in effect on the date of the Change in Control of the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company, including travel expenses; (d) the Executive shall be included, to the extent eligible thereunder, in any and all plans providing but not limited to, group life insurance, hospitalization, disability, medical, dental, pension, profit sharing and stock bonus plans, and shall be provided any and all other benefits and perquisites made available to other employees of comparable status 10 11 and position at the expense of the Company on a comparable basis; (e) the Executive shall receive annually not less than the amount of paid vacation and not fewer than the number of paid holidays received annually immediately prior to the Change in Control of the Company or available annually to other employees of comparable status and position with the Company; and (f) During the Employment Period the Board of Directors of the Company, or an appropriate committee thereof, will consider and appraise, at least annually, the contributions of the Executive to the Company's operating efficiency, growth, production and profits and, in accordance with past practice, due consideration shall be given to the upward adjustment of the Executive's compensation rate, at least annually, commensurate with increases generally given to other senior corporate officers and key employees and as the scope of the Executive's duties expands. 7. Termination of Employment. Any termination by the Company or the Executive of the Executive's employment during the Employment Period shall be communicated by written Notice of Termination to the Executive if such notice is delivered by the Company and to the Company if such notice is delivered by the Executive. The Notice of Termination shall comply with the requirements of Section 17 below. (a) Termination for Disability. If during the Employment Period, the Executive's employment is terminated on account of the Executive's disability, as determined under the Company's long-term disability plan (as in effect on the date of a Change in Control of the Company), the Executive shall receive any Accrued Benefits, and shall remain eligible for all benefits as provided pursuant to the terms of any long-term 11 12 disability programs of the Company in effect at the time of such termination. (b) Termination on the Executive's Death. If, during the Employment Period, the Executive's employment is terminated on account of the Executive's death, the Executive's estate or his designated beneficiary (or beneficiaries), as applicable, shall receive all the Executive's Accrued Benefits. (c) Voluntary Termination or Termination for Cause. If, during the Employment Period, (i) the Executive shall terminate employment with the Company other than for Good Reason, or (ii) the Executive's employment is terminated for Cause, the Executive shall receive from the Company his Accrued Benefits. (d) Termination by the Company Without Cause or by the Executive for Good Reason. If, during the Employment Period, the Executive's employment with the Company is terminated by the Company other than for Cause, or by the Executive for Good Reason, then: (i) the Executive shall be entitled to receive from the Company his Accrued Benefit, except that, for this purpose, Accrued Benefit shall not include any entitlement to severance under any Company severance policy generally applicable to the Company's salaried employees; (ii) the Executive shall receive from the Company, no less than ten days following termination of his employment, a lump sum payment (the "Termination Payment") equal to three times the Executive's Annual Compensation; 12 13 (iii) all rights under any equity or long-term incentive plan shall be fully vested; (iv) rights, if any, to supplemental pension shall be fully vested; and (v) the Executive shall continue to be covered at the expense of the Company by the same or equivalent hospital, medical, dental, accident, disability and life insurance coverage as in effect for the Executive immediately prior to termination of his employment, until the earlier of (A) thirty-six months following termination of employment, or (B) the date the Executive has commenced new employment and has thereby become eligible for comparable benefits. 8. Certain Supplemental Payments by the Company. (a) In the event the Executive's employment is terminated pursuant to Section 7(d) above, and if in connection therewith it is determined that (A) part or all of the compensation and benefits to be paid to the Executive constitute "parachute payments" under Section 28OG of the Code, and (B) the payment thereof will cause the Executive to incur excise tax under Section 4999 of the Code, the Company, on or before the date for payment of such excise tax, shall pay the Executive, in lump sum, an amount (the "Gross-Up Amount") such that, after payment of all federal, state and local income tax and any additional excise tax under Section 4999 of the Code in respect of the Gross-Up Amount payment, the Executive will be fully reimbursed for the amount of such excise tax. (b) The determination of the Parachute Amount, the Base Amount and the 13 14 Gross-Up Amount, as well as any other calculations necessary to implement this Section 8 shall be made by a nationally recognized accounting or benefits consulting firm selected by the Executive and reasonably satisfactory to the Company and which has not performed services, other than minor indirect or incidental services, for either the Company or the Executive for three years prior to the date the Consultant is retained for this purpose. The Consultant's fee shall be paid by the Company. (c) As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement and shall promptly pay to or distribute for the benefit of the Executive in the future such amounts as become due to the Executive under this Agreement. (d) As a result of the uncertainty in the application of Section 28OG of the Code at the time of an initial determination hereunder, it is possible that payments will not have been made by the Company which should have been made under clause (a) of this Section 8 ("Underpayment"). In the event that there is a final determination by the Internal Revenue Service, or a final determination by a court of competent jurisdiction, that an Underpayment has been made and the Executive thereafter is required to make any payment of an excise tax, income tax, any interest or penalty, the accounting or benefits consulting firm selected under clause (b) above shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 14 15 9. Further Obligations of the Executive. During and following the Executive's employment by the Company, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company, except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials or copies thereof, relating to the Company's business which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 10. Expenses and Interest. If, after a Change in Control of the Company, a good faith dispute arises with respect to the enforcement of the Executive's rights under this Agreement, or if any legal or arbitration proceeding shall be brought in good faith to enforce or interpret any provision contained herein, or to recover damages for breach hereof, the Executive shall recover from the Company any reasonable attorney's fees and necessary costs and disbursements incurred as a result of such dispute, and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Peoples Heritage Bank, or the successor thereto, from 15 16 time to time as its prime rate from the date that payments to him should have been made under this Agreement. 11. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set off, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reason whatever except as provided in Section 8(d) above. 12. Successors. (a) (i) If the Company sells, assigns, or transfers all or substantially all of its business and assets to any Person, excluding Affiliates of the Company, or if the Company merges into or consolidates or otherwise combines with any Person which is a continuing or successor entity, then the Company shall assign all of its rights, title and interest in this Agreement as of the date of such event to the Person which is either the acquiring or successor Company, and such Person shall assume in writing and perform from and after the date of such written assignment all of the terms, conditions and provisions imposed by this Agreement 16 17 upon the Company. Failure of the Company to obtain such written assignment shall be a breach of this Agreement. In case of such assignment by the Company and of written assumption and agreement by such Person, all further rights as well as all other obligations of the Company under this Agreement thenceforth shall cease and terminate and thereafter the expression "the Company" wherever used herein shall be deemed to mean such Person or Persons. (ii) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting Company or other entity to which all or substantially all of the Company's business and assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. 13 Enforcement. The provisions of this Agreement shall be regarded as divisible, and if any such provisions or any part hereof are declared invalid or unenforceable 17 18 by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 14. Amendment. This Agreement may not be amended or modified at any time except by a written instrument executed by the Company and the Executive if such amendment or modification occurs before any Change in Control, or by the Executive and the Company after any Change in Control. 15. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes, or charge which it is from time to time required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 16. Governing law: Arbitration. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Maine. Any dispute arising out of this Agreement shall be determined by arbitration in the State of Maine under the rules of the American Arbitration Association then in effect and judgment upon any award pursuant to such arbitration may be enforced in any court having jurisdiction thereof. 17. Notice. Notices given pursuant to this Agreement shall be in writing and shall be deemed given when received and, if mailed, shall be mailed by United States registered or certified mail, return receipt requested, addressee only postage prepaid, to the Company at: 18 19 Peoples Heritage Financial Group, Inc. P.O. Box 9540 One Portland Square Portland, ME 04112 Attn: Clerk or if to the Executive, at the address set forth below the Executive's signature line of this Agreement, or to such other address as the party to be notified shall have given to the other. 18. No Waiver. No waiver by any party at any time of any breach by another party of, or compliance with, any condition or provision of this Agreement to be performed by another party shall be deemed a waiver of similar or dissimilar provisions or conditions at any time. 19. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first written above. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ William J. Ryan ------------------------------------ Attest: /s/ Carol L. Mitchell -------------------------------- Secretary /s/ William J. Ryan ---------------------------------------- Executive Address: 6 Hemlock Dr. Cumberland Center, ME 04021 19 EX-10.(B) 3 PETER J. VERRILL SEVERANCE AGREEMENT 1 EXHIBIT 10(b) AMENDED & RESTATED PETER J. VERRILL SEVERANCE AGREEMENT This AGREEMENT, made and entered into as of the 1st day of January, 1996, by and among PEOPLES HERITAGE FINANCIAL GROUP, INC. (the "Company") and PETER J. VERRILL (the "Executive"); W I T N E S S E T H: WHEREAS, the Executive is employed by the Company in a key executive capacity and possesses intimate knowledge of the business and affairs of the Company; and WHEREAS, the Company desires to ensure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill; and WHEREAS, the Company recognizes that circumstances may arise in which a change in the control of the Company occurs, thereby causing uncertainty of employment without regard to the Executive's competence or past contributions; and WHEREAS, the Company and the Executive wish to provide reasonable security to the Executive against changes in the Executive's relationship with the Company in the event of such change in control; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 2 1. Definitions (a) Accrued Benefit means: (i) All salary earned or accrued through the date the Executive's employment is terminated; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the date the Executive's employment is terminated; (iii) any and all other compensation previously earned and deferred at the election of the Executive or pursuant to any deferred compensation plans then in effect together with any interest or desired earnings thereon; (iv) annual bonus, if any, accrued for a Year prior to the Year in which employment terminates, but not yet paid to the Executive, under any bonus or incentive compensation plan or plans in which the Executive is a participant; (v) a pro rata portion of the maximum bonus payable to the Executive for the Year in which employment terminates under any bonus or incentive compensation plan or plans in which the Executive is a participant, determined 2 3 as if the Executive had remained in employment for the full Year and prorated based upon weeks, including partial weeks, of employment during that Year; (vi) all other payments and benefits to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit plan or program of the Company. (b) Act means the Securities Exchange Act of 1934, as amended. (c) Affiliate of any specified persons means any other person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under direct or indirect common control with such specified person. For the purposes of this definition, "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (d) Annual Compensation. Annual compensation shall mean the sum of: (i) the Executive's annual salary at the rate in effect on the date of a termination of employment as described in Section 3 or in Section 7(d) (or, in the event of a termination for Good Reason under Section l (k) (i) (A) below, the annual salary as in effect immediately before 3 4 the actions giving rise to Good Reason); plus (ii) the greatest of the bonuses either paid or accrued in either the Year of the Change in Control or the immediately preceding Year. (e) Base Amount means an amount equal to the Executive's Annualized Includable Compensation for the Base Period as defined in Section 28OG (d) (1) and (2) of the Code (as hereinafter defined). (f) Cause means (i) the executive's conviction of, or plea of nolo contendere to, a felony; or (ii) willful and intentional misconduct, willful neglect, or gross negligence, in the performance of the Executive's duties, which has caused a demonstrable and serious injury to the Company, monetary or otherwise. The Executive shall be given written notice that the Company intends to terminate his employment for Cause. Such written notice shall specify the particular acts, or failures to act, on the basis of which the decision to so terminate employment was made. In the case of a termination for Cause as described in Clause (ii), above, the Executive shall be given the opportunity within 30 days of the receipt of such notice to meet with the Board to defend such acts, or failures to act, prior to termination. The Company may suspend the Executive's title and authority pending such meeting, and such suspension shall not constitute "Good Reason," as defined in subsection (k) below. (g) Change in Control of the Company shall mean a Change in Control of a nature that would be required to be reported in response to Item 5(f) of 4 5 Schedule 14A of Regulation 14A promulgated under the Act or any successor thereto, provided that without limiting the foregoing, a Change in Control of the Company also shall be deemed to have occurred if: (i) any "person" (as defined under Section 3 (a) (9) of the Act) or "group" of persons (as provided under Rule 13d- 3 of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 or otherwise under the Act), directly or indirectly (including as provided in Rule 13d- 3 (d) (1) of the Act), of capital stock of the Company the holders of which are entitled to vote for the election of directors ("voting stock") representing that percentage of the Company's then outstanding voting stock (giving effect to the deemed ownership of securities by such person or group, as provided in Rule 13d-3 (d) (1) of the Act, but not giving effect to any such deemed ownership of securities by another person or group) equal to or greater than thirty-five percent (35%) of all such voting stock; (ii) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof. Any person becoming a director subsequent to such date whose 5 6 election, or nomination for election, is, at any time, approved by a vote of at least a majority of the directors comprising the Incumbent Board shall be considered as though he were a member of the Incumbent Board; (iii) The Company combines with another person or entity, whether through a merger, asset sale, reorganization or otherwise, and (A) any person or group of persons holds at any time after such combination, voting stock equal to or greater than thirty-five percent (35%) determined by reference to the voting securities of the surviving entity, or (B) the Company's directors, as of the date immediately before such combination, constitute less than a majority of the Board of Directors of the combined entity. (h) Code means the Internal Revenue Code of 1986, including any amendments thereto. (i) Effective Date means the date this Agreement is executed by the parties. (j) Employment Period means a period commencing on the date of a Change in Control of the Company and ending on the earlier of (i) the last day of the twenty-fourth month following the month in which the Change in Control occurs, or (ii) the Executive's Normal Retirement Date. 6 7 (k) Good Reason means: (i) any breach of this Agreement by the Company, including without limitation (A) any reduction during the employment period in the amount of the Executive's base salary or aggregate benefits as in effect from time to time, (B) failure to provide the Executive with the same fringe benefits that were provided to the Executive immediately prior to a Change in Control of the Company, or with a package of fringe benefits (including paid vacations) that, though one or more of such benefits may vary from those in effect immediately prior to such a Change in Control, is substantially comparable in all material respects to such fringe benefits taken as a whole, or (C) any other breach by the Company of its obligations contained in Section 6 below; (ii) without the Executive's express written consent, the assignment to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status immediately prior to the Change in Control of the Company, a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect 7 8 immediately prior to the Change in Control, or a significant reduction, in the Executive's title, duties or responsibilities, or in the level of his support services; (iii) the relocation of the Executive's principal place of employment, without the Executive's written consent, to a location outside the same metropolitan area in which the Executive was employed at the time of such Change in Control, or the imposition of any requirement that the Executive spend more than ninety business days per year at a location other than such principal place of employment; (iv) any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (m) below; or Upon the occurrence of any of the events described in (i), (ii), (iii), (iv) or (v) above, the Executive shall give the Company written notice that such event constitutes Good Reason, and the Company shall thereafter have thirty (30) days in which to cure. If the Company has not cured in that time, the event shall constitute Good Reason. (l) Normal Retirement Date means Normal Retirement Date as defined in the Peoples Heritage Financial Group, Inc. Retirement Plan. (m) Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision relied upon in this Agreement and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under 8 9 the provision so indicated. (n) Person or Group means a "Person" or "group," as defined in Section i (g) (i) hereof. (o) Year means a calendar year unless otherwise specifically provided. 2. Term of Agreement. This Agreement shall begin on the date first set forth above and shall continue until the third anniversary of such date, provided that, on such third anniversary, and each succeeding anniversary, the term shall be renewed for an additional period of one year unless either party has given written notice that the term is not so renewed, which notice must be delivered to the other party at least one year prior to the date of any such renewal, and further provided that if a Change in Control of the Company occurs during such term, the term shall in all events continue through the last day of the Employment Period. This Agreement is also subject to earlier termination as provided in Section 3 below. All rights and obligations hereunder shall survive to the extent necessary to the intended enforcement thereof. 3. Termination of Employment Prior to a Change in Control,. (a) The Company and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the Company. In the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall, except as provided in Subsection (b) below, be terminated and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. (b) If the Executive's employment is terminated by the Company prior to 9 10 the occurrence of a Change in Control of the Company, and if it can be shown that the Executive's termination (i) was at the direction or request of a third party that had taken steps reasonably calculated to effect the Change in Control of the Company thereafter, or (ii) otherwise occurred in connection with, or in anticipation of, the Change in Control of the Company, the Executive shall have the rights described in Section 7(d) below, as if a Change in Control of the Company had occurred on the date immediately preceding such termination. 4. Employment Following a Change in Control. If a Change in Control of the Company occurs when the Executive is employed by the Company, the Company will continue thereafter to employ the Executive, and the Executive will remain in the employ of the Company, during the Employment Period, in accordance with the terms and provisions of this Agreement. 5. Duties. During the Employment Period, the Executive shall serve in such capacities and positions as may be assigned by the Company consistent with the Executive's capacities and positions on the Effective Date and shall devote the Executive's best efforts and all of the Executive's business time, attention and skill to the business and affairs of the Company, as such business and affairs now exist and as they may hereafter be conducted. 6. Compensation. During the Employment Period, the Executive shall be compensated by the Company as follows: (a) the Executive shall receive, at such intervals and in accordance with such standard policies as in effect on the date of the Change in Control of the Company, 10 11 an annual salary not less than the Executive's annual salary as in effect on the date of the Change in Control of the Company, subject to adjustment as hereinafter provided; (b) the Executive shall be included in all plans providing incentive compensation to executives, including but not limited to bonus, deferred compensation, annual or other incentive compensation, supplemental pension, stock ownership, stock option, stock appreciation, stock bonus and similar or comparable plans as any such plans are extended by the Company from time to time to senior corporate officers, key employees and other employees of comparable status; (c) the Executive shall be reimbursed, at such intervals and in accordance with such standard policies as may be in effect on the date of the Change in Control of the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company, including travel expenses; (d) the Executive shall be included, to the extent eligible thereunder, in any and all plans providing but not limited to, group life insurance, hospitalization, disability, medical, dental, pension, profit sharing and stock bonus plans, and shall be provided any and all other benefits and perquisites made available to other employees of comparable status and position at the expense of the Company on a comparable basis; (e) the Executive shall receive annually not less than the amount of paid vacation and not fewer than the number of paid holidays received annually immediately prior to the Change in Control of the Company or available annually to other employees of comparable status and position with the Company; and 11 12 (f) During the Employment Period the Board of Directors of the Company, or an appropriate committee thereof, will consider and appraise, at least annually, the contributions of the Executive to the Company's operating efficiency, growth, production and profits and, in accordance with past practice, due consideration shall be given to the upward adjustment of the Executive's compensation rate, at least annually, commensurate with increases generally given to other senior corporate officers and key employees and as the scope of the Executive's duties expands. 7. Termination of Employment. Any termination by the Company or the Executive of the Executive's employment during the Employment Period shall be communicated by written Notice of Termination to the Executive if such notice is delivered by the Company and to the Company if such notice is delivered by the Executive. The Notice of Termination shall comply with the requirements of Section 17 below. (a) Termination for Disability. If during the Employment Period, the Executive's employment is terminated on account of the Executive's disability, as determined under the Company's long-term disability plan (as in effect on the date of a Change in Control of the Company), the Executive shall receive any Accrued Benefits, and shall remain eligible for all benefits as provided pursuant to the terms of any long-term disability programs of the Company in effect at the time of such termination. (b) Termination on the Executive's Death. If, during the Employment Period, the Executive's employment is terminated on account of the Executive's death, the Executive's estate or his designated beneficiary (or beneficiaries), as applicable, shall receive all the Executive's Accrued Benefits. 12 13 (c) Voluntary Termination or Termination for Cause. If, during the Employment Period, (i) the Executive shall terminate employment with the Company other than for Good Reason, or (ii) the Executive's employment is terminated for Cause, the Executive shall receive from the Company his Accrued Benefits. (d) Termination by the Company Without Cause or by the Executive for Good Reason. If, during the Employment Period, the Executive's employment with the Company is terminated by the Company other than for Cause, or by the Executive for Good Reason, then: (i) the Executive shall be entitled to receive from the Company his Accrued Benefit, except that, for this purpose, Accrued Benefit shall not include any entitlement to severance under any Company severance policy generally applicable to the Company's salaried employees; (ii) the Executive shall receive from the Company, no less than ten days following termination of his employment, a lump sum payment (the "Termination Payment") equal to three times the Executive's Annual Compensation; (iii) all rights under any equity or long-term incentive plan shall be fully vested; (iv) rights, if any, to supplemental pension shall be fully vested; and (v) the Executive shall continue to be covered at the expense of the Company by the same or equivalent hospital, medical, dental, 13 14 accident, disability and life insurance coverage as in effect for the Executive immediately prior to termination of his employment, until the earlier of (A) thirty-six months following termination of employment, or (B) the date the Executive has commenced new employment and has thereby become eligible for comparable benefits. 8. Certain Supplemental Payments by the Company. (a) In the event the Executive's employment is terminated pursuant to Section 7(d) above, and if in connection therewith it is determined that (A) part or all of the compensation and benefits to be paid to the Executive constitute "parachute payments" under Section 28OG of the Code, and (B) the payment thereof will cause the Executive to incur excise tax under Section 4999 of the Code, the Company, on or before the date for payment of such excise tax, shall pay the Executive, in lump sum, an amount (the "Gross-Up Amount") such that, after payment of all federal, state and local income tax and any additional excise tax under Section 4999 of the Code in respect of the Gross-Up Amount payment, the Executive will be fully reimbursed for the amount of such excise tax. (b) The determination of the Parachute Amount, the Base Amount and the Gross-Up Amount, as well as any other calculations necessary to implement this Section 8 shall be made by a nationally recognized accounting or benefits consulting firm selected by the Executive and reasonably satisfactory to the Company and which has not performed services, other than minor indirect or incidental services, for either the Company or the Executive for three years prior to the date the Consultant is retained for this purpose. The 14 15 Consultant's fee shall be paid by the Company. (c) As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement and shall promptly pay to or distribute for the benefit of the Executive in the future such amounts as become due to the Executive under this Agreement. (d) As a result of the uncertainty in the application of Section 28OG of the Code at the time of an initial determination hereunder, it is possible that payments will not have been made by the Company which should have been made under clause (a) of this Section 8 ("Underpayment"). In the event that there is a final determination by the Internal Revenue Service, or a final determination by a court of competent jurisdiction, that an Underpayment has been made and the Executive thereafter is required to make any payment of an excise tax, income tax, any interest or penalty, the accounting or benefits consulting firm selected under clause (b) above shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 9. Further Obligations of the Executive. During and following the Executive's employment by the Company, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company, except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or 15 16 appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials or copies thereof, relating to the Company's business which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 10. Expenses and Interest. If, after a Change in Control of the Company, a good faith dispute arises with respect to the enforcement of the Executive's rights under this Agreement, or if any legal or arbitration proceeding shall be brought in good faith to enforce or interpret any provision contained herein, or to recover damages for breach hereof, the Executive shall recover from the Company any reasonable attorney's fees and necessary costs and disbursements incurred as a result of such dispute, and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Peoples Heritage Bank, or the successor thereto, from time to time as its prime rate from the date that payments to him should have been made under this Agreement. 11. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set off, counterclaim, recoupment, 16 17 defense or other right which the Company may have against him or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reason whatever except as provided in Section 8(d) above. 12. Successors. (a) (i) If the Company sells, assigns, or transfers all or substantially all of its business and assets to any Person, excluding Affiliates of the Company, or if the Company merges into or consolidates or otherwise combines with any Person which is a continuing or successor entity, then the Company shall assign all of its rights, title and interest in this Agreement as of the date of such event to the Person which is either the acquiring or successor Company, and such Person shall assume in writing and perform from and after the date of such written assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such written assignment shall be a breach of this Agreement. In case of such assignment by the Company and of written assumption and agreement by such Person, all further rights as well as all other obligations of the Company under this Agreement thenceforth shall cease and terminate and thereafter the 17 18 expression "the Company" wherever used herein shall be deemed to mean such Person or Persons. (ii) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting Company or other entity to which all or substantially all of the Company's business and assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. 13 Enforcement. The provisions of this Agreement shall be regarded as divisible, and if any such provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 14. Amendment. This Agreement may not be amended or modified at any time except by a written instrument executed by the Company and the Executive if such amendment or modification occurs before any Change in Control, or by the Executive and the Company after any Change in Control. 18 19 15. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes, or charge which it is from time to time required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 16. Governing law: Arbitration. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Maine. Any dispute arising out of this Agreement shall be determined by arbitration in the State of Maine under the rules of the American Arbitration Association then in effect and judgment upon any award pursuant to such arbitration may be enforced in any court having jurisdiction thereof. 17. Notice. Notices given pursuant to this Agreement shall be in writing and shall be deemed given when received and, if mailed, shall be mailed by United States registered or certified mail, return receipt requested, addressee only postage prepaid, to the Company at: Peoples Heritage Financial Group, Inc. P.O. Box 9540 One Portland Square Portland, ME 04112 Attn: Clerk or if to the Executive, at the address set forth below the Executive's signature line of this Agreement, or to such other address as the party to be notified shall have given to the other. 18. No Waiver. No waiver by any party at any time of any breach by another party of, or compliance with, any condition or provision of this Agreement to be performed 19 20 by another party shall be deemed a waiver of similar or dissimilar provisions or conditions at any time. 19. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first written above. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ Peter J. Verrill --------------------------------------------- Attest: /s/ Carol L. Mitchell ----------------------------------- Secretary /s/ Peter J. Verrill ----------------------------------- Executive Address: 57 U.S. Route 1 Falmouth, Maine 04105 20 EX-10.(E) 4 EMPLOYMENT AGREEMENT OF JOHN E. MENARO 1 EXHIBIT 10(e) EMPLOYMENT AGREEMENT This AGREEMENT is made and entered into the 30th day of June 1995, by and between Peoples Heritage Financial Group, Inc. (the "Company"), and John E. Menario (the "Executive"), and shall become effective as provided in Section 1, below. WITNESSETH WHEREAS, the Executive has served the Company as Senior Executive Vice President and Chief Operating Officer; and WHEREAS, the Executive desires to alter his employment status so as to reduce his annual time commitment to the Company while remaining an active employee; WHEREAS, the Company wishes to continue the Executive's employment on that basis; and WHEREAS, in connection therewith, the Company and the Executive (the "Parties") desire to amend the Severance Agreement between the Company and the Executive dated January 1, 1995 (the "Severance Agreement") pursuant to Section 14 thereof: NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties agree as follows: 1. Term of Employment. This Agreement shall become fully effective on February 1, 1996 (the "Effective Date"), if the Executive is then in the employ of the Company. Once this Agreement becomes effective, the Executive's employment hereunder shall run from the Effective Date until January 31, 2001 (the "Termination Date"), subject to earlier termination as provided in Section 7 below (the "Employment Term"). 2. Position, Duties, Responsibilities. During the Employment Term, the Executive shall serve as Special Assistant to the President with such duties and responsibilities as may be assigned from time to time by the President and Chief Executive Officer of the Company, to whom the Executive shall report. The Executive shall be employed for a period of 1,000 hours during any calendar year. The exact schedule for the performance of the Executive's services shall be established in good faith by the Chief Executive Officer, it being understood that the Executive shall reside out of state during approximately three months of the year and that during such period he shall be subject to limited reasonable travel demands. 2 3. Salary. During the Employment Term, the Executive shall be paid salary ("Salary") at an annual rate of Ninety Thousand Dollars ($90,000), payable in accordance with the Company's standard payroll practices. The Executive's salary shall be reviewed annually for increase in the sole judgment of the Chief Executive Officer, provided that in all events the Executive's salary shall be increased by a percentage not less than the average percentage increase in salary applicable to Executive Vice Presidents of the Company. 4. Annual Bonus. The Executive shall have an annual target bonus opportunity stated as a percentage of his salary for the bonus year (the "Annual Bonus"). The percentage shall be the same as the percentage of "mid-point" salaries set as the target bonus opportunity applicable to Executive Vice Presidents for that year. Actual bonus shall be determined as per the Company's Short Term Incentive Compensation Plan. 5. Stock Options. The Executive shall be granted stock options at such times and pursuant to such terms as are applicable to Executive Vice Presidents of the Company generally. The number of shares subject to any such option ("Option Shares"), shall be equal to one half the average number of Option Shares applicable to simultaneous grants to such Executive Vice Presidents. 6. Other Benefits. The Company shall provide the Executive (i) continued crediting of "employment" under the Executive's Supplemental Retirement Agreement (the "Supplemental Pension), and (ii) such benefits and perquisites as are provided under the Company's Plans applicable to part-time employees (the "Plans"). The Executive shall be reimbursed for all reasonably incurred business expenses properly accounted for. 7. Termination of Employment. 7.1 Disability or Death. (a) Subject to Section 7.4 below, if the Executive's employment is terminated due to the Executive's Disability, as defined in Subsection (b) below, or the death of the Executive, then the Executive, his guardian or his estate, as applicable, shall be entitled to: (i) Salary and benefits earned to the date of termination of employment; 2 3 (ii) any unpaid Annual Bonus earned for the performance year prior to the performance year in which the Executive's employment terminates; and (iii) other benefits as are provided under the Plans of the Company as then in effect. (b) For purposes of this Agreement, "Disability" shall mean the inability of the Executive to perform all the material and substantial duties called for in this Agreement as a result of sickness or injury which commenced while the Executive was employed by the Company. Disability shall be determined by a physician selected by the Company. (c) The amounts described in clauses (i) and (ii) of subsection 7.1 (a) above shall each be paid as soon as practicable once the amount thereof can be determined. 7.2 Termination by the Company without Cause. (a) Subject to Section 7.4 below, the Company may terminate the Executive's employment at any time without Cause (as hereinafter defined), in which case the Executive shall be entitled to: (i) Salary and benefits earned to the date of termination of employment; (ii) continued Salary through the earlier of (A) the end of the twelfth full calendar month after the date of such termination of employment, or (B) January 31, 2001 (the "Continuation Period"); (iii) continued crediting of employment under the Supplemental Pension for the Continuation Period; (iv) coverage for the Continuation Period under the Plans, to the extent practicable under the provisions of the Plans, applicable insurance policies and law, at the same cost, if any, to the Executive as was applicable during the Employment Term (it being understood that the Executive may be entitled under Federal law to continue certain coverages at his own cost after the end of the Continuation Period); (v) any unpaid Annual Bonus earned for the performance year prior to the performance year in which his employment terminates; (vi) Pro-rata Annual Bonus, determined as provided in subsection (b) below, for the performance year in which the Executive's employment terminates. 3 4 (b) Pro-rata Annual Bonus shall mean the Annual Bonus as otherwise determined for the applicable year, multiplied by a fraction, the numerator of which is the number of full weeks of employment worked by the Executive in the applicable year and the denominator of which is 52. (c) The amounts described in clauses (i), (iii) and (iv) of subsection 7.2 (a) above shall each be paid as soon as practicable once the amount thereof can be determined. The amounts described in clause (ii) above shall be paid pursuant to standard payroll practices for Executive Vice Presidents as in effect from time to time. 7.3 Voluntary Termination or Termination by the Company for Cause. (a) Subject to Section 7.4 below, if the Executive terminates employment voluntarily, or the Company terminates the Executive's employment for Cause, as defined in Subsection (b) below, the Executive shall be entitled only to: (i) Salary and benefits earned to the date of termination of employment; and (ii) any unpaid Annual Bonus earned for the performance year prior to the performance year in which his employment terminates. (b) Cause shall mean: (i) the Executive's conviction of, or plea of nolo contendere to a felony; (ii) the Executive's willful and repeated neglect of duties which continues after written notice; or (iii) the Executive's willful or gross misconduct in the performance of duties. (c) The amounts described in clauses (i) and (ii) of (a) above, shall each be paid as soon as practicable once the amount thereof can be determined. 7.4 Severance Agreement. (a) On the Effective Date, the Severance Agreement shall, without further action by the Parties, be amended and restated as set forth in Attachment A. (b) Notwithstanding any other provision of this Agreement, if the Executive's employment with the Company is terminated under circumstances entitling him to compensation or benefits under the restated Severance Agreement, then all rights and 4 5 obligations of either party under this Agreement shall terminate and the Executive's rights in respect of such termination shall be determined under the restated Severance Agreement. 8. Confidential Information. (a) The Executive by reason of his employment with the Company may acquire Confidential Information (as hereinafter defined), concerning the operation of the Company or its subsidiaries (collectively, "the Group"), the use or disclosure of which would cause the company substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, the Executive agrees that he will not (directly or indirectly) at any time, whether during or after the Employment Term, (i) knowingly use for an improper personal benefit any Confidential Information that he may learn or has learned by reason of his employment with the Company or (ii) disclose any such Confidential Information to any person except (A) in the performance of his obligations to the Group hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his rights under this Employment Agreement or (D) with the prior consent of the Board. As used herein, "Confidential Information" includes information with respect to the Group's confidential reports, financial information, business plans, prospects or opportunities; provided, however, that such term shall not include any information that (x) is or becomes generally known or available other than as a result of a disclosure by the Executive or (y) is or becomes known or available to the Executive on a nonconfidential basis from a source (other than the Group) which, to the Executive's knowledge, is not prohibited from disclosing such information to the Executive by a legal, contractual, fiduciary or other obligation to the Group. (b) The Executive confirms that all Confidential Information is the exclusive property of the Group. All business records, papers and documents kept or made by the Executive relating to the business of the Group shall be and remain the property of the Group during the Employment Term and all times thereafter. Upon the termination of his employment with the Company or upon the request of the Group at any time, the Executive shall promptly deliver to the Group, and shall retain no copies of, any written materials, records and documents made by the Executive or coming into his possession concerning the business or affairs of the Group other than personal notes or correspondence of the Executive not containing Confidential Information. 9. Non-Competition. (a) During the Employment Term, and, if the Executive's employment is terminated voluntarily by the Executive as described in Section 7.3 above, for a period of one year thereafter (the "Restricted Period"), the Executive shall not, unless he receives the prior written consent of the Board, own any interest in, manage, operate, join, control, or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person engaged in the business of banking or acting as a trust company, or any person who otherwise competes with any member of the Group, in any 5 6 state in which any member of the Group maintains or maintained an office during the period of the Executive's employment. Nothing herein shall prohibit the Executive from acquiring or holding any issue of stock or securities of any person that has any securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, listed on a national securities exchange or quoted on the automated quotation system of the National Association of Securities Dealers, Inc. so long as (i) the Executive is not deemed to be an "affiliate" of such person as such term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933, as amended, and (ii) the Executive, members of his immediate family or persons under his control do not own or hold more than 5% of any voting securities of any such person. (b) The Executive has carefully read and considered the provisions of this Section 9 and, having done so, agrees that the restrictions set forth in this Section 9 (including the Restricted Period, scope of activity to be restrained and the geographical scope) are fair and reasonable and are reasonably required for the protection of the interest of the Group, its officers, directors, employees, creditors and shareholders. The Executive understands that the restrictions contained in this Section 9 may limit his ability to engage in a business similar to the Group's business, but acknowledges that he will receive sufficient remuneration and other benefits from the Company hereunder to justify such restrictions. (c) During the Restricted Period, the Executive shall not, whether for his own account or for the account of any other person (excluding the Group), intentionally (i) solicit, endeavor to entice or induce any employee of the Group to terminate his employment with any member of the Group or accept employment with anyone else or (ii) interfere in a similar manner with the business of the Group. (d) In the event that any provision of this Section 9 relating to the Restricted Period and/or the areas of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period or areas of restriction such court deems reasonable and enforceable, the Restricted Period and/or areas of restriction deemed reasonable and enforceable by the court shall become and thereafter be the maximum time period and/or areas of restriction. 10. Breach of Section 8 or Section 9. The Executive acknowledges that a breach of any of the covenants contained in Section 8 and Section 9 hereof may result in material, irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, all obligations of the Company to the Executive, including its obligations under this Agreement, shall cease, and the Company shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by Section 8 or Section 9 hereof or such other relief as may be required to 6 7 enforce any of the covenants contained in Section 8 or Section 9 hereof. 11. Withholding. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive, his spouse, his estate or beneficiaries, shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 12. Assignability; Binding Nature. (a) If the Company sells, assigns, or transfers all or substantially all of its business and assets to any Person (as defined under Section 3(a)(9) of the Securities Exchange Act of 1934, as amended), excluding affiliates of the Company, or if the Company merges into or consolidates or otherwise combines with any Person which is a continuing or successor entity, then the Company shall assign all of its rights, title and interest in this Agreement as of the date of such event to the Person which is either the acquiring or successor Company, and such Person shall assume in writing and perform from and after the date of such written assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such written assignment shall be a breach of this Agreement. In case of such assignment by the Company and of written assumption and agreement by such Person, all further rights as well as all other obligations of the Company under this Agreement thenceforth shall cease and terminate and thereafter the expression "the Company" wherever used herein shall be deemed to mean such Person or Persons. (b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting Company or other entity to which all or substantially all of the Company's business and assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. 13. Entire Agreement. This Agreement, together with the Severance Agreement, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior 7 8 agreements, understandings, discussions, negotiations, and undertakings, whether written or oral, between the Parties with respect thereto. 14. Amendments and Waivers. This Agreement may not be modified or amended except by a writing signed by both Parties. A Party may waive compliance by the other Party with any term or provision of this Agreement, or any part thereof, provided that the term or provision, or part thereof, is for the benefit of the waiving Party. Any waiver will be limited to the facts or circumstances giving rise to the noncompliance and will not be deemed either a general waiver or modification with respect to the term or provision, or part thereof, being waived, or as to any other term or provision of this Agreement, nor will it be deemed a waiver of compliance with respect to any other facts or circumstances then or thereafter occurring. 15. Notice. Any notice given hereunder shall be in writing and shall be deemed given when delivered personally or by courier, or five days after being mailed, certified or registered mail, duly addressed to the Party concerned at the address indicated below or at such other address as such Party may subsequently provide, in accordance with the notice and delivery provisions of this Section 15: To the Company: Peoples Heritage Financial Group, Inc. One Portland Square PO Box 9540 Portland, ME 04112-9540 ATTN.: Clerk With a copy to: Stephan G. Bachelder Moon, Moss, McGill & Bachelder, P.A. 10 Free Street, PO Box 7250 Portland, ME 04112-7250 To the Executive: John E. Menario 215 East Grand Avenue Old Orchard Beach, ME 04046 16. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement will be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 8 9 17. Survivorship. The respective rights and obligations of the Parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 18. References. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his legal representative or, where appropriate, to his beneficiary or beneficiaries. 19. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Maine without reference to the principles of conflicts of law. 20. Headings. The headings of paragraphs contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first written above. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ William J. Ryan ------------------------------- Chairman, President and Chief Executive Officer Attest: /s/ Carol L. Mitchell ------------------------------- Secretary /s/ John E. Menario ---------------------------------------- Executive Address: 215 E. Grand Avenue ------------------------------ Old Orchard Beach, Maine 04064 ------------------------------ 9 10 ATTACHMENT A JOHN E. MENARIO SEVERANCE AGREEMENT This AGREEMENT, made and entered into by and among PEOPLES HERITAGE FINANCIAL GROUP, INC. (the "Company") and JOHN E. MENARIO (the "Executive"); W I T N E S S E T H: WHEREAS, the Executive is employed by the Company in a key executive capacity and possesses intimate knowledge of the business and affairs of the Company; and WHEREAS, the Company desires to ensure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill; and WHEREAS, the Company recognizes that circumstances may arise in which a change in the control of the Company occurs, thereby causing uncertainty of employment without regard to the Executive's competence or past contributions; and WHEREAS, the Company and the Executive wish to provide reasonable security to the Executive against changes in the Executive's relationship with the Company in the event of such change in control; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Definitions. (a) Accrued Benefit means: (i) all salary earned or accrued through the date the Executive's employment is terminated; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the date the Executive's employment is terminated; (iii) any and all other compensation previously earned and deferred at the election of the Executive or pursuant to any deferred compensation plans then in effect together with any interest or desired earnings thereon; (iv) annual bonus, if any, accrued for a Year prior to the Year in which employment terminates, but not yet paid to the Executive, under any bonus or incentive compensation plan or plans in which the Executive is a participant; 11 (v) a pro rata portion of the maximum bonus payable to the Executive for the Year in which employment terminates under any bonus or incentive compensation plan or plans in which the Executive is a participant, determined as if the Executive had remained in employment for the full Year and prorated based upon weeks, including partial weeks, of employment during that Year; (vi) all other payments and benefits to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit plan or program of the Company. (b) Act means the Securities Exchange Act of 1934, as amended. (c) Affiliate of any specified persons means any other person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under direct or indirect common control with such specified person. For the purposes of this definition, "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (d) Annual Compensation means the sum of: (i) the Executive's annual salary at the rate in effect on the date of a termination of employment as described in Section 3 or in Section 7(d) (or, in the event of a termination for Good Reason under Section 1(k)(i)(A) below, the annual salary as in effect immediately before the actions giving rise to Good Reason); plus (ii) the greatest of the bonuses either paid or accrued in either the Year of the Change in Control or the immediately preceding Year (except that, only one half of any bonus accrued prior to 1996 shall be taken into account). (e) Base Amount means an amount equal to the Executive's Annualized Includable Compensation for the Base Period as defined in Section 280G(d)(1) and (2) of the Code (as hereinafter defined). (f) Cause means (i) the executive's conviction of, or plea of nolo contendere to, a felony; or (ii) willful and intentional misconduct, willful neglect, or gross negligence, in the performance of the Executive's duties, which has caused a demonstrable and serious injury to the Company, monetary or otherwise. The Executive shall be given written notice that the Company intends to terminate his employment for Cause. Such written notice shall specify the particular acts, or failures to act, on the basis of which the decision to so terminate employment was made. 2 12 In the case of a termination for Cause as described in Clause (ii), above, the Executive shall be given the opportunity within 30 days of the receipt of such notice to meet with the Board to defend such acts, or failures to act, prior to termination. The Company may suspend the Executive's title and authority pending such meeting, and such suspension shall not constitute "Good Reason," as defined in subsection (k) below. (g) Change in Control of the Company shall mean a Change in Control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Act or any successor thereto, provided that without limiting the foregoing, a Change in Control of the Company also shall be deemed to have occurred if: (i) any "person" (as defined under Section 3(a)(9) of the Act) or "group" of persons (as provided under Rule 13d-3 of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 or otherwise under the Act), directly or indirectly (including as provided in Rule 13d-3(d)(1) of the Act), of capital stock of the Company the holders of which are entitled to vote for the election of directors ("voting stock") representing that percentage of the Company's then outstanding voting stock (giving effect to the deemed ownership of securities by such person or group, as provided in Rule 13d- 3(d)(1) of the Act, but not giving effect to any such deemed ownership of securities by another person or group) equal to or greater than thirty-five percent (35%) of all such voting stock; (ii) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof. Any person becoming a director subsequent to such date whose election, or nomination for election, is, at any time, approved by a vote of at least a majority of the directors comprising the Incumbent Board shall be considered as though he were a member of the Incumbent Board; (iii) The Company combines with another person or entity, whether through a merger, asset sale, reorganization or otherwise, and (A) any person or group of persons holds at any time after such combination, voting stock equal to or greater than thirty-five percent (35%) determined by reference to the voting securities of the surviving entity, or (B) the Company's directors, as of the date immediately before such combination, constitute less than a majority of the Board of Directors of the combined entity. (h) Code means the Internal Revenue Code of 1986, including any amendments thereto. (i) Effective Date means February 1, 1996. (j) Employment Period means a period commencing on the date of a Change in Control of the Company and ending on the earlier of (i) the last 3 13 day of the twenty-fourth month following the month in which the Change in Control occurs, or (ii) the Termination Date under the Employment Agreement effective January 1, 1996 between the Company and the Executive (the "Employment Agreement"). (k) Good Reason means: (i) any breach of this Agreement by the Company, including without limitation (A) any reduction during the employment period in the amount of the Executive's base salary or aggregate benefits as in effect from time to time, (B) failure to provide the Executive with the same fringe benefits that were provided to the Executive immediately prior to a Change in Control of the Company, or with a package of fringe benefits (including paid vacations) that, though one or more of such benefits may vary from those in effect immediately prior to such a Change in Control, is substantially comparable in all material respects to such fringe benefits taken as a whole, or (C) any other breach by the Company of its obligations contained in Section 6 below. Notwithstanding the above, the changes in the terms and conditions of the Executive's employment occurring as of the Effective Date pursuant to the Employment Agreement shall not constitute Good Reason, and the terms and conditions applicable to the Executive's employment under the Employment Agreement as of the Effective Date, shall constitute the basis for determining whether an event constituting Good Reason shall have occurred thereafter. (ii) without the Executive's express written consent, the assignment to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status immediately prior to the Change in Control of the Company, a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to the Change in Control, or a significant reduction, in the Executive's title, duties or responsibilities, or in the level of his support services; (iii) the relocation of the Executive's principal place of employment, without the Executive's written consent, to a location outside the same metropolitan area in which the Executive was employed at the time of such Change in Control, or the imposition of any requirement that the Executive spend more than ninety business days per year at a location other than such principal place of employment; or (iv) any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (l) below. Upon the occurrence of any of the events described in (i), (ii), (iii), or (iv) above, the Executive shall give the Company written notice that such event constitutes Good Reason, and the Company shall thereafter have thirty (30) days in which to cure. If the Company has not cured in that time, the event shall constitute Good Reason. 4 14 (l) Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision relied upon in this Agreement and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (m) Person or Group means a "person" or "group," as defined in Section 1(g)(i) hereof. (n) Year means a calendar year unless otherwise specifically provided. 2. Term of Agreement. This Agreement shall begin on the Effective Date and shall continue until December 31, 2000, provided that, if a Change in Control of the Company occurs during such term, the term shall in all events continue through the last day of the Employment Period. This Agreement is also subject to earlier termination as provided in Section 3 below. All rights and obligations hereunder shall survive to the extent necessary to the intended enforcement thereof. 3. Termination of Employment Prior to a Change in Control. (a) The Company and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the Company, subject to the Employment Agreement. In the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall, except as provided in Subsection (b) below, be terminated and of no further force and effect, and any and all rights and obligations of the parties hereunder shall be determined solely under the Employment Agreement. (b) If the Executive's employment is terminated by the Company prior to the occurrence of a Change in Control of the Company, and if it can be shown that the Executive's termination (i) was at the direction or request of a third party that had taken steps reasonably calculated to effect the Change in Control of the Company thereafter, or (ii) otherwise occurred in connection with, or in anticipation of, the Change in Control of the Company, the Executive shall have the rights described in Section 7(d) below, as if a Change in Control of the Company had occurred on the date immediately preceding such termination. 4. Employment Following a Change in Control. If a Change in Control of the Company occurs when the Executive is employed by the Company, the Company will continue thereafter to employ the Executive, and the Executive will remain in the employ of the Company, during the Employment Period, in accordance with the terms and provisions of this Agreement and the Employment Agreement. 5. Duties. During the Employment Period, the Executive shall serve in such capacities and positions as may be assigned by the Company consistent with the 5 15 Employment Agreement, and the Executive shall devote his best efforts, attention and skill to the business and affairs of the Company, as such business and affairs now exist and as they may hereafter be conducted. 6. Compensation. During the Employment Period, the Executive shall be compensated by the Company as follows: (a) the Executive shall receive, at such intervals and in accordance with such standard policies as in effect on the date of the Change in Control of the Company, an annual salary not less than the Executive's annual salary as in effect under the Employment Agreement; (b) the Executive shall, subject to the Employment Agreement, be included in all plans providing incentive compensation to executives, including but not limited to bonus, deferred compensation, annual or other incentive compensation, supplemental pension, stock ownership, stock option, stock appreciation, stock bonus and similar or comparable plans as any such plans are extended by the Company from time to time to senior corporate officers, key employees and other employees of comparable status; (c) the Executive shall be reimbursed, at such intervals and in accordance with such standard policies as may be in effect on the date of the Change in Control of the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company, including travel expenses; (d) the Executive shall be included, to the extent eligible thereunder, and subject to the Employment Agreement, in any and all plans providing but not limited to, group life insurance, hospitalization, disability, medical, dental, pension, profit sharing and stock bonus plans, and shall be provided any and all other benefits and perquisites made available to other employees of comparable status and position at the expense of the Company on a comparable basis; (e) During the Employment Period the Executive's salary shall be subject to adjustment as per the Employment Agreement. 7. Termination of Employment. Any termination by the Company or the Executive of the Executive's employment during the Employment Period shall be communicated by written Notice of Termination to the Executive if such notice is delivered by the Company and to the Company if such notice is delivered by the Executive. The Notice of Termination shall comply with the requirements of Section 17 below. 6 16 (a) Termination for Disability. If, during the Employment Period, the Executive's employment is terminated on account of the Executive's Disability, as defined below, this Agreement shall terminate and the Executive's rights shall be determined under the Employment Agreement. For purposes of this Agreement, "Disability" shall have the meaning set forth in the Employment Agreement. (b) Termination on the Executive's Death. If, during the Employment Period, the Executive's employment is terminated on account of the Executive's death, this Agreement shall terminate and the Executive's rights shall be determined under the Employment Agreement. (c) Voluntary Termination or Termination for Cause. If, during the Employment Period, (i) the Executive terminates employment with the Company other than for Good Reason, or (ii) the Executive's employment is terminated for Cause, the Executive shall receive from the Company his Accrued Benefits. (d) Termination by the Company Without Cause or by the Executive for Good Reason. If, during the Employment Period, the Executive's employment with the Company is terminated by the Company other than for Cause, or by the Executive for Good Reason, then: (i) the Executive shall be entitled to receive from the Company his Accrued Benefit, except that, for this purpose, Accrued Benefit shall not include any entitlement to severance under any Company severance policy generally applicable to the Company's salaried employees; (ii) the Executive shall receive from the Company, no less than ten (10) days following termination of his employment, a lump-sum payment equal to his Annual Compensation multiplied by the lesser of (A) 2, or (B) a fraction, the numeration of which is the number of months remaining through December 31, 2000 (the "Employment Agreement Term") and the denominator of which is 12; (iii) all rights under any equity or long-term incentive plan shall be fully vested to the extent such rights would have become vested had the Executive remained in employment through the Employment Agreement Term; (iv) rights, if any, to supplemental pension shall be fully vested; and (v) the Executive shall continue to be covered at the expense of the Company by the same or equivalent hospital, medical, dental, accident, disability and life insurance coverage as in effect for the Executive immediately prior to termination of his employment, until the earliest of (A) twenty-four months following termination of employment, (B) the date the Executive has commenced new employment and has thereby become eligible for comparable benefits, and (C) the end of the Employment Agreement 7 17 Term. 8. Certain Supplemental Payments by the Company. (a) In the event the Executive's employment is terminated pursuant to Section 7(d) above, and if in connection therewith it is determined that (A) part or all of the compensation and benefits to be paid to the Executive constitute "parachute payments" under Section 280G of the Code, and (B) the payment thereof will cause the Executive to incur excise tax under Section 4999 of the Code, the Company, on or before the date for payment of such excise tax, shall pay the Executive, in lump sum, an amount (the "Gross-Up Amount") such that, after payment of all federal, state and local income tax and any additional excise tax under Section 4999 of the Code in respect of the Gross-Up Amount payment, the Executive will be fully reimbursed for the amount of such excise tax. (b) The determination of the Parachute Amount, the Base Amount and the Gross-Up Amount, as well as any other calculations necessary to implement this Section 8 shall be made by a nationally recognized accounting or benefits consulting firm selected by the Executive and reasonably satisfactory to the Company and which has not performed services, other than minor indirect or incidental services, for either the Company or the Executive for three years prior to the date the Consultant is retained for this purpose. The Consultant's fee shall be paid by the Company. (c) As promptly as practicable following such determination and the elections hereunder, the Company shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement and shall promptly pay to or distribute to or for the benefit of the Executive in the future such amounts as become due to the Executive under this Agreement. (d) As a result of the uncertainty in the application of Section 280G of the Code at the time of an initial determination hereunder, it is possible that payments will not have been made by the Company which should have been made under clause (a) of this Section 8 ("Underpayment"). In the event that there is a final determination by the Internal Revenue Service, or a final determination by a court of competent jurisdiction, that an Underpayment has been made and the Executive thereafter is required to make any payment of an excise tax, income tax, any interest or penalty, the accounting or benefits consulting firm selected under clause (b) above shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 9. Further Obligations of the Executive. During and following the Executive's employment by the Company, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company, except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or 8 18 appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials or copies thereof, relating to the Company's business which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 10. Expenses and Interest. If, after a Change in Control of the Company, a good faith dispute arises with respect to the enforcement of the Executive's rights under this Agreement, or if any legal or arbitration proceeding shall be brought in good faith to enforce or interpret any provision contained herein, or to recover damages for breach hereof, the Executive shall recover from the Company any reasonable attorney's fees and necessary costs and disbursements incurred as a result of such dispute, and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Peoples Heritage Bank, or the successor thereto, from time to time as its prime rate from the date that payments to him should have been made under this Agreement. 11. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reason whatever except as provided in Section 8(d) above. 12. Successors. (a) If the Company sells, assigns, or transfers all or substantially all of its business and assets to any Person, excluding Affiliates of the Company, or if the Company merges into or consolidates or otherwise combines with any Person which is a continuing or successor entity, then the Company shall assign all of its rights, title and interest in this Agreement as of the date of such event to the Person which is either the acquiring or successor Company, and such Person shall assume in writing and perform from and after the date of such written assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such written assignment shall be a breach of this Agreement. In case of such assignment by the Company and of written assumption and agreement by such Person, all further rights as well as all other obligations of the Company under this Agreement thenceforth shall cease and terminate and thereafter the expression "the Company" wherever used herein shall be 9 19 deemed to mean such Person or Persons. (ii) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting Company or other entity to which all or substantially all of the Company's business and assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. 13. Enforcement. The provisions of this Agreement shall be regarded as divisible, and if any such provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 14. Amendment. This Agreement may not be amended or modified at any time except by a written instrument executed by the Company and the Executive. 15. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes, or charge which it is from time to time required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. 16. Governing law: Arbitration. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Maine. Any dispute arising out of this Agreement shall be determined by arbitration in the State of Maine under the rules of the American Arbitration Association then in effect and judgment upon any award pursuant to such arbitration may be enforced in any court having jurisdiction thereof. 17. Notice. Notices given pursuant to this Agreement shall be in writing and shall be deemed given when received and, if mailed, shall be mailed by United States registered or certified mail, return receipt requested, addressee only postage prepaid, to the Company at: Peoples Heritage Financial Group, Inc. P.O. Box 9540 One Portland Square Portland, ME 04112 Attn: Clerk 10 20 or if to the Executive, at the address set forth below the Executive's signature line of this Agreement, or to such other address as the party to be notified shall have given to the other. 18. No Waiver. No waiver by any party at any time of any breach by another party of, or compliance with, any condition or provision of this Agreement to be performed by another party shall be deemed a waiver of similar or dissimilar provisions or conditions at any time. 19. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 20. Effectiveness. This Agreement shall become effective on the Effective Date, but only if the Executive is then in the employ of the Company. Once this Agreement becomes effective, it shall supersede the Severance Agreement between the Executive and the Company dated January 1, 1995 in its entirety. IN WITNESS WHEREOF, the parties have executed this Agreement as an Attachment A to the Employment Agreement. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ William J. Ryan ------------------------------- Chairman, President and Chief Executive Officer Date: June 30, 1995 ------------------------------- Attest: /s/ Carol L. Mitchell Secretary /s/ John E. Menario ---------------------------------------- Executive Date: June 30, 1995 Address: 215 E. Grand Avenue Old Orchard Beach, Maine 04064 11 EX-10.(J) 5 SUPPLEMENTAL RETIREMENT AGREEMENT 1 EXHIBIT 10(j) SUPPLEMENTAL RETIREMENT AGREEMENT THIS AGREEMENT, made as of this first day of January, 1996 by and between Peoples Heritage Financial Group, Inc., its subsidiaries and affiliates (hereinafter collectively called the "Corporation") and John W. Fridlington (hereinafter called the "Executive"). WITNESSETH: WHEREAS, the Executive has been in the employ of the Corporation and is now serving as Executive Vice President of Peoples Heritage Bank and, WHEREAS, because of the Executive's experience, knowledge of affairs of the Corporation, and reputation and contacts in the industry, the Corporation deems the Executive's continued employment with the corporation important for its future growth; and, WHEREAS, it is the desire of the Corporation and in its best interest that the Executive's service be retained; and WHEREAS, in order to induce the Executive to continue in the employ of the Corporation and in recognition of his past service, the Board of Directors of Peoples Heritage Financial Group, Inc. voted on December 19, 1996 to authorize the Corporation to enter into this Agreement to provide him or his beneficiaries certain benefits in accordance with the terms and conditions hereinafter set forth: NOW, THEREFORE, in consideration of these premises as well as the mutual promises and covenants herein contained, it is agreed as follows: ARTICLE ONE 1.01 EMPLOYMENT. The Corporation may employ the Executive in such capacity as the Corporation may from time to time determine. Notwithstanding anything contained herein, this Agreement is not an agreement of employment. Nothing herein shall restrict the Corporation concerning other terms and conditions of his employment. 2 The benefits provided by this Agreement are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits. ARTICLE TWO 2.01 NORMAL RETIREMENT BENEFITS. If the Executive shall continue in the employment of the Corporation until his sixty-fifth (65th) birthday (the "Normal Retirement Date"), he shall be entitled to a retirement benefit (the "Normal Retirement Benefit") commencing on the first day of the month next following his actual retirement and continuing for fifteen (15) years certain payable monthly in the annual amount of sixty-five percent (65%) of his Benefit Computation Base (defined in Section 2.02), multiplied by a fraction, not to exceed one (1), the numerator of which is the actual number of months of employment with the Corporation (including partial months for month of hire and month of termination) and the denominator of which is three hundred (300) months, and reduced by: (1) fifty percent (50%) of the Executive's Primary Social Security retirement benefit estimated as of the Normal Retirement Date based on the Social Security retirement benefit formulas assuming level future earnings based on his Benefit Computation Base in effect on the date of termination of the Executive; (2) the annual amount of benefits payable to the Executive at the Normal Retirement Date on the life annuity basis from the qualified defined benefit pension plan maintained by the Corporation; (3) the annual amount of benefits payable to the Executive at the Normal Retirement Date on the life annuity basis, which is the Actuarial Equivalent (as defined in the Corporation's qualified defined benefit plan), at the date of determination, of that portion of the account balances attributable to contributions by the Corporation to any and all qualified defined contribution plans maintained by the Corporation; and (4) the annual amount of benefits payable to the Executive at the Normal 2 3 Retirement Date on a life annuity basis attributable to contributions by the Corporation from any other qualified or non-qualified retirement plan or agreement maintained or entered into by the Corporation. 2.02 BENEFIT COMPUTATION BASE. The Executive's Benefit Computation Base shall be the average of the Executive's compensation from the Corporation for the five (5) consecutive calendar years during the ten (10) years preceding the Executive's termination of employment with the Corporation in which such compensation is the highest (excluding all years of the Executive's employment by the Corporation after the year in which the Normal Retirement Date occurs). For the purposes of this Agreement, compensation shall mean the amount actually paid or made available to the Executive during a calendar year as remuneration of a kind or nature reported by the Corporation on the Executive's W-2. Compensation shall also include annual bonuses, any contributions made on behalf of the Executive by the Corporation pursuant to a salary reduction agreement under Internal Revenue Code Sections 125, 129 and/or 401(k), and any compensation deferred under the Corporation's Senior Management Deferred Compensation Plan. Compensation shall not include any amounts available to the Executive pursuant to any Stock Option, Stock Appreciation Right and Senior Management Long Term Incentive Plans of the Corporation. 2.03 ACCRUED BENEFIT. As used herein, the term "Accrued Benefit" shall mean the Normal Retirement Benefit (before applying the offsets in Section 2.01(1), (2), (3) and (4) to which the Executive would be entitled under Section 2.01 commencing at the Normal Retirement Date assuming continuation of service by the Executive to the Normal Retirement Date based on the Benefit Computation Base on the date the Accrued Benefit is determined (the "Determination Date"), multiplied by a fraction, not to exceed one (1), the numerator of which is the actual number of months of employment with the Corporation (including partial months for month of hire and month of termination) and the denominator of which is three hundred (300) months, and reduced by: (1) fifty percent (50%) of the Executive's Primary Social Security 3 4 retirement benefit estimated as of the Normal Retirement Date based on the Social Security retirement benefit formulas assuming level future earnings based on his Benefit Computation Base in effect on the date of termination of the Executive; (2) the annual amount of benefits payable to the Executive at the Normal Retirement Date on the life annuity basis from the qualified defined benefit pension plan maintained by the Corporation; (3) the annual amount of benefits payable to the Executive at the Normal Retirement Date on the life annuity basis, which is the Actuarial Equivalent (as defined in the Corporation's qualified defined benefit plan), at the date of determination, of that portion of the account balances attributable to contributions by the Corporation to any and all qualified defined contribution plans maintained by the Corporation; and (4) the annual amount of benefits payable to the Executive at the Normal Retirement Date on a life annuity basis attributable to contributions by the Corporation from any other qualified or non-qualified retirement plan or agreement maintained or entered into by the Corporation. 2.04 OPTIONAL FORMS OF PAYMENT. In lieu of the fifteen year certain payments provided in Section 2.01 above, or whenever an Accrued Benefit is payable under this Agreement, the Executive may elect in the calendar year prior to the calendar year in which payments are to begin an optional form of payment which shall be the actuarial equivalent of the said fifteen year certain payments, and which shall be any optional form which is provided the Executive under the terms of the Corporation's qualified defined benefit pension plan. In addition, the Executive may elect a lump sum payment under this plan; however, the Corporation may require that such payment shall be made over a period of up to five (5) years in equal consecutive annual installments of principal and interest. The applicable rate of interest (as defined in Section 6.01) shall be determined as of the date of the first monthly installment and shall remain the same for all subsequent payments. 4 5 2.05 VESTING. The Executive has a vested interest in any Accrued Benefit payable under this Agreement if he has completed at least five years of employment with the Corporation commencing with his original date of hire with the Corporation. ARTICLE THREE 3.01 DEATH OF EXECUTIVE. Upon the death of the Executive while employed by the Corporation, the Corporation will pay to the Executive's named beneficiaries the Accrued Benefit earned by the Executive as of the date of death in equal annual installments for a period of fifteen (15) years. The Executive may name one or more beneficiaries in writing to the Corporation. If no beneficiary is so named or if no named beneficiary is living at the time a payment is due, that payment and all subsequent payments shall be made, when otherwise due, to the Executive's estate. ARTICLE FOUR 4.01 DISABILITY PRIOR TO RETIREMENT. In the event the Executive shall become disabled, mentally or physically, which disability prevents him from performing the material aspects of his duties, the Corporation will pay no disability benefits under this Agreement. Disability benefits (if any) will be paid to the Executive through the insurance program sponsored by the Corporation. Upon termination of such other disability benefits (if any), or attainment of the Normal Retirement Date if later, the Executive shall commence receiving payment of his Accrued Benefit determined as of the date of the disability. The Accrued Benefits shall be paid in the form provided in Section 2.04. In the event the Executive returns to work with the Corporation after terminating employment because of disability, this Agreement shall continue in full force and effect as though such disability had not occurred as long as he returns to work in the position in which he was employed at the date of disability. For the purposes of the numerator of the fractions in Sections 2.01 and 2.03, the Executive's period of disability shall be treated as a period of employment with the Corporation. 5 6 ARTICLE FIVE 5.01 TERMINATION OF SERVICE OR DISCHARGE. In the event that prior to the Normal Retirement Date, the Executive's employment with the Corporation is terminated for reasons other than death or disability and the Executive is vested pursuant to Section 2.05, the Executive shall be entitled to an annual benefit payable monthly commencing at the Normal Retirement Date and continuing for fifteen years which shall be his Accrued Benefit as of the date of his termination of employment. 5.02 EARLY RETIREMENT. The Executive may retire prior to the Normal Retirement Date and receive an annual benefit determined in accordance with Section 5.01, payable monthly, and continuing for fifteen (15) years certain. Said early retirement and payments hereunder may commence at the earlier of (a) age 55 or (b) any date approved by the Corporation, notwithstanding the provisions of Section 5.01. Said early retirement payments shall be the annual benefit payable according to Section 5.01 further reduced by one-quarter of one percent (.25%) per month for each month of the first sixty (60) months the annual benefit is received prior to age 65. Said early retirement payments shall be further reduced by one-half of one percent (.50%) per month for each of the months by which the annual benefit is received prior to age 60. 5.03 PAYMENT. Benefits payable under this Article Five shall be paid for fifteen (15) years certain payable monthly or in the manner provided in Section 2.04. 5.04 FORFEITURE. Anything to the contrary in this Agreement notwithstanding, benefits under this Agreement shall be forfeited and all rights of the Executive and his beneficiaries shall become null and void, if the Executive's employment is terminated for cause. For this purpose, "cause" shall mean conviction by a court of law for fraud, misappropriation, embezzlement or any crime related to the Corporation. ARTICLE SIX 6.01 INTEREST. Unless otherwise expressly provided herein, any reference to "interest" shall be a variable rate of interest which shall be the rate of interest on one (1) year U.S. 6 7 Treasury Bills determined at the first auction of each calendar year or part thereof during the period of which interest is to be applied to any obligation hereunder. ARTICLE SEVEN 7.01 ALIENABILITY. Neither the Executive, nor any beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owed by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, or otherwise. ARTICLE EIGHT 8.01 PARTICIPATION IN OTHER PLANS. Nothing contained in this Agreement shall be construed to alter, abridge, or in any manner affect the rights and privileges of the Executive to participate in and be covered by any pension, profit-sharing, group insurance, bonus or any other employee plan or plans which the Corporation may have or hereafter have. ARTICLE NINE 9.01 FUNDING. The Corporation reserves the absolute right at its sole and exclusive discretion to insure or otherwise provide for the obligations of the Corporation undertaken by this Agreement or to refrain from same, and to determine the extent, nature and method thereof, including the establishment of one or more trusts. Should the Corporation elect to insure this Agreement, in whole or in part, through the medium of insurance or annuities, or both, the Corporation shall be the owner and beneficiary of the policy. At no time shall the Executive be deemed to have any right, title or interest in or to any specified asset or assets of the Corporation trust or escrow arrangement, including, but not by way of restriction, any insurance or annuity or contracts or the proceeds therefrom. Any such policy, contract or asset shall not in any way be considered to be security for the performance of the obligations of this Agreement. 7 8 If the Corporation purchases a life insurance or annuity policy on the life of the Executive, he agrees to sign any papers that may be required for that purpose and to undergo any medical examination or tests which may be necessary, and generally cooperate with the Corporation in securing such policy. 9.02 NO TRUST. Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between the Corporation and the Executive, his designated beneficiary or any other person. ARTICLE TEN 10.01 REORGANIZATION. The Corporation shall not merge or consolidate into or with another corporation, or reorganize, or sell substantially all of its assets to another corporation, or reorganize, or sell substantially all of its assets to another corporation, firm, or person unless and until such succeeding or continuing corporation, firm or person agrees to assume and discharge the obligations of the Corporation under this Agreement. Upon the occurrence of such event, the term "Corporation" as used in this Agreement shall be deemed to refer to such successor, assignee, or survivor Corporation. ARTICLE ELEVEN 11.01 BENEFITS AND BURDENS. This Agreement shall be binding upon and inure to the benefit of the Executive and his personal representatives, and the Corporation, and any successor organization which shall succeed to substantially all of its assets and business without regard to the form of such succession. 11.02 CORPORATION. As used in this Agreement, the term "Corporation" shall mean Peoples Heritage Financial Group, Inc., a Maine Corporation, and any entity that from time to time is aggregated with Peoples Heritage Financial Group, Inc., its successors and assigns, under Sections 414(b), 414(c), 414(m), 414(n) or 414(o) of the Internal Revenue Code of 1986, as amended. For the purpose of determining the Executive's period of employment 8 9 with the Corporation as required hereunder, the term "Corporation" shall also include any predecessor of the Corporation. ARTICLE TWELVE 12.01 COMMUNICATIONS. Any notice or communication required of either party with respect to this Agreement shall be made in writing and may either be delivered personally or sent by First Class mail, as the case may be: TO THE CORPORATION: Peoples Heritage Financial Group, Inc. One Portland Square Portland, ME 04112 TO THE EXECUTIVE: John W. Fridlington 53 Stapleford Drive Falmouth, ME 04105 Each party shall have the right by written notice to change the place to which any notice may be addressed. ARTICLE THIRTEEN 13.01 CLAIMS PROCEDURE. In the event that benefits under this Agreement are not paid to the Executive (or his beneficiary or personal representative in the case of the Executive's death), and such person feels entitled to receive them, a claim shall be made in writing to the Corporation within sixty (60) days after written notice from the Corporation to the Executive or his beneficiary or personal representative that payments are not being made or are not to be made under this Agreement. Such claim shall be reviewed by the Corporation. If the claim is approved or denied, in full or in part, the corporation shall provide a written notice of approval or denial within sixty (60) days of receipt of the written claim setting forth the specific reason for denial, specific reference to the provision of this 9 10 Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim, if any. Also, such written notice shall indicate the steps to be taken if a review of the denial is desired. If a claim is denied and a review is desired, the Executive or his beneficiary or personal representative shall notify the Corporation in writing within twenty (20) days (a claim shall be deemed denied if the Corporation does not take action within the aforesaid sixty (60) day period). In requesting a review of the denial, the Executive or his beneficiary or personal representative may review this Agreement or any document relating to it and submit any written issues and comments he or she may feel appropriate. In its sole discretion, the Corporation shall then review the claim and provide a written decision within sixty (60) days. This decision likewise shall state the specific reasons for the decision and shall include reference to specific provisions of this Agreement on which the decision is based. Any decision of the Corporation shall not preclude further action by the Executive, his beneficiary or personal representative. ARTICLE FOURTEEN 14.01 ENTIRE AGREEMENT; MODIFICATION. This instrument contains the entire agreement of the parties hereto and there are no agreements or representations which are not set forth herein. This instrument may be altered or amended only by written agreement signed by the parties hereto. 14.02 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Maine. 14.03 SEVERABILITY. The provisions of this Agreement are severable and the invalidity of any provision shall not affect the validity of any other provision. 10 11 IN WITNESS WHEREOF, the Corporation and the Executive have caused this Agreement to be executed and the Seal of the Corporation to be affixed, as of the date and year first above written. PEOPLES HERITAGE FINANCIAL GROUP, INC. /s/ Cynthia H. Hamilton By: /s/ Carol L. Mitchell - --------------------------- ------------------------- Witness Its: /s/ Cynthia H. Hamilton /s/ John Fridlington - --------------------------- ----------------------------- 11 EX-10.(Q)2 6 FIRST AMENDMENT TO THRIFT INCENTIVE PLAN 1 EXHIBIT 10(q)(2) FIRST AMENDMENT TO THE PEOPLES HERITAGE FINANCIAL GROUP, INC. THRIFT INCENTIVE PLAN The Peoples Heritage Financial Group, Inc. Thrift Incentive Plan (the "Plan") was last amended and restated, effective generally, January 1, 1989. The Plan is hereby further amended in the following respects: 1. The terms used in this Amendment shall have the meanings set forth in the Plan unless the context indicates otherwise. 2. The first sentence of Section 1.6 is hereby amended to read as follows: "1.6 Beneficiary. The person, trust, estate or other entity designated by the Participant to receive benefits which may be payable on account of the death of a Participant under Article 8; provided, however, that in the case of a married Participant, the Participant's spouse shall be the Beneficiary unless the Participant's spouse waives his or her rights as the Beneficiary, the Participant is legally separated or has been abandoned and the Participant has a court order to such effect, or the Participant's current spouse cannot be located." 3. Section 1.16 is hereby amended to read as follows: "1.16 Direct Rollover. Direct transfer of all or a portion of the Participant's Vested Interest, as designated by an eligible distributee, to an eligible retirement plan in accordance with the requirements under Section 401(a)(31) of the Code and Section 8.10." 4. Section 1.17 is hereby amended to read as follows: "1.17 Earnings. The total compensation paid by the Company to the Employee for services rendered while a Participant that constitutes wages as defined in Section 3401(a) of the Code and all other payments made by the Company to an Employee for services rendered while a Participant for which the Company is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code without regard to any rules under Section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or service performed. Notwithstanding the forgoing to the contrary, Earnings (i) shall include elective contributions made by the Company on behalf of an Employee that are not includable in income under Section 125, Section 402(e)(3), or Section 402(h) of the Code; and (ii) shall be reduced by reimbursements or other expense 2 allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits. Notwithstanding the foregoing to the contrary, effective January 1, 1989, the annual Earnings of any Employee in excess of Two Hundred Thousand Dollars ($200,000.00) (or such higher amount as the Secretary of the Treasury may prescribe) shall not be taken into account under the Plan, and, effective January 1, 1994, the annual Earnings of any Employee in excess of One Hundred Fifty Thousand Dollars ($150,000.00) (or such higher amount as the Secretary may prescribe) shall not be taken into account under the Plan. In the event Earnings are determined based on a period of time which contains fewer than twelve (12) calendar months, the annual Earnings limit shall be an amount equal to the annual Earnings limit for the calendar year in which the period begins multiplied by a fraction, the numerator of which is the number of full calendar months and the denominator of which is twelve (12). For purposes of the annual Earnings limit, any Earnings paid to an Employee who is the spouse or a lineal descendant (who has not attained age nineteen (19) by the close of the Plan Year) of an Employee who is a five percent owner (as defined in Section 416(i)(1) of the Code) or one of the ten (10) Highly Compensated Employees paid the highest earnings (as defined in Section 4.4) for the Plan Year shall be treated as paid to or on behalf of such five percent owner or Highly Compensated Employee. If Earnings for a prior Plan Year are taken into account for any Plan Year, such Earnings shall be subject to the annual Earnings limit in effect for such prior Plan Year." 5. Paragraphs (2) through (4) of Section 1.25(b) are hereby amended to read as follows: "(2) Solely for purposes of this Section, the Company shall include all Affiliates, and Earnings shall have the meaning given such term under Section 1.17, but without regard to the annual Earnings limit. (3) For purposes of Paragraph (a)(3) of this Section, the top-paid group shall consist of the top twenty percent of Employees for a Plan Year when ranked on the basis of Earnings. In determining the number of Employees to be included in the top twenty percent and the number of officers to be taken into account under Paragraph (a)(4), Employees described in Section 414(q)(8) of the Code and the regulations promulgated thereunder shall be excluded. (4) If an Employee is a family member of an Employee who owns more than five percent of the Company or of a Highly Compensated Employee who is one of the top ten Employees when ranked on the basis of Earnings for the current Plan Year, such Employee shall not 2 3 be treated as a separate Employee, and any Earnings paid to him and any contributions on his behalf shall be treated as paid to (or contributed on behalf of) such five percent owner or Highly Compensated Employee, as the case may be. For purposes of this Paragraph (b)(4), "family member" shall mean a spouse, lineal ascendant, lineal descendant and the spouses of such lineal ascendants and descendants." 6. Section 1.33 is hereby amended to read as follows: "1.33 Plan Administrator. A committee of not less than four individuals appointed by the Board." 7. Section 3.2 is hereby amended to read as follows: 3.2 Annual Limitation on Salary Deferrals. (a) Effective January 1, 1989, the Salary Deferrals that may be allocated to a Participant's Salary Deferral Contribution Account for any calendar year shall not exceed Seven Thousand Six Hundred Twenty- Seven Dollars ($7,627.00), reduced by the amount of any employer contributions for such year on behalf of such Participant pursuant to an election to defer compensation under any qualified cash or deferred arrangement within the meaning of Section 401(k) of the Code, any simplified employee pension cash or deferred arrangement within the meaning of Section 402(h)(1)(B) of the Code, any eligible deferred compensation plan under Section 457 of the Code, any plan within the meaning of Section 501(c)(18) of the Code and a salary reduction agreement for the purchase of an annuity contract under Section 403(b) of the Code. For purposes of this Section, any Salary Deferrals returned to a Participant pursuant to Section 4.4 shall be disregarded. The dollar limitation of this Section shall be automatically adjusted to reflect any cost of living adjustment made under Section 402(g)(5) of the Code. (b) In the event that the limitation of Paragraph (a) is exceeded with respect to any Participant, not later than April 15 of the following calendar year, the Plan Administrator shall distribute the excess deferral (plus any income and minus any loss allocable thereto), provided that the Plan Administrator has received the notice pre- scribed in Paragraph (c). Excess deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to excess deferrals shall be determined by the same manner in which income or loss is allocated to the Participants' Aggregate Accounts under Article 4 of the Plan. 3 4 The amount of excess deferral with respect to a Participant for any calendar year shall be reduced by the amount of any contributions previously distributed to such Participant under Section 3.7 for the Plan Year beginning with or within the calendar year. (c) It shall be the responsibility of the Participant to notify the Plan Administrator of any excess deferral for a calendar year. Such notice shall be in writing; shall specify the amount of the excess deferral; shall state that if the excess deferral is not distributed, such excess shall be includable in the Participant's gross income under Section 402(g) of the Code; and shall be submitted to the Plan Administrator not later than March 1 of the following calendar year. A Participant shall be deemed to have notified the Plan Administrator of an excess deferral to the extent such Participant has an excess deferral for a calendar year, taking into account only Salary Deferrals under the Plan and any other plans of the Company or its Affiliates subject to Section 402(g) of the Code." 8. Section 3.3 is hereby amended to read as follows: "3.3 Company Matching Contributions. For each Plan Year, the Company shall contribute and allocate to each Participant's Company Matching Contribution Account an amount equal to fifty percent of such Participant's Salary Deferrals under Section 3.1 not in excess of six percent of Earnings; provided, however, no Company Matching Contribution may be made with respect to any excess deferral under Section 3.2, or any Excess Salary Deferral under Section 3.6 or any Salary Deferral which is returned to the Participant pursuant to Section 4.4. The Company shall contribute Company Matching Contributions for a Plan Year to the Trust not later than the date the Company is required to file its federal corporate income tax return (with extensions) with respect to the year in which such Plan Year ends." 9. Section 3.4 is hereby amended to read as follows: "3.4 Company Discretionary Contributions. Within twelve months after the end of the Plan Year, the Company, as instructed by the Plan Administrator, may make a qualified nonelective contribution (as defined in Section 401(m)(4)(C) of the Code) on behalf of Non-Highly Compensated Employees in an amount which enables the Plan to satisfy the requirements set forth in Section 3.6 or 3.8." 10. Section 3.6 is hereby amended to read as follows: "3.6 Limitations on Actual Deferral Percentage. In the event a Participant 4 5 who is a Highly Compensated Employee participates in two or more cash or deferred arrangements (under Section 401(k) of the Code) that have different plan years, for purposes of this Section, all such arrangements ending with or within the same calendar year shall be treated as a single arrangement. For purposes of this Section, this Plan and any other Code Section 401(k) plan maintained by the Company or any of its Affiliates shall be treated as a single plan if such plans are treated as one plan for purposes of Section 401(a)(4) or Section 410(b) of the Code or if a Highly Compensated Employee participates in such other plan. Plans may be aggregated to satisfy Section 401(k) of the Code only if such plans have the same Plan Year. (a) The Actual Deferral Percentage for Participants who are Highly Compensated Employees for any Plan Year commencing after December 31, 1986, shall not exceed the greater of: (i) the Actual Deferral Percentage for all other Participants multiplied by 1.25; or (ii) the lesser of the Actual Deferral Percentage for all other Participants multiplied by 2, or the Actual Deferral Percentage for such Participants plus two percent (2%). (b) The sum of the Actual Deferral Percentage for Participants who are Highly Compensated Employees and the Average Contribution Percentage for Participants who are Highly Compensated Employees shall not exceed the greater of: (i) the sum of (1) the greater of the Actual Deferral Percentage for all other Participants multiplied by 1.25 or the Average Contribution Percentage for all other Participants multiplied by 1.25, and (2) the lesser of the Actual Deferral Percentage for all other Participants plus 2 or the Average Contribution Percentage for all other Participants plus 2, provided that in no event shall such percentage plus 2 exceed such percentage multiplied by 2. (ii) the sum of (1) the lesser of the Actual Deferral Percentage for all other Participants multiplied by 1.25 or the Average Contribution Percentage for all other Participants multiplied by 1.25, and (2) the greater of the Actual Deferral Percentage for all other Participants plus 2 or the Average Contribution Percentage for all other Participants plus 2, provided that in no event shall such percentage plus 2 exceed such percentage multiplied by 2. 5 6 Paragraph (b) of this Section shall not apply if the respective Actual Deferral Percentage and Average Contribution Percentage of the Highly Compensated Employees does not exceed the respective Actual Deferral Percentage and Average Contribution Percentage of all other Participants multiplied by 1.25. For purposes of this Section, Salary Deferrals and Company Matching Contributions must be made before the last day of the twelve (12) month period immediately following the Plan Year to which such contributions relate. If a Participant who is a Highly Compensated Employee is subject to the family aggregation provisions of Section 1.25, the individual deferral percentage for such Participant shall be determined in accordance with the applicable regulations under Section 401(k) of the Code. For purposes of this Section, any Salary Deferrals returned to a Participant pursuant to Section 4.4 shall be disregarded. The Company shall maintain records sufficient to demonstrate compliance with this Section and the amount of any Company Matching Contributions used to satisfy this Section. The determination and treatment of the contributions on behalf of any Participant that are taken into account for purposes of this Section shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury." 11. Section 3.7 is hereby amended to read as follows: "3.7 Restrictions and Adjustments. The Plan Administrator may restrict the deferral percentages elected by Participants if the Plan Administrator determines such restriction is necessary to comply with Section 3.2, Section 3.6, Section 3.11 or Section 4.4. In the event that the Actual Deferral Percentage of the Participants who are Highly Compensated Employees for any Plan Year exceeds the limitations prescribed in Paragraph 3.6(a), the Plan Administrator shall, within two and one-half (2 1/2) months after the end of such year, distribute the Excess Salary Deferrals (plus any income and minus any loss allocable thereto) to such Participants on the basis of the respective portions of the Excess Salary Deferrals attributable to each such Participant and shall designate such distribution as a distribution of Excess Salary Deferrals (plus any income and minus any loss allocable thereto). Excess Salary Deferrals shall be allocated to Participants who are subject to the family aggregation rules of Section 414(q)(6) of the Code in the manner prescribed by regulations. The amount of any Excess Salary Deferrals of a Participant who is a Highly Compensated Employee shall be determined by reducing contributions on behalf of all such Participants in the order of their respective individual 6 7 deferral percentages, beginning with the highest such percentage. The amount of Excess Salary Deferrals with respect to a Participant who is a Highly Compensated Employee for any Plan Year shall be reduced by the amount of excess deferrals previously distributed to such Participant under Section 3.2 for the calendar year ending with or within the Plan Year; provided, however, that notwithstanding the distribution of an excess deferral in accordance with Section 3.2 to a Participant who is a Highly Compensated Employee, such distributed amount shall be taken into account under Section 3.6. Excess Salary Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Salary Deferrals shall be determined by the same manner in which income or loss is allocated to Participants' Aggregate Accounts under Article 4 of the Plan. In the event that the sum of the Actual Deferral Percentage for Participants who are Highly Compensated Employees and the Average Contribution Percentage for Participants who are Highly Compensated Employees for any Plan Year exceeds the limitations prescribed in Paragraph 3.6(b), the Plan Administrator shall, within two and one-half (2 1/2) months after the end of such year reduce the Average Contribution Percentage for Participants who are Highly Compensated Employees in the manner prescribed in subsections (g) through (j) of Section 3.8. Notwithstanding the foregoing provisions of this Section to the contrary, in lieu of distributing Excess Salary Deferrals (plus any income and minus any loss allocable thereto) or reducing the Average Contribution Percentage for Participants who are Highly Compensated Employees in the manner prescribed in subsections (g) through (j) of Section 3.8 in order to comply with Paragraph 3.6(b) for any Plan Year, the Company may make qualified nonelective contributions to the Plan as provided in Section 3.4." 12. Section 3.8 is hereby amended to read as follows: "3.8 Special Rules for Company Matching Contributions. (a) The Average Contribution Percentage for Participants who are Highly Compensated Employees for any Plan Year commencing after December 31, 1986, shall not exceed the greater of: (i) the Average Contribution Percentage for all other Participants multiplied by 1.25; or (ii) the lesser of the Average Contribution Percentage for all other Participants multiplied by 2, or the Average Contribution 7 8 Percentage for such Participants plus two percent (2%). (b) For purposes of this Section, if two or more qualified plans maintained by the Company or any of its Affiliates are treated as one plan to meet the requirements of Section 401(a)(4), Section 410(b) or Section 401(m) of the Code, such plans shall be treated as a single plan. If a Participant who is a Highly Compensated Employee participates in any other qualified plan maintained by the Company to which Company Matching Contributions or Employee contributions are made, all such contributions for Plan Years ending with or within the same calendar year shall be aggregated for purposes of this Section. If a Participant who is a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same plan year. (c) If an Employee is a family member within the meaning of Section 1.25 of a five percent owner (as defined in Section 416(i)(1) of the Code) or of one of the ten (10) Highly Compensated Employees receiving the greatest compensation from the Company during the Plan Year, then the individual contribution percentage attributable to such Employee shall be treated as if it were attributable to the five percent owner or Highly Compensated Employee. An Employee who is a family member with respect to a five percent owner or one of the ten (10) Highly Compensated Employees receiving the greatest compensation from the Company shall not be considered a separate Employee for purposes of determining the Average Contribution Percentage for Participants who are Highly Compensated Employees and the Average Contribution Percentage for all other Participants. (d) To the extent Salary Deferrals are taken into account under this Section, any Salary Deferrals returned to a Participant pursuant to Section 4.4 shall be disregarded. (e) Notwithstanding Section 7.3 to the contrary, any Company Matching Contribution which is attributable to an excess deferral under Section 3.2 or an Excess Salary Deferral shall be forfeited and shall be disregarded for purposes of Paragraph (a) of this Section. Forfeitures shall be used to reduce future Company Matching Contributions. (f) For purposes of this Section, Company Matching Contributions shall 8 9 be treated as made for a Plan Year if such contributions are made no later than the end of the twelve (12) month period beginning on the day after the close of the Plan Year. The Company shall maintain records sufficient to demonstrate satisfaction of this Section and the amount of any Salary Deferrals taken into account under this Section. The determination and treatment of the individual contribution percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (g) In the event that the Average Contribution Percentage of the Partici- pants who are Highly Compensated Employees for any Plan Year exceeds the limitation of Paragraph 3.8 (a) above, the Plan Administra- tor shall, within two and one-half (2 1/2) months after the end of such year, distribute the Excess Aggregate Contributions to the extent nonforfeitable (plus any income and minus any loss allocable thereto) to such Participants on the basis of the respective portions of the Excess Aggregate Contributions attributable to each such Participant and shall designate such distribution as a distribution of Excess Aggregate Contributions (plus any income and minus any loss allocable thereto). To the extent the Excess Aggregate Contributions are forfeitable, they shall be forfeited in accordance with the provisions of Section 7.3; provided, however, that forfeitures of Excess Aggregate Contributions may not be allocated to the Aggregate Accounts of Participants whose Company Matching Contributions are reduced pursuant to this paragraph 3.8(g). Notwithstanding the foregoing provisions of this Section to the contrary, in lieu of distributing Excess Aggregate Contributions to the extent nonforfeitable (plus any income and minus any loss allocable thereto) to Participants who are Highly Compensated Employees or forfeiting Excess Aggregate Contributions (to the extent forfeitable) in order to comply with Paragraph 3.8(a) above for any Plan Year, the Company may make qualified nonelective contributions as provided in Section 3.4. (h) Excess Aggregate Contributions shall be allocated to Participants who are subject to the family aggregation rules of Section 414(q)(6) of the Code in the manner prescribed by regulations. (i) Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Aggregate Contributions shall be determined by the same manner in which income or loss is allocated to Participants' Aggregate Accounts under Article 4. 9 10 (j) The amount of Excess Aggregate Contributions of any Participant who is a Highly Compensated Employee shall be determined by reducing contributions on behalf of all such Participants in the order of their respective contribution percentages, beginning with the highest such percentage. The determination of the amount of Excess Aggregate Contributions with respect to the Plan shall be made after first determining the amount of excess deferrals under Section 3.2 and second determining the amount of Excess Salary Deferrals under Section 3.6." 13. Section 3.9 is hereby deleted, and Sections 3.10 and 3.11 are hereby redesignated as Sections 3.9 and 3.10 respectively. 14. Section 3.9(b), as herein redesignated, is hereby amended by adding the following sentence at the end thereof: "The portion of any contribution returned to the Company in accordance with this Section that represents Salary Deferrals shall be paid promptly to the Participants on whose behalf such deferrals were made." 15. Section 3.10, as herein redesignated, is hereby amended to read as follows: "Rollover Contributions. An Employee who has received an eligible rollover distribution (as defined in Section 402(c)(4) of the Code) from an employee's trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code may transfer all or any portion of such distribution to the Trust, provided the transfer is made to the Trust not later than the sixtieth (60th) day following the day on which he received such distribution and the amount transferred is $1,000 or more. In addition, an Employee who receives a distribution from an individual retirement account (within the meaning of Section 408(a) of the Code) which is attributable solely to a rollover contribution (as defined in Section 402(c)(5) of the Code) from an employee's trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code may transfer the entire amount distributed to the Trust, provided the transfer is made to the Trust not later than the sixtieth (60th) day following the day on which he received such distribution and the amount transferred is $1,000 or more. Notwithstanding the foregoing to the contrary, an Employee who has received an eligible rollover distribution (as hereinabove defined), solely by reason of the death of his spouse, or a distribution from an individual retirement account (as hereinabove defined), which account is attributable solely to a rollover contribution (as hereinabove defined) from an employee's trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code of amounts received by reason of the death of his spouse, may not transfer any 10 11 portion of such distribution to the Trust. A rollover contribution shall be credited to a Rollover Contributions Account on behalf of the contributing Employee, and such Employee shall have a fully vested and nonforfeitable interest in his Rollover Contributions Account. An Employee who has made a rollover contribution in accordance with this Section who has not otherwise become a Participant shall become a Participant coincident with such rollover contribution, provided that such Participant shall not have a right to defer Earnings or to share in any Company Matching Contributions until he has otherwise satisfied the eligibility requirements imposed by Article 2." 16. Article III is hereby amended by adding the following Section 3.11 at the end thereof: "3.11 Maximum Contributions. In no event shall the contributions made by the Company for any Plan Year exceed the maximum amount which the Company is permitted to deduct for federal income tax purposes or cause the Annual Addition (as defined in Section 4.4) for any Participant to exceed the amount permitted under the Plan." 17. Paragraph (a)(4) of Section 4.4 is hereby amended to read as follows: "(4) `Maximum Annual Additions' of a Participant for any Limitation Year shall mean the lesser of (A) $30,000 (or, if greater,1/4of the dollar limitation as then in effect under Section 415(b)(1)(A) of the Code for such Limitation Year) or (B) twenty-five percent of such Participant's earnings during such year except the limitation in this Clause (B) shall not apply to any contribution for medical benefits (within the meaning of Section 419A(f)(2) of the Code) after a Participant's termination of employment with the Company or an Affiliate which is otherwise treated as an Annual Addition or to any amount otherwise treated as an Annual Addition under Section 415(l)(1) of the Code. For purposes of Clause (B) and except as hereinafter provided, `earnings' shall mean, with respect to a Plan Year, the total compensation paid by the Company to an Employee for services rendered while an Employee that constitutes wages as defined in Section 3401(a) of the Code and all other payments by the Company to an Employee for services rendered while an Employee for which the Company is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code without regard to any rules under Section 3401(a) of the Code that limit the remuneration 11 12 included in wages based on the nature or location of the employment or services performed. For Limitation Years beginning after Decem- ber 31, 1991, for purposes of applying the limitations of this Section 4.4, `earnings' for a Limitation Year shall mean the compensation actually paid or includable in gross income during such Limitation Year. Notwithstanding the preceding sentence, `earnings' with respect to a Participant who is permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code) shall mean the earnings such Participant would have received for the Limitation Year if he or she had been paid at the rate of earnings paid immediately before becoming permanently and totally disabled; provided such imputed earnings may be taken into account only if the Participant is not a Highly Compensated Employee and contributions made on behalf of such Participant are not forfeitable when made." 18. Section 4.4(b) is hereby amended to read as follows: "(b) Notwithstanding any other provision in the Plan regarding the allocation of contributions, under no circumstances shall the Annual Additions credited to a Participant's Aggregate Account for any Limitation Year exceed the Maximum Annual Additions for such Participant for such year. If, as a result of a reasonable error in estimating a Participant's Earnings or because of other limited facts and circumstances, the Annual Additions which would be credited to a Participant's Aggregate Account for a Limitation Year would nonetheless exceed the Maximum Annual Additions for such Partici- pant for such year, the excess Annual Additions which, but for this Section, would have been allocated to such Participant's Aggregate Account shall be disposed of as follows: (1) Any such excess Annual Additions in the form of Salary Deferrals, shall, to the extent such amounts would have otherwise been allocated to such Participant's Salary Deferral Contribution Account, be returned to the Participant; (2) Any such excess Annual Additions in the form of Company Matching Contributions remaining in the Plan after the application of Paragraph (b)(1) above, shall, to the extent such amounts would have otherwise been allocated to such Participant's Company Matching Contribution Account, be allocated instead to a suspense account and shall be held therein until used to reduce future Company Matching Contributions in the same manner as a Forfeiture; and 12 13 (3) Any such excess Annual Additions in the form of Company Discretionary Contributions remaining in the Plan after the application of Paragraphs (b)(1) and (2) above, shall be allocated instead to a suspense account and shall be held therein until allocated to such Participant's Salary Deferral Contribution Account in future Limitation Years before any Salary Deferral contributions or Company Discretionary Contributions are made to the Plan on behalf of such Participant." 19. Section 6.2(c)(1) is hereby amended to read as follows: "(1) Payment of medical expenses described in Section 213(d) of the Code previously incurred by the Participant, his spouse or dependent (within the meaning of Section 152 of the Code) or payment necessary for such persons to obtain medical care as described in Section 213(d) of the Code;" 20. Section 6.2(c)(4) is hereby amended to read as follows: "(4) Payment of tuition, related educational fees and room and board expenses for the next 12 months of post-secondary education for the Participant, his spouse or dependent (within the meaning of Section 152 of the Code); or" 21. Section 6.3(c) is hereby deleted, and Section 6.3(d) is hereby redesignated as Section 6.3(c). 22. The last sentence of Section 8.3(a) is hereby amended to read as follows: "For purposes of this Paragraph, if the value of the Participant's vested interest in his Company Matching Contribution Account upon terminating employment is zero, such Participant shall be deemed to have received an immediate distribution of such interest." 23. Section 8.3(b) is hereby amended to read as follows: "(b) If a Participant terminates employment prior to Normal Retirement Age for any reason other than on account of Disability or death and his Vested Interest at any time has exceeded $3,500, such Participant shall be entitled to receive his Vested Interest in one or more of the forms of benefit provided under Section 8.5(a). A Participant electing to receive a distribution shall forfeit the unvested portion of his Aggregate Account." 13 14 24. Article 8 is hereby amended by adding the following new Section 8.10 at the end thereof: "8.10 Direct Rollovers. (a) Effective January 1, 1993, a Participant who is entitled to receive an eligible rollover distribution may elect to have such distribution (or a portion thereof not less than Five Hundred Dollars ($500.00)) made directly to an eligible retirement plan ("direct rollover election"). An alternate payee who is entitled to receive an eligible rollover distribution pursuant to a qualified domestic relations order under Section 8.9 and who is the spouse or a former spouse of a Participant may make a direct rollover election as if such alternate payee were the Participant. A surviving spouse who is entitled to receive an eligible rollover distribution by reason of the Participant's death may make a direct rollover election; provided that such election is restricted to an eligible retirement plan that is an individual retirement account described in Section 408(a) of the Code or an individual retirement annuity described in Section 408(b) of the Code. (b) No earlier than ninety (90) days and no later than thirty (30) days before an eligible rollover distribution is to be made, the Plan Administrator shall provide the Participant, alternate payee, or surviving spouse, as the case may be, with a written explanation of: (i) the rules under which he may make a direct rollover election; (ii) the legal requirement that federal income tax be withheld from the distribution if he does not elect a direct rollover; (iii) the rules under which the amount that he actually receives will not be subject to federal income tax if such amount is transferred ("rolled over") within sixty (60) days after being received pursuant to Section 402(c) of the Code; (iv) the rules, if applicable, for receiving special income tax averaging, or capital gain treatment, under Section 402(d) of the Code; and 14 15 (v) the Plan provisions under which a direct rollover election with respect to one payment in a series of periodic payments will apply to all subsequent payments until such election is changed. Notwithstanding the foregoing to the contrary, if an eligible rollover distribution is one of a series of periodic payments, the explanation required by this Paragraph (b) shall be provided annually as long as such payments continue. (c) A direct rollover election shall be made in such manner and at such time as the Plan Administrator shall prescribe, and shall include: (i) the name of the eligible retirement plan; (ii) a statement that such plan is an eligible retirement plan; and (iii) any other information necessary to permit a direct rollover by the means selected by the Plan Administrator. An election to make a direct rollover with respect to one payment in a series of periodic payments shall apply to all subsequent payments in the series until such election is changed; such change with respect to subsequent payments may be made at any time. (d) Notwithstanding Paragraph (b) to the contrary, if an individual, after receiving the written explanation required by subsection (b) affirmatively elects to make or not make a direct rollover, an eligible rollover distribution may be made less than thirty (30) days after the date such written explanation was given, provided the Plan Administrator has informed such individual, in writing, of his right to a period of at least thirty (30) days to make such election. (e) As used in this Section, the following terms shall have the following meanings: (i) `Eligible Retirement Plan' shall mean (A) an individual retirement account, described in Section 408(a) of the Code; (B) an individual retirement annuity described in 15 16 Section 408(b) of the Code (other than an endowment contract); (C) a trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code and which is part of a defined contribution plan described in Section 414(i) of the Code that permits rollover contributions; or (D) an annuity plan described in Section 403(a) of the Code. (ii) `Eligible Rollover Distribution' shall mean a distribution from the Plan of Two Hundred Dollars ($200.00) or more, excluding the following: (A) a distribution that is one of a series of periodic payments (not less frequently than annually) made for a specified period of ten (10) years or longer, for the distributee's life expectancy (or the joint life expectancy of the distributee and his designated Beneficiary), or for the distributee's life (or the joint lives of the distributee and his designated Beneficiary); (B) a required distribution pursuant to Section 401(a)(9) of the Code; (C) a return of Salary Deferrals pursuant to Section 4.4; (D) a corrective distribution pursuant to Section 3.2, 3.7 or 3.8." 25. Section 9.1 is hereby amended to read as follows: "9.1 Plan Administrator. The general administration of the Plan shall be vested in the Plan Administrator, who shall be a named fiduciary for purposes of Section 402(a)(1) of ERISA. In performing its duties hereunder, the Plan Administrator shall have the fullest discretion permitted by law and shall have all powers granted by the provisions of the Plan except those specifically granted or allocated to the Board, the Trustee and investment manager." 26. Section 9.2(i) of the Plan is hereby amended to read as follows: 16 17 "(i) To select any investment managers;" 27. Section 9.3 is hereby amended to read as follows: "9.3 Delegation of Ministerial Duties. The Plan Administrator may delegate to any of its members or to any Employee or Employees, severally or jointly, the authority to perform any ministerial act in connection with the administration of the Plan." 28. Section 12.1(a) is hereby amended to read as follows: "(a) No amendment may be made which would vary the Plan's exclusive purpose of providing benefits to Participants, and their beneficiaries, and defraying reasonable expenses of administering the Plan or which would permit the diversion of any part of the Trust Fund from that exclusive purpose. No amendment shall, except to the extent permit- ted under Section 412(c)(8) of the Code, decrease a Participant's Aggregate Account balance or, except to the extent permitted by regulations, eliminate an optional form of benefit. In addition, no amendment shall have the effect of decreasing a Participant's Vested Interest determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective." 29. Section 12.1 is hereby amended by adding the following new paragraph at the end thereof: "(d) If the vesting schedule in effect under the Plan is amended, each Participant who has completed at least three (3) Years of Service may elect to have the vested percentage of such portion of his Aggregate Account determined without regard to such amendment. The Plan Administrator shall promptly give each such Participant written notice of the adoption of any such amendment and the availability of the election to have the vested percentage of such portion of his Aggregate Account determined without regard to such amendment. An election by a Participant shall be in writing and shall be effective if filed with the Plan Administrator at any time during the period beginning with the date such amendment is adopted and ending on the later of (i) the date which is 60 days after the day such amendment is adopted, (ii) the date which is 60 days after the day such amendment becomes effective, or (iii) the date which is 60 days after the day the Participant receives written notice of such amendment. An election once made shall be irrevocable. For purposes of this Section, a Participant shall be considered to have completed 3 Years of Service if the Participant has 17 18 completed 3 Years of Service prior to the expiration of the period in which an election could be made." 30. Except as otherwise provided herein, this Amendment shall be effective January 1, 1989. IN WITNESS WHEREOF, Peoples Heritage Financial Group, Inc. has caused this Amendment to be executed by its duly authorized officer on this 23rd day of May 1995. PEOPLES HERITAGE FINANCIAL GROUP, INC. By /s/ Carol L. Mitchell ---------------------------------------- Name: Carol L. Mitchell Title: Senior Vice President and General Counsel 18 EX-10.(Q)3 7 SECOND AMENDMENT TO THRIFT INCENTIVE PLAN 1 EXHIBIT 10(q)(3) SECOND AMENDMENT TO THE PEOPLES HERITAGE FINANCIAL GROUP, INC. THRIFT INCENTIVE PLAN The Peoples Heritage Financial Group, Inc. Thrift Incentive Plan (the "Plan") was last amended and restated effective generally January 1, 1989, and further amended by a First Amendment effective as of the same date. The Plan is hereby further amended in the following respects: 1. The terms used in this Amendment shall have the meanings set forth in the Plan unless the context indicates otherwise. 2. Section 1.3(c) is hereby amended to read as follows, effective as of the adoption date of this Second Amendment: (c) In lieu of a joint and survivor annuity under Paragraph (b)(1), a married Participant may elect to receive a single life annuity, a ten year certain and continuous life annuity or a 50% joint and survivor annuity with another individual as joint annuitant if the Participant's spouse consents to such election. Such election may be made, with spousal consent, during the ninety-day period ending on the first day of the first period for which an amount is paid as an Annuity ("annuity starting date"), provided, however, that (1) if the written explanation required by Section 417(a)(3) of the Code has not been furnished to the Participant at least thirty days before the annuity starting date, the election period will be extended, if necessary, to include the thirty-day period following the date on which such information is furnished to the Participant, and (2) if the Participant requests additional information described in Treasury Regulation Section 1.401(a)-11(c)(3)(iii), the election period shall be extended, if necessary, to include the thirty-day period following the day on which such additional information is personally delivered or mailed to the Participant. Notwithstanding the foregoing to the contrary, if a Participant, after receiving the written explanation required by Section 417(a)(3) of the Code, affirmatively elects a form of distribution, with spousal consent, an Annuity may commence no less than seven days after the date such written explanation was given, provided the Plan Administrator has informed such Participant, in writing, of his right to a period of at least thirty days to make such election. 2 For purposes of this Paragraph (c): (1) any consent by the Participant's spouse to waive rights to survivor benefits under a joint and survivor annuity must be in writing, must acknowledge the effect of such waiver and must be witnessed by a notary public; (2) subject to the spousal consent requirement above, the Participant may change an election under this Paragraph (c) at any time and any number of times before the annuity starting date, in the form and the manner required by the Plan Administrator from time to time; and (3) the Participant's spouse may not revoke consent to a specific waiver of a joint and survivor form of benefit. 3. Section 1.43 is hereby amended to read as follows: 1.43 Valuation Date. For any Plan Year, the last day of each Calendar Quarter and such additional dates as the Plan Administrator may designate. 4. Section 1.45 is hereby amended by adding the following new paragraph (d) at the end thereof, effective October 1, 1995: (d) All Years of Service with Mid Maine Savings Bank, FSB prior to the date on which such bank was acquired by the Company, and all Years of Service with North Conway Bank prior to the date on which such bank was acquired by the Company, shall be recognized for participation and vesting purposes under this Plan. 5. Article 2 is hereby amended by adding a new Section 2.4 to read as follows: "2.4 Special Participation Rules. Effective August 1, 1994, each Employee who was previously employed by Mid Maine Savings Bank, FSB, immediately prior to the date on which such bank was acquired by the Company, shall be eligible to participate in the Plan as of the later of August 1, 1994, or the first day of the Calendar Quarter coincident with or next following completion of a Year of Service, provided that a Participation Agreement has been filed with the Plan Administrator by the fifteenth day of the month immediately preceding such Calendar Quarter. Effective July 1, 1995, each Employee who was previously employed by North Conway Bank, immediately prior to the date on which such bank was acquired by the Company, shall be eligible to participate in the Plan as of the later of July 1, 1995, or the first day of the Calendar Quarter coincident with or next following completion of a Year of Service, provided that a Participation Agreement has been filed with the 2 3 Plan Administrator by the fifteenth day of the month immediately preceding such Calendar Quarter. For purposes of determining whether an Employee described in this Section has completed a Year of Service, his service with Mid Maine Savings Bank or North Conway Bank shall be taken into account." 6. Section 5.1 is hereby amended to read as follows, effective October 1, 1995: 5.1 Investment Funds. The Trustee shall establish a Company Stock Fund and one or more other Investment Funds as the Plan Administrator shall from time to time direct. Each Investment Fund, other than the Company Stock Fund, shall be invested, as the Plan Administrator shall direct: (a) at the discretion of the Trustee in accordance with such investment guidelines and objectives as may be established by the Plan Administrator for such Investment Fund; (b) at the discretion of a duly appointed Investment Manager in accordance with such investment guidelines and objectives as may be established by the Plan Administrator; or (c) in such investments as the Plan Administrator may specify for such Investment Fund. The Plan Administrator may from time to time change its direction with respect to any Investment Fund and may, at any time, eliminate any Investment Fund. Whenever an Investment Fund is eliminated, the Trustee shall promptly liquidate the assets of such Investment Fund and reinvest the proceeds thereof in accordance with the direction of the Plan Administrator. The Trustee shall transfer to each Investment Fund such portion of the assets of the Trust as the Plan Administrator may from time to time direct in accordance with the terms of the Plan. All interest, dividends and other income received with respect to, and any proceeds realized from the sale or other disposition of, assets held in any Investment Fund shall be credited to and reinvested in such Investment Fund, and all expenses properly attributable to any Investment Fund shall be paid therefrom unless paid by the Company. 7. Section 5.2 is hereby amended to read as follows, effective October 1, 1995: 5.2 Investment of Contributions. (a) Each Participant may direct that contributions made on his behalf shall be invested in any one or more of the Investment Funds. An investment direction shall be made by such written, 3 4 telephonic or electronic means as shall be prescribed by the Plan Administrator. A Participant's investment direction, if received by the Plan Administrator prior to the date he commences participation, shall be effective as of said date. If a Participant does not make an investment direction or an investment direction is not received by the Plan Administrator before the Participant commences participation, the contributions on behalf of such Participant shall be invested in the fund which presents the least risk of loss as determined by the Plan Administrator. An investment direction received by the Plan Administrator after the date a Participant commences participation shall be effective as soon as practicable following receipt by the Plan Administrator (or by the person or persons specified by the Plan Administrator). (b) A Participant may modify an investment direction to have future contributions on his behalf invested in the Investment Funds in proportions other than those previously elected, by such written, telephonic or electronic means as shall be prescribed by the Plan Administrator. A modification shall be effective as soon as practicable following receipt by the Plan Administrator (or by the person or persons specified by the Plan Administrator). (c) A Participant may elect to reinvest all or a portion of the balance credited to one or more of his accounts in any one or more of the Investment Funds, by such written, telephonic or electronic means as shall be prescribed by the Plan Administrator. An election to reinvest shall be effective as soon as practicable after receipt by the Plan Administrator (or by the person or persons specified by the Plan Administrator). Notwithstanding the foregoing, an Insider shall be subject to the provisions of Section 5.8 whenever he shall transfer any amount credited to one or more of his accounts from the Company Stock Fund to another Investment Fund or from another Investment Fund to the Company Stock Fund or change his previously elected investment options with respect to future contributions or make any other investment election under the Plan. 8. Section 6.2 is hereby amended to read as follows: 6.2 Hardship Withdrawals. The Plan Administrator may direct the Trustee 4 5 to make a hardship withdrawal distribution to a Participant from the accounts designated by the Participant, excluding investment earnings allocated to the Participant's Salary Deferral Account after December 31, 1988, subject to the following: (a) Each request for a hardship withdrawal shall be made by such written, telephonic or electronic means as may be prescribed by the Plan Administrator. The request shall specify the reason for such withdrawal and shall include such other information and documentation as the Plan Administrator may request. (b) A hardship withdrawal may be made only in cash and may not exceed the Participant's Vested Interest in his accounts, excluding investment earnings allocated to the Participant's Salary Deferral Account after December 31, 1988. (c) A hardship withdrawal shall be permitted only if the distribution is on account of an immediate and heavy financial need of the Participant and is necessary to satisfy such financial need. (1) A financial need may qualify as immediate and heavy without regard to whether such need was foreseeable or voluntarily incurred by the Participant. The following shall be deemed immediate and heavy financial needs: (A) Payment of medical expenses described in Section 213(d) of the Code previously incurred by the Participant, his spouse or dependent (within the meaning of Section 152 of the Code) or payment necessary for such persons to obtain medical care as described in Section 213(d) of the Code; (B) Costs directly related to the purchase (excluding mortgage payments) of a principal residence of the Participant; (C) Payment of tuition, related educational fees and room and board expenses for the next 12 months of post-secondary education for the Participant, his spouse or dependent (within the meaning of Section 152 of the Code); (D) Payment to prevent eviction of the Participant 5 6 from his principal residence or foreclosure on the mortgage of the Participant's principal residence; and (E) Any other financial need deemed to be immediate and heavy by the Commissioner of Internal Revenue as set forth in a Treasury regulation, revenue ruling, notice, or other document of general applicability. The above list of deemed immediate and heavy financial needs shall not be exclusive, and other needs may qualify as immediate and heavy financial needs. (2) A distribution shall be treated as necessary to satisfy an immediate and heavy financial need of the Participant only to the extent (A) the amount of such distribution does not exceed the amount required to relieve the financial need (including the amount of any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution) and (B) the amount of such distribution is not reasonably available to the Participant from other resources. The Plan Administrator may reasonably rely (unless the Plan Administrator has actual knowledge to the contrary) on the Participant's written representations that the need cannot be relieved through reimbursement or compensation by insurance or otherwise; by reasonable liquidation of the Participant's assets; by cessation of Salary Deferral Contributions under the Plan; or by other distributions or nontaxable (at the time of the loan) loans from plans maintained by any present or former employer of the Participant or from commercial lenders. A Participant's resources shall be deemed to include those assets of his spouse and minor children that are reasonably available to the Participant. (3) The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. (d) A request for a hardship distribution shall be treated as a claim for benefits under Section 9.5. A hardship withdrawal shall be 6 7 made as soon as practicable following approval of the request by the Plan Administrator. (e) The Plan Administrator may from time to time establish rules governing withdrawals. Such rules shall be applied on a uniform and nondiscriminatory basis. 9. Section 8.5(b) is hereby amended to read as follows, effective as of the adoption date of this Second Amendment: (b) Any distribution to a Participant who has a Vested Interest that exceeds $3,500, or that exceeded $3,500 at the time of any prior distribution, shall require such Participant's written consent if such distribution commences prior to Normal Retirement Age. With regard to such consent: (1) The Participant shall receive the written notice described in Treasury Regulation 1.411(a)-11(c)(2)(i), including notice of his right to defer payment of benefits under this Article, no less than thirty days and no more than ninety days before the date on which such distribution is paid or commences to be paid. If a Participant declines or fails to consent, it shall be deemed to be an election to defer payment of such benefits. However, any election to defer payment shall not apply with respect to distributions which are required under Section 8.5(c). (2) Notwithstanding the foregoing to the contrary, if a Participant, after receiving written notice under Paragraph (b)(1), affirmatively elects a distribution, then the distribution may be paid or may commence to be paid less than thirty days after the date such written explanation was given, provided the Plan Administrator has informed such Participant, in writing, of his right to a period of at least thirty days to consider whether to consent to the distribution. 10. Section 8.10(e)(ii) is hereby amended by modifying subparagraph (D) to read as follows and adding the following new subparagraphs (E), (F), and (G) at the end thereof, effective October 19, 1995: (D) a corrective distribution pursuant to Section 3.2, 3.7, or 3.8; (E) the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation described in Section 402(e)(4) of the Code); 7 8 (F) a loan pursuant to Section 6.3 that is treated as a deemed distribution pursuant to Section 72(p) of the Code; or (G) any similar item designated by the Commissioner of Internal Revenue as set forth in a Treasury regulation, revenue ruling, notice, or other document of general applicability. 11. Except as otherwise provided herein, this Amendment shall be effective January 1, 1995. * * * * * * * * * * IN WITNESS WHEREOF, Peoples Heritage Financial Group, Inc. has caused this Second Amendment to be executed by its duly authorized officer on this 24th day of October 1995. PEOPLES HERITAGE FINANCIAL GROUP, INC. By /s/ Carol L. Mitchell ------------------------------------ Name: Carol L. Mitchell Title: Senior Vice President and General Counsel 8 EX-10.(R)2 8 FIRST AMENDMENT TO PROFIT SHARING EMPLOYEE STOCK 1 EXHIBIT 10(r)(2) FIRST AMENDMENT TO THE PEOPLES HERITAGE FINANCIAL GROUP, INC. PROFIT-SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN The Peoples Heritage Financial Group, Inc. Profit-Sharing and Employee Stock Ownership Plan ("Plan") was last amended and restated effective generally January 1, 1989. The Plan is hereby amended in the following respects: i. The terms used in this Amendment shall have the meanings set forth in the Plan, unless the context indicates otherwise. ii. Section 1.11 is hereby amended to read as follows: "1.11 Earnings. The total compensation paid by the Company to the Employee for services rendered while a Participant that constitutes wages as defined in Section 3401(a) of the Code and all other payments made by the Company to an Employee for services rendered while a Participant for which the Company is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code without regard to any rules under Section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or service performed. Notwithstanding the forgoing to the contrary, Earnings (i) shall include elective contributions made by the Company on behalf of an Employee that are not includable in income under Section 125, Section 402(e)(3) or Section 402(h) of the Code; and (ii) shall be reduced by reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits. Notwithstanding the foregoing to the contrary, effective January 1, 1989, the annual Earnings of any Employee in excess of Two Hundred Thousand Dollars ($200,000.00) (or such higher amount as the Secretary of the Treasury may prescribe) shall not be taken into account under the Plan, and, effective January 1, 1994, the annual Earnings of any Employee in excess of One Hundred Fifty Thousand Dollars ($150,000.00) (or such higher amount as the Secretary may prescribe) shall not be taken into account under the Plan. In the event Earnings are determined based on a period of time which contains fewer than twelve (12) calendar months, the annual Earnings limit shall be an amount equal to the annual Earnings limit for the calendar year in which the period begins multiplied by a fraction, the numerator of which is the number of full calendar months and the denominator of which is twelve (12). For purposes of the annual Earnings limit, any Earnings paid to an Employee who is the spouse or a lineal descendant (who has not attained age nineteen (19) by the close of the Plan Year) of an Employee who is a five percent owner (as defined in Section 416(i) of the Code) or one of the ten (10) Highly Compensated Employees paid the highest earnings (as defined in Section 4.8(a)(5)) for the Plan Year shall be 2 treated as paid to or on behalf of such five percent owner or Highly Compensated Employee. If Earnings for a prior Plan Year are taken into account for any Plan Year, such Earnings shall be subject to the annual Earnings limit in effect for such prior Plan Year." iii. Section 1.31 is hereby amended to read as follows: "1.31 Plan Administrator. A committee of not less than four (4) individuals appointed by the Board of Directors." iv. Section 4.4 is hereby amended to read as follows: "4.4 Allocation of Company Contributions and Forfeitures. Company contributions and any Forfeitures from Participants' ESOP Accounts (whether in whole or fractional shares of Stock, cash or other property) during the Plan Year shall be allocated to the ESOP Stock Accounts and ESOP Cash Accounts, as the case may be, of Participants who completed at least 1,000 Hours of Service during such Plan Year and who were employed by the Company or an Affiliate on the last day of such Plan Year, or terminated employment during such year on account of death, Disability or Retirement. Such allocation shall be made in the same proportion that each such Participant's Earnings for the Plan Year bears to the total Earnings of all such Participants for the Plan Year." v. Section 4.8(a)(5) is hereby amended to read as follows: "(5) 'Section 415 Compensation' shall mean, with respect to a Limitation Year, the total compensation paid by an Employer to an Employee for services rendered while an Employee that constitutes wages as defined in Section 3401(a) of the Code, and all other payments by the Employer to an Employee for services rendered while an Employee for which the Employer is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code, without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or services performed. 'Limitation Year' shall mean the calendar year." vi. Section 6.6 Loans to Participants and all references thereto are hereby deleted. vii. Section 6.7 is hereby amended to read as follows: 6.7 Direct Rollovers. (a) Effective January 1, 1993, a Participant who is entitled to receive an eligible rollover distribution may elect to have such distribution (or a portion thereof not less than Five Hundred Dollars ($500.00)) made 2 3 directly to an eligible retirement plan ("direct rollover election"). An alternate payee who is entitled to receive an eligible rollover distribution pursuant to a qualified domestic relations order under Section 6.9 and who is the spouse or a former spouse of a Participant may make a direct rollover election as if such alternate payee were the Participant. A surviving spouse who is entitled to receive an eligible rollover distribution by reason of the Participant's death may make a direct rollover election; provided that such election is restricted to an eligible retirement plan that is an individual retirement account described in Section 408(a) of the Code or an individual retirement annuity described in Section 408(b) of the Code. (b) No earlier than ninety (90) days and no later than thirty (30) days before an eligible rollover distribution is to be made, the Plan Administrator shall provide the Participant, alternate payee, or surviving spouse, as the case may be, with a written explanation of: (1) the rules under which he may make a direct rollover election; (2) the legal requirement that federal income tax be withheld from the distribution if he does not elect a direct rollover; (3) the rules under which the amount that he actually receives will not be subject to federal income tax if such amount is transferred ("rolled over") within sixty (60) days after being received pursuant to Section 402(c) of the Code; (4) the rules, if applicable, for receiving special income tax averaging, or capital gain treatment, under Section 402(d) of the Code; and (5) the Plan provisions under which a direct rollover election with respect to one payment in a series of periodic payments will apply to all subsequent payments until such election is changed. Notwithstanding the foregoing to the contrary, if an eligible rollover distribution is one of a series of periodic payments, the explanation 3 4 required by this Paragraph (b) shall be provided annually as long as such payments continue. (c) A direct rollover election shall be made in such manner and at such time as the Plan Administrator shall prescribe, and shall include: (1) the name of the eligible retirement plan; (2) a statement that such plan is an eligible retirement plan; and (3) any other information necessary to permit a direct rollover by the means selected by the Plan Administrator. An election to make a direct rollover with respect to one payment in a series of periodic payments shall apply to all subsequent payments in the series until such election is changed; such change with respect to subsequent payments may be made at any time. (d) Notwithstanding Paragraph (b) to the contrary, if an individual, after receiving the written explanation required by subsection (b) affirmatively elects to make or not make a direct rollover, an eligible rollover distribution may be made less than thirty (30) days after the date such written explanation was given, provided the Plan Administrator has informed such individual, in writing, of his right to a period of at least thirty (30) days to make such election. (e) As used in this Section, the following terms shall have the following meanings: (1) 'Eligible Retirement Plan' shall mean (A) an individual retirement account, described in Section 408(a) of the Code; (B) an individual retirement annuity described in Section 408(b) of the Code (other than an endowment contract); (C) a trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code and which is part of a defined contribution plan described in Section 414(i) of the Code 4 5 that permits rollover contributions; or (D) an annuity plan described in Section 403(a) of the Code. (2) 'Eligible Rollover Distribution' shall mean a distribution from the Plan of Two Hundred Dollars ($200.00) or more, excluding the following: (A) a distribution that is one of a series of periodic payments (not less frequently than annually) made for a specified period of ten (10) years or longer, for the distributee's life expectancy (or the joint life expectancy of the distributee and his designated Beneficiary), or for the distributee's life (or the joint lives of the distributee and his designated Beneficiary); (B) a required distribution pursuant to Section 401(a)(9) of the Code." viii. Section 7.1 is hereby amended to read as follows: "7.1 Plan Administrator. The general administration of the Plan shall be vested in the Plan Administrator, who shall be a named fiduciary for purposes of Section 402(a) (2) of ERISA. In performing its duties, the Plan Administrator shall have the fullest discretion permitted under ERISA and the provisions of this Plan, and shall have all powers granted by the provisions of the Plan and the Trust Agreement except those specifically granted or allocated to the Board of Directors, to the Trustees, and any Investment Manager." ix. Section 7.2(i) of the Plan is hereby amended to read as follows: "(i) to select any investment managers;" x. Section 7.3 is hereby amended to read as follows: "7.3 Delegation of Ministerial Duties. The Plan Administrator may delegate to any of its members or to any Employee or Employees, severally or jointly, the authority to perform any ministerial act in connection with the administration of the Plan." xi. Section 9.1(a)(3) is hereby amended to read as follows: 5 6 "(3) decrease a Participant's ESOP Accounts balance (except to the extent permitted under Section 412(c)(8) of the Code), eliminate an optional form of benefit (except to the extent permitted by regulations), or have the effect of decreasing a Participant's Vested Interest determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective." xii. Section 9.1 is amended by adding a new subsection (d) to read as follows: "(d) If the vesting schedule in effect under the Plan is amended, each Participant who has completed at least three (3) Years of Service may elect to have his or her Vested Interest determined without regard to such amendment. The Plan Administrator shall promptly give each such Participant written notice of the adoption of any such amendment and the availability of the election to have his or her Vested Interest determined without regard to such amendment. An election by a Participant shall be in writing and shall be effective if filed with the Plan Administrator at any time during the period beginning with the date such amendment is adopted and ending on the later of (i) the date which is 60 days after the day such amendment is adopted, (ii) the date which is 60 days after the day such amendment becomes effective, or (iii) the date which is 60 days after the day the Participant receives written notice of such amendment. An election once made shall be irrevocable. For purposes of this Section, a Participant shall be considered to have completed 3 Years of Service if the Participant has completed 3 Years of Service prior to the expiration of the period in which an election could be made." xiii. This Amendment shall be effective January 1, 1989. IN WITNESS WHEREOF, Peoples Heritage Financial Group, Inc. has caused this Amendment to be executed by its duly authorized officer on this 23rd day of May 1995. PEOPLES HERITAGE FINANCIAL GROUP, INC. By /s/ Carol L. Mitchell -------------------------------- Name: Carol L. Mitchell Title: Senior Vice President and General Counsel 6 EX-10.(R)3 9 SECOND AMENDMENT TO PROFIT SHARING EMPLOYEE STOCK 1 EXHIBIT 10(r)(3) SECOND AMENDMENT TO THE PEOPLES HERITAGE FINANCIAL GROUP, INC. PROFIT-SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN The Peoples Heritage Financial Group, Inc. Profit-Sharing and Employee Stock Ownership Plan ("Plan") was last amended and restated effective generally January 1, 1989. The Plan was thereafter amended effective the same date, and is hereby further amended in the following respects: xiv. The terms used in this Amendment shall have the meanings set forth in the Plan, unless the context indicates otherwise. xv. Section 1.41 is hereby amended by adding a new paragraph at the end thereof to read as follows: "All Years of Service with Mid Maine Savings Bank, FSB prior to the date on which such bank was acquired by the Company, and all Years of Service with North Conway Bank prior to the date on which such bank was acquired by the Company, shall be recognized for participation and vesting purposes under this Plan." xvi. Article 2 is hereby amended by adding a new Section 2.5 to read as follows: "2.5 Special Participation Rules. Effective August 1, 1994, each Employee who was previously employed by Mid Maine Savings Bank, FSB, immediately prior to the date on which such bank was acquired by the Company, shall be eligible to participate in the Plan as of the later of August 1, 1994, or the first day of the Calendar Quarter coincident with or next following completion of a Year of Service. Effective July 1, 1995, each Employee who was previously employed by North Conway Bank, immediately prior to the date on which such bank was acquired by the Company, shall be eligible to participate in the Plan as of the later of July 1, 1995, or the first day of the Calendar Quarter coincident with or next following completion of a Year of Service. For purposes of determining whether an Employee described in this Section has completed a Year of Service, his service with Mid Maine Savings Bank or North Conway Bank shall be taken into account." xvii. Section 6.4(b) is hereby amended to read as follows, effective as of the adoption date of this Second Amendment: "(b) Any distribution to a Participant who has a Vested Interest that exceeds $3,500, or that exceeded $3,500 at the time of any prior distribution, shall require such Participant's written consent if such distribution commences prior to Normal Retirement Age. With regard to such consent: 2 (1) The Participant shall receive the written notice described in Treasury Regulation 1.411(a)-11(c)(2)(i), including notice of his right to defer payment of benefits under this Article, no less than thirty days and no more than ninety days before the date on which such distribution is paid or commences to be paid. If a Participant declines or fails to consent, it shall be deemed to be an election to defer payment of such benefits. However, any election to defer payment shall not apply with respect to distributions which are required under Section 6.4(d). (2) Notwithstanding the foregoing to the contrary, if a Participant, after receiving written notice under Paragraph (b)(1), affirmatively elects a distribution, then the distribution may be paid or may commence to be paid less than thirty days after the date such written explanation was given, provided the Plan Administrator has informed such Participant, in writing, of his right to a period of at least thirty days to consider whether to consent to the distribution. xviii. Except as otherwise provided herein, this Amendment shall be effective January 1, 1995. IN WITNESS WHEREOF, Peoples Heritage Financial Group, Inc. has caused this Amendment to be executed by its duly authorized officer on this 24th day of October 1995. PEOPLES HERITAGE FINANCIAL GROUP, INC. By /s/ Carol L. Mitchell -------------------------------- Name: Carol L. Mitchell Title: Senior Vice President and General Counsel 2 EX-13 10 ANNUAL REPORT 1 EXHIBIT 13 [GRAPHIC OMITTED] Peoples Heritage Financial Group, Inc. 1995 Annual Report 2 At Peoples Heritage, we achieved another record earnings year by making banking easier and more convenient for our customers. With our customer-driven approach, we're continuing to offer new services, build our lines of business, and expand our markets. Because for us, success comes one customer at a time. Table of Contents ANOTHER RECORD EARNINGS YEAR 1 Selected financial highlights at Peoples Heritage Financial Group, Inc. LETTER TO SHAREHOLDERS 2 A look at what made 1995 a year of accomplishment by President and CEO William J. Ryan. PERFORMANCE 4 The key financial indicators of our impressive performance across the board. STRATEGY 6 How we've taken advantage of short-term opportunity while continuing to build for long-term growth. LINES OF BUSINESS 8 Highlights of our 1995 business growth as we find new ways to attract customers and broaden customer relationships. MARKETS 10 An overview of our significant expansion into New Hampshire and continued growth in Maine. LOOKING AHEAD 12 How our unique role as a community bank can continue to contribute to our success as we grow throughout northern New England. SELECTED 5-YEAR CONSOLIDATED FINANCIAL AND OTHER DATA 14 MANAGEMENT'S DISCUSSION AND ANALYSIS 15 FINANCIAL STATEMENTS 30 CORPORATE DIRECTORY 52
PEOPLES HERITAGE FINANCIAL GROUP, INC. Peoples Heritage Financial Group, Inc. is a multi-bank and financial services holding company for Peoples Heritage Bank in Maine and First Coastal Banks, Inc., the parent company of The First National Bank of Portsmouth in New Hampshire. 3 FINANCIAL HIGHLIGHTS Another Record Earnings Year By setting our goals high and working hard to achieve them, Peoples Heritage again turned in an impressive financial performance. 1995 earnings were up 34% over our record-breaking 1994 results. And we finished the year with our stock price at an all-time high-- up nearly 90% for the year. In 1995, we gained important market share, increased our loans, and added deposits. We raised our return on assets to a record level, increased our return on equity, and improved asset quality. We wrote more home mortgages, raised net interest income and increased our fee income. At the same time, we maintained our focus on strong expense control and efficiency to deliver a solid financial performance across the board. [BAR GRAPHS OMITTED] 1 4 [PHOTO OF WILLIAM J. RYAN] "Our strategic plan is on course as we transition from Maine's premier community bank to build northern New England's premier community banking franchise." Dear Shareholders: I am pleased to report that 1995 was another record earnings year, up 34% over 1994's record-setting earnings. Peoples Heritage achieved impressive results on virtually every significant measure of our company's financial performance. Our record earnings were fueled by many factors, including our growth in net interest income and fee income combined with strong expense control. 1995 has been a remarkable year by more than just financial measures. We have continued to successfully expand our Maine and New Hampshire franchises to increase our future earnings potential. In Maine, we increased our market share to become the state's second largest deposit bank. We also doubled our ATM network, made a strong move into telephone banking, and entered new communities to expand our presence across the state. In New Hampshire, we acquired North Conway Bank and agreed to purchase five Shawmut branches. Most significantly, we agreed to buy the $1 billion Bank of New Hampshire with an agreement that is structured to ensure that net earnings will increase during the first year. Our New Hampshire expansion is part of our ongoing effort to increase both earnings per share and the rate of return that we generate on shareholders' equity. Clearly, our strategic plan is on course as we transition from Maine's premier community bank to build northern New England's premier community banking franchise. The acquisition of Bank of New Hampshire will make us the third largest bank in New Hampshire, balancing our number two position in Maine and giving 2 5 us significant earnings potential in two states. As an innovator in all our markets, Peoples Heritage is constantly changing in very positive ways with new services to serve our customers better. These include our new PhoneBank, a new supermarket banking office, and our pace-setting Sunday banking hours. At the same time, we remain steadfast in our commitment to our customers and what it means to be a community bank. For all of us at Peoples Heritage, that means a focus on customer service, local decision-making, and contributing to the community. In addition to our ongoing support of charitable causes, our commitment to our customers and the communities we serve was recognized by a variety of organizations in 1995. We were commended by the Newcomen Society as Maine's business of the year, and by the Finance Authority of Maine for our commitment to Maine businesses. The Small Business Administration recognized Peoples Heritage as a leading "LowDoc" lender, and IDC Financial Publishing recognized us with its superior ranking as one of the safest institutions in the United States. While focusing on our long-term vision of expanding our community banking franchise, we were also flexible enough to seize short-term opportunity. With marketplace disruption caused by mergers and cutbacks at competitive financial institutions, we acted swiftly and aggressively to attract new customers to Peoples Heritage. Customers responded in great numbers, won over by our reputation for customer service, and attracted by products like our innovative relationship accounts which reward customers for maintaining higher balances and multiple account relationships. Our initiatives to strengthen and expand our customer relationships will play an even greater role in the coming year as we cross sell products and services to current customers, while bringing superior service and products to our expanded customer base in New Hampshire. As we look ahead to 1996 and beyond with a sense of anticipation and promise, I wish to thank all of you who made 1995 a year of accomplishment -- our board of directors, our enthusiastic and dedicated employees, our loyal customers, and our shareholders for your continued support. Sincerely yours, /s/ WILLIAM J. RYAN - ------------------- William J. Ryan Chairman, President and Chief Executive Officer [BAR GRAPH OMITTED] 3 6 [GRAPHIC OMITTED] PERFORMANCE STRENGTH IN NUMBERS Our 1995 financial results speak to our financial strength, as well as our ability to achieve these results while expanding our markets to position Peoples Heritage for continued growth in northern New England. We remain on course as we strive to become one of the nation's top-performing financial organizations. RECORD EARNINGS - Peoples Heritage Financial Group achieved record annual net earnings of $34.0 million, or $2.05 per share in 1995. Net earnings were up 33.8% from 1994's annual record net earnings of $25.4 million, or $1.52 per share. RETURN ON ASSETS - Our return on average assets (ROA) of 1.17% in 1995 was up from 0.95% in 1994. In addition, we reported a 1.25% ROA for our fourth quarter, establishing a new quarterly record. RETURN ON EQUITY - In 1995, our return on average equity (ROE) was 13.76%, up from 11.35% in 1994, another record performance. EFFICIENCY RATIO - Our efficiency ratio, a measure of how efficient we are in generating revenue, improved to 63.3%, down from 71.1% in 1994. For the fourth quarter of 1995, our efficiency ratio was 61.3%. STRONG MARGINS - In 1995, the net interest margin was 4.62%, up from 4.41% in 1994. Our net interest margin has continued to benefit from higher levels of earning assets as we've continued to increase earnings and reduce our level of nonperforming assets. MORE LOANS - Net loans and leases increased 5.89% in 1995. Contributing factors included the success of our fall Home Equity campaign and our ongoing initiatives in business lending at our banking centers. 4 7 [GRAPHIC OMITTED] INCREASED FEE INCOME - Fee income increased to $21.8 million in 1995 from $18.5 million the previous year. This increase of 17.86% was largely due to our significant growth in mortgage servicing and strong originations. CAPITALIZATION - We ended 1995 with a leverage capital ratio of 8.28%, up from 8.06% at the end of 1994. This greatly exceeds the 5% level at which banks are considered "well capitalized" and reflects our increased earnings and continued reductions in nonperforming assets. RECORD DEPOSITS - In 1995, we attracted a record level of deposits. In Maine, we moved from third to the second largest deposit bank in the state. By capitalizing on disruptions in the marketplace, we were able to attract customers with our relationship banking products and reputation for quality customer service. ASSET QUALITY IMPROVEMENTS - We significantly improved our asset quality in 1995. Nonperforming assets were $41.6 million, or just 1.35% of total assets, down from $53.0 million, or 1.9% of total assets in 1994. More than $5.0 million of the twelve-month reduction occurred in the fourth quarter of 1995. INCREASED DIVIDEND - Our dividend payout has increased steadily from 6 cents per share for the first quarter of 1994 to 16 cents per share declared for the fourth quarter of 1995. [BAR GRAPHS OMITTED] 5 8 [GRAPHIC OMITTED] STRATEGY GROWING OPPORTUNITY The success of our core strategy lies in its simplicity: serve our customers better. For while we expand our markets, build our lines of business, and offer new integrated services, we remain customer-driven in all we do. Our strategic planning sessions and task forces regularly examine every area of the Company to find new ways to improve our performance for our customers, and in turn, for our shareholders. CUSTOMER FOCUS - Our success at Peoples Heritage is rooted in our unique role as a true community banking organization. We listen to our customers to understand their needs. So we can provide the kinds of products and services that will fit their lives and values -- and set us apart from our competition. EXPANDING OUR REACH - As we become northern New England's premier community bank, we're expanding our reach with market growth in both Maine and New Hampshire. Fortunately, the efficiency of our advanced operations center continues to help us easily manage our growth and operate cost-effectively as we serve greater numbers of customers. STRENGTHENING RELATIONSHIPS - While bringing aboard new customers, we're also strengthening and deepening our current relationships by cross selling our services. In addition, our CARE (Customer and Account Retention Excellence) program helps all employees identify accounts that may be at risk and offers effective retention strategies. GROWING CUSTOMER BASE - In our Maine banking market, we turned unrest into opportunity. With market disruption from mergers, cutbacks, and bank sales, customers were being shuffled about. We responded with a targeted advertising appeal, the right mix of products, and our reputation for service. The result was over 2,000 new customers. 6 9 [GRAPHIC OMITTED] DOUBLED ATM NETWORK - As part of our commitment to make banking more accessible and convenient for our customers, Peoples Heritage more than doubled its ATM network in 1995. We added 35 ATM machines in supermarkets, banking centers, and at freestanding locations throughout our market area. So Peoples customers can bank where and when they want. LAUNCHED PHONE BANK - Our new PhoneBank gives Peoples Heritage a distinct competitive advantage. It offers convenience for our customers, while enabling us to increase sales and service productivity. Through an automated system or a customer service representative, customers can access account balances and information, and even apply for a loan. SUPERMARKET BANKING - With the busy pace of modern life, customers appreciate the ability to bank where they shop. As the first bank to open a supermarket banking center in Maine, Peoples Heritage added a new Waterville supermarket banking center in 1995. SUNDAY HOURS - Because our customers don't always have time to get to the bank, Peoples Heritage offers Sunday hours at numerous branch locations. We also offer expanded Saturday hours and expanded weekday hours at many locations. It's one more way to make sure we're there for our customers. [BAR GRAPH OMITTED] 7 10 [GRAPHIC OMITTED] BUSINESS LINES BROADENING OUR RELATIONSHIPS Much of our success stems from our ability to maximize our growth potential through our core competencies in retail banking, commercial banking and mortgage banking. We also recognize the opportunity to grow and integrate many of our business lines by packaging our services to meet our customers' financial needs in every aspect of their lives. By broadening our relationships with our consumer, business, and public sector customers, we broaden our own potential for growth. SMALL BUSINESS LENDING - Peoples Heritage continues to offer fast, local decision-making and a simplified application process to make our banking centers a convenient source for small business lending. In 1995, our efforts were recognized with Certified Lender status from the Small Business Administration (SBA) and recognition as a leading SBA "LowDoc" Lender. In addition, Peoples Heritage was recognized by the Finance Authority of Maine for our commitment to Maine's small businesses. GROWTH IN COMMERCIAL LENDING - Taking advantage of our lending expertise and local decision-making, our commercial lending and business loan portfolio grew 25% in 1995 to reach $800 million. Peoples Heritage offers a full range of commercial lending services throughout Maine with an increasing presence in New Hampshire. RELATIONSHIP BANKING SUCCESS - Our relationship banking programs have succeeded beyond expectations. While strengthening ties with our customers, our new Signature Banking program attracted $200 million in deposits in 1995. The more recent introduction of our New Hampshire bank's First Charter Banking program has also been a great success. Both programs reward customers for multiple account relationships. INCREASED MORTGAGE LENDING - Peoples Heritage originated more than $650 million in mortgage loans in 1995. We're the 80th largest issuer of mortgage-backed securities in the nation. In addition, we originate more mortgage loans than any other bank in Maine. And we service more than $2.5 billion in mortgages for others. NEW TRUST SERVICES - With the launch of our Trust and Investment Management Services at the start of the year, Peoples Heritage rounds out its capabilities as a full- 8 11 [GRAPHIC OMITTED] service institution for the people and businesses of northern New England. Trust services represent another opportunity for relationship building with our customers and are a natural extension of Peoples' mission as a customer-driven bank. INVESTMENT PRODUCTS AT BANKING CENTERS - To make investing easier and more accessible for our customers, we offer investment products through our banking centers. So our customers can take care of their investments right where they bank. It's another way we're expanding customer relationships and developing new ones. DOUBLED CREDIT CARD FEE INCOME - In 1995, we established a new relationship with MBNA, the world's second-largest bank credit card lender. With MBNA, we more than doubled our credit card fee income through various telemarketing and direct mail campaigns. GROWTH IN PUBLIC FINANCE - The revitalized Public Finance Division of Peoples Heritage is a growing provider of investment and loan products to northern New England's cities, towns, and other public bodies. The division set ambitious goals for 1995 and delivered by increasing public sector deposits from $82.7 million in January 1995 to $125 million by December 1995, and more than doubling loan volume from $13.4 million to $27.6 million. [BAR GRAPH OMITTED] 9 12 [GRAPHIC OMITTED] MARKETS EXTENDING OUR REACH Peoples Heritage began 1995 as the premier community bank in both Maine and seacoast New Hampshire with our New Hampshire bank, The First National Bank of Portsmouth. We ended the year with plans to become the premier community banking franchise in northern New England with an agreement to acquire the $1 billion Bank of New Hampshire. As we continue our market expansion, we intend to build on our customer-driven approach to keep lending decisions, community involvement choices and service as close to the customer as possible. As a result, we not only increase our market reach, but our opportunities for success. GROWTH IN NEW HAMPSHIRE - With several major developments in 1995, Peoples Heritage is expanding its New Hampshire franchise from a regional seacoast area bank to a statewide presence. We reached agreement to acquire the Bank of New Hampshire Corporation, acquired North Conway Bank in the Mount Washington Valley area of the state, and reached agreement to purchase five New Hampshire branches of Shawmut Bank, NH. AGREEMENT TO ACQUIRE BANK OF NH - When the acquisition of Bank of New Hampshire is completed as expected in the second quarter of 1996, we will be the third largest bank in New Hampshire with a virtual statewide reach and a strong presence in the state's most important markets. Peoples Heritage will climb to more than $4 billion in assets as the sixth-largest bank holding company in New England. PURCHASE OF NORTH CONWAY BANK - This past year Peoples Heritage acquired Bankcore, Inc., the holding company for North Conway Bank. The acquisition added five full-service banking offices and marked our entry into another key market area in New Hampshire. 10 13 [GRAPHIC OMITTED] AGREEMENT TO PURCHASE FIVE SHAWMUT BRANCHES - In 1995, Peoples Heritage also reached agreement to acquire five branches of Shawmut Bank NH, that were being divested as part of the merger of Fleet Financial Group and Shawmut National Corporation. The purchase was finalized in February, 1996. The branches added total deposits of $160 million and add an important presence in the Merrimack Valley. This region includes some of New Hampshire's most prosperous communities and key business areas. EXPANSION IN MAINE - Building on our commitment to provide community banking services throughout Maine, Peoples Heritage Bank acquired seven branches in Aroostook County from Fleet Financial Group. In addition to a greater presence in northern Maine, the acquisition increased deposits by $56 million. In 1995, Peoples also opened a new banking center in Augusta, the state's capital, and a supermarket banking center in Waterville. [GRAPHIC OMITTED] MAINE -- 61 Branches NEW HAMPSHIRE -- 21 Branches* *Includes five former Shawmut Bank NH branches acquired February 16, 1996. Merger of twenty-nine Bank of New Hampshire branches anticipated in second quarter, 1996. 11 14 [GRAPHIC OMITTED] LOOKING AHEAD BUILDING ON OUR SUCCESS At Peoples Heritage, our success is built on strong, loyal customer relationships. We understand that what sets us apart from our competitors is more than the services we offer. It's the little things we do to serve our customers better every day. It's the extra effort at every level of our organization that shows we're willing to do more. And it's how we intend to continue growing in the days ahead. After all, we know there's no shortcut to success. It happens one customer at a time. UNDERSTANDING OUR ROLE - Staying close to the customer is important at Peoples Heritage. That not only means meeting our customers' financial needs, but being a responsible, involved neighbor in every community we serve. With a year of activities like our "Strike Out Cancer in Kids" program, "Peoes Cares for Kids CD," and "Neighborhood Cause" programs, Peoples Heritage continued to demonstrate its commitment to community needs. In 1996, our new "Peoples Promise" campaign will lend new focus to our corporate giving by supporting organizations that improve the lives of children within our communities. GROWING WITH OUR CUSTOMERS - In 1995, we successfully capitalized on market unrest as large regional banks in northern New England changed ownership and customers reevaluated their banking relationships. Through our marketing and product initiatives, we were able to strengthen our competitive position. Looking ahead in 1996, we aim to continue to attract new customers, but just as importantly, build on our current relationships by turning single service customers into multi-service customers. INCENTIVE COMPENSATION - We believe that Peoples Heritage employees are the most dedicated, motivated and enthusiastic in the industry. While we may be biased, it's the spirit of our employees that makes Peoples what it is. That's something our customers can see and feel just by walking into a banking center. Now, with our newly revitalized performance pay plan, every employee at Peoples gets the opportunity to earn more through higher performance. 12 15 [GRAPHIC OMITTED] TECHNOLOGY UPGRADES - To provide the best service, Peoples Heritage employees need the technological tools that will allow them to address needs quickly and accurately. In 1995, we implemented numerous technology upgrades throughout our organization. Our Technology Planning Committee is continually selecting and prioritizing new project plans to help Peoples Heritage improve operational efficiency in the future. STRATEGIC PLANNING - Strategic planning is vital to our solid financial performance and enables us to focus our goals as we push ourselves to higher levels. Our planning encompasses every area of our business, from delivering excellent customer service to maximizing our growth potential to reaching key financial milestones. With a three to five year planning horizon, we continue to update our goals and strategies as we progress to keep ourselves focused on new heights. SHAREHOLDER VALUE - Peoples Heritage ended 1995 with our stock price up nearly 90% for the year. This level of increase was the third highest among New England banking companies -- and one of the only two banks to achieve a higher level of increase was the Bank of New Hampshire, which we have agreed to merge with our current New Hampshire bank. As we broaden our banking franchise, we will continue to seek business and earnings growth that will generate total returns for our shareholders. [BAR GRAPH OMITTED] 13 16
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL AND OTHER DATA (Dollars in Thousands, Except Per Share Data) December 31, - ------------------------------------------------------------------------------------------------------------------------------------ Financial Condition Data 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 3,078,669 $ 2,783,182 $ 2,640,269 $ 2,546,754 $ 2,735,272 Total loans and leases, net 2,168,499 2,047,794 1,858,086 1,817,258 1,976,258 Debt and equity securities, net (1) 485,218 429,003 459,075 372,509 369,231 Deposits 2,361,965 2,063,767 2,074,491 2,079,624 2,292,766 Borrowings 412,816 461,387 324,669 248,777 253,766 Shareholders' equity 270,468 229,265 219,111 199,317 171,478 Nonperforming assets 41,629 53,014 90,626 150,088 206,554 Allowance for loan and lease losses 49,138 50,484 52,804 54,604 67,956 - ------------------------------------------------------------------------------------------------------------------------------------ Operations Data Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Interest and dividend income $ 235,599 $ 196,396 $ 181,033 $ 199,690 $ 256,567 Interest expense 111,063 87,274 89,435 119,147 174,736 ------- ------ ------ ------- ------- Net interest income 124,536 109,122 91,598 80,543 81,831 Provision for loan losses 2,430 1,857 9,779 25,225 58,938 ----- ----- ----- ------ ------ Net interest income after provision for loan losses 122,106 107,265 81,819 55,318 22,893 ------- ------- ------ ------ ------ Net securities gains (losses) 116 (419) 1,001 2,851 (1,603) Net gains on sales of consumer loans -- 33 2,576 -- -- Other noninterest income 21,710 18,904 16,127 17,599 14,244 Noninterest expenses 92,657 90,758 87,743 86,920 78,482 ------ ------ ------ ------ ------ Income (loss) before provision for income taxes 51,275 35,025 13,780 (11,152) (42,948) Income tax expense (benefit) 17,243 9,588 (2,339) 53 (14,586) ------ ----- ------ -- ------- Net income (loss) $ 34,032 $ 25,437 $ 16,119 $ (11,205) $ (28,362) =========== =========== =========== =========== =========== Earnings (loss) per share $ 2.05 $ 1.52 $ 0.97 $ (1.18) $ (3.02) Dividends per share $ 0.52 $ 0.24 $ 0.00 $ 0.00 $ 0.06 - ------------------------------------------------------------------------------------------------------------------------------------ Other Data (2) At or For the Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin (3) 4.62% 4.41% 3.93% 3.36% 3.21% Interest rate spread (3) 4.06% 4.01% 3.60% 3.13% 2.89% Book value per share at end of period $ 15.96 $ 13.72 $ 13.17 $ 12.05 $ 18.25 Tangible book value per share at end of period $ 14.71 $ 12.59 $ 11.92 $ 10.61 $ 15.44 Return on average assets 1.17% 0.95% 0.63% -0.43% -1.01% Return on average equity (4) 13.76% 11.35% 7.83% -6.80% -16.11% Tier I leverage capital ratio at end of period 8.28% 8.06% 7.59% 6.93% 5.26% Dividend payout ratio 25.38% 15.55% 0.00% 0.00% -1.95% Price to book value at end of period 142.54% 87.46% 91.10% 80.90% 14.38% Nonperforming assets as a % of total assets at end of period 1.35% 1.90% 3.43% 5.89% 7.55% Allowance for loan losses as a % of nonperforming loans at end of period 140.28% 119.41% 85.95% 61.26% 8.57% Allowance for loan losses as a % of total loans at end of period 2.22% 2.415 2.76% 2.92% 3.32% Full service banking offices at end of period 77 67 70 72 75 - ------------------------------------------------------------------------------------------------------------------------------------ (1) All securities were classified as available for sale at December 31, 1995, 1994 and 1993. (2) Ratios are based on average daily balances during the respective periods. (3) Fully-taxable equivalent basis, excludes effect of unrealized gains or losses on securities available for sale. (4) Excludes effect of unrealized gains or losses on securities available for sale.
14 17 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Overview of Company. Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank and financial services holding company incorporated under the laws of the State of Maine and headquartered in Portland, Maine. The Company's direct subsidiaries, both of which are wholly-owned, are Peoples Heritage Bank (the "Bank") based in Portland, Maine, and First Coastal Banks, Inc. ("First Coastal") based in Portsmouth, New Hampshire. First Coastal wholly owns The First National Bank of Portsmouth ("Portsmouth") headquartered in Portsmouth, New Hampshire. Business Strategy. The principal business of the Company consists of attracting deposits from the general public through its offices and using such deposits and other sources of funds to originate residential mortgage loans, commercial business loans and leases, commercial real estate loans and a variety of consumer loans. The Company also invests in mortgage-backed securities and securities issued by the United States Government and agencies thereof. In addition, the Company engages in the sale of other financial products (annuities and mutual funds), provides trust services, and services residential mortgage loans for investors. The Company's goal is to sustain profitable, controlled growth by focusing on increased loan and deposit market share in Maine and New Hampshire, developing new financial products, services and delivery channels, closely managing yields on earning assets and rates on interest-bearing liabilities, increasing non-interest income through expanded trust and investment advisory services and mortgage servicing operations and controlling growth of noninterest expenses. It is also part of the business strategy of the Company to supplement internal growth with targeted acquisitions of other banking or thrift institutions in Northern New England. During the period covered by this discussion, the Company engaged in numerous merger and acquisition related activities. For further information, see Note 18, "Mergers and Acquisitions," to the consolidated financial statements and "Acquisitions" below. Maine and New Hampshire Economies. The success of the Company is closely linked to the overall health and vitality of the Maine and New Hampshire economies. Starting in the late 1980s through 1992 the region experienced an economic decline, including severe problems in the local real estate markets. During this period excess real estate inventory contributed substantially to increases in the Company's nonperforming assets. Since 1992 the Company has been able to significantly reduce its nonperforming assets and related costs. The Company believes that Maine, New Hampshire and New England in general have witnessed slow but steady economic growth since 1992. While economic activity is just beginning to reach levels experienced in the late 1980s, the Northern New England economy appears stable at the end of 1995. 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. REVIEW OF FINANCIAL STATEMENTS The discussion and analysis which follows focuses on the factors affecting the Company's financial condition at December 31, 1995 and 1994 and financial results of operations during 1995, 1994 and 1993. The consolidated financial statements and related notes beginning on page 30 of this report should be read in conjunction with this review. Certain amounts in years prior to 1995 have been reclassified to conform to the 1995 presentation. RESULTS OF OPERATIONS Overview. The Company reported net income of $34.0 million in 1995 versus net income of $25.4 million in 1994 and $16.1 million in 1993. Earnings per share in 1995 was $2.05 versus $1.52 in 1994 and $.97 in 1993. Return on average assets was 1.17% in 1995 compared with .95% in 1994 and .63% in 1993. Return on average equity was 13.76% in 1995 compared to 11.35% in 1994 and 7.83% in 1993. The primary reasons for the improved results in 1995 were the improvement in net interest income, increases in mortgage banking services and customer services income, a decrease in collection and carrying costs related to a reduction in nonperforming assets, and a decrease in deposit assessment expense, which were offset in part by higher salary and employee benefit costs and income tax expense. Overall, the Company was able to increase revenue, both net interest income and noninterest income, at a faster rate than the increase in operating expenses in 1995. The operating results of the Company depend greatly on its net interest income, which is the difference between interest and dividend income on earning assets, which consist primarily of loans and leases and securities, and interest expense on interest-bearing liabilities, which consist primarily of deposits and borrowings. The Company's results of operations also are affected by the provision for loan losses, resulting from the Company's assessment of the adequacy of the allowance for loan losses, the level of its other noninterest income, including gains and losses on the sales of loans and securities, noninterest expenses, and income tax expense and benefits. Each of these principal components of the Company's operating results is discussed below. Net Interest Income. Net interest income was $124.5 million, $109.1 million and $91.6 million in 1995, 1994 and 1993, respectively. Net interest income changes are caused by interest rate movements, changes in the amounts and the mix of earning assets and interest-bearing liabilities, and changes in the level of nonearning assets and noninterest-bearing liabilities. 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 15 18 Peoples Heritage Financial Group, Inc. and Subsidiaries - -------------------------------------------------------------------------------- liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods. 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) nonaccrual loans have been included in the appropriate average balance loan category, but unpaid interest on nonaccrual loans has not been included for purposes of determining interest income.
- -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------- AVERAGE YIELD/ BALANCE INTEREST RATE - -------------------------------------------------------------------------------- Loans and leases: (1) Residential real estate mortgages $ 674,008 $ 54,516 8.09% Commercial real estate mortgages 604,891 60,226 9.96 Commercial business loans and leases 303,607 30,481 10.04 Consumer loans and leases 627,394 59,353 9.46 -------- ----- Total loans and leases 2,209,900 204,576 9.26 --------- ------- Investment securities (2) 484,082 30,460 6.29 Federal funds sold 24,755 1,527 6.17 Total earning assets 2,718,737 236,563 8.70 --------- ------- Nonearning assets (2) 184,152 ------- Total assets $2,902,889 ========== Interest-bearing deposits: Regular savings $ 319,916 9,207 2.88 NOW accounts 195,267 2,418 1.24 Money market access accounts 367,531 14,304 3.89 Brokered deposits -- -- -- Certificates of deposit 1,080,384 60,242 5.58 --------- ------ Total interest-bearing deposits 1,963,098 86,171 4.39 Borrowed funds 429,919 24,892 5.79 ------- ------ Total interest-bearing liabilities 2,393,017 111,063 4.64 --------- ------- Demand deposit accounts 228,141 Other liabilities (2) 32,797 Shareholders' equity (2) 248,934 ------- Total liabilities and shareholders' equity $2,902,889 ========== Net earning assets $ 325,720 ========== Net interest income (fully-taxable equivalent) 125,500 Less: fully-taxable equivalent adjustments (964) -------- Net interest income $124,536 ======== Net interest rate spread (fully-taxable equivalent) 4.06 Net interest margin (fully-taxable equivalent) 4.62 - -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------- Average Yield/ Balance Interest Rate - -------------------------------------------------------------------------------- Loans and leases: (1) Residential real estate mortgages $ 630,386 $ 46,575 7.39% Commercial real estate mortgages 567,758 50,181 8.84 Commercial business loans and leases 245,268 22,851 9.32 Consumer loans and leases 565,960 50,751 8.97 ------- ------ Total loans and leases 2,009,372 170,358 8.48 --------- ------- Investment securities (2) 467,153 26,215 5.61 Federal funds sold 8,751 386 4.41 Total earning assets 2,485,276 196,959 7.93 --------- ------- ---- Nonearning assets (2) 189,720 ------- Total assets $2,674,996 ========== Interest-bearing deposits: Regular savings $ 293,943 8,291 2.82 NOW accounts 174,275 2,915 1.67 Money market access accounts 313,773 8,576 2.73 Brokered deposits -- -- -- Certificates of deposit 1,065,401 48,442 4.55 --------- ------ Total interest-bearing deposits 1,847,392 68,224 3.69 Borrowed funds 378,849 19,050 5.03 ------- ------ Total interest-bearing liabilities 2,226,241 87,274 3.92 --------- ------ Demand deposit accounts 189,133 Other liabilities (2) 226,845 ------- Total liabilities and shareholders' equity $2,674,996 ---------- Net earning assets $ 259,035 ========== Net interest income (fully-taxable equivalent) 109,685 Less: fully-taxable equivalent adjustments (563) -------- Net interest income $109,122 ======== Net interest rate spread (fully-taxable equivalent) 4.01 Net interest margin (fully-taxable equivalent) 4.41 - -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1993 - -------------------------------------------------------------------------------- Average Yield/ Balance Interest Rate - -------------------------------------------------------------------------------- Loans and leases: (1) Residential real estate mortgages $ 530,355 $ 42,588 8.03% Commercial real estate mortgages 574,682 45,731 7.96 Commercial business loans and leases 256,965 21,562 8.39 Consumer loans and leases 538,103 47,595 8.84 ------- ------ Total loans and leases 1,900,105 157,476 8.29 --------- ------- Investment securities (2) 416,280 23,130 5.56 Federal funds sold 25,988 807 3.11 Total earning assets 2,342,373 181,413 7.74 --------- ------- Nonearning assets (2) 203,672 ------- Total assets $ 2,546,045 =========== Interest-bearing deposits: Regular savings $ 240,967 6,891 2.86 NOW accounts 181,810 3,566 1.96 Money market access accounts 407,922 11,988 2.94 Brokered deposits 15,000 550 3.67 Certificates of deposit 1,040,083 51,733 4.97 --------- Total interest-bearing deposits 1,885,782 74,728 3.96 Borrowed funds 272,679 14,707 5.39 ------- Total interest-bearing liabilities 2,158,461 89,435 4.14 --------- Demand deposit accounts 163,181 Other liabilities (2) 18,567 Shareholders' equity (2) 205,836 -- ------- Total liabilities and shareholders' equity $ 2,546,045 =========== Net earning assets $ 183,912 =========== Net interest income (fully-taxable equivalent) 91,978 Less: fully-taxable equivalent adjustments (380) ---- Net interest income $ 91,598 ======== Net interest rate spread (fully-taxable equivalent) 3.60 Net interest margin (fully-taxable equivalent) 3.93 (1) Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans. (2) Excludes effect of unrealized gains or losses.
16 19 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, 1995 vs 1994 Year Ended December 31, 1994 vs 1993 Increase (Decrease) Due to Increase (Decrease) Due to - ------------------------------------------------------------------------------------------------------------------------------------ Rate/ Rate/ Rate Volume Volume Total Rate Volume Volume Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Loans and leases: (1) Residential real estate mortgages $ 4,413 $ 3,224 $ 304 $ 7,941 $ (3,394) $ 8,033 $ (652) $ 3,987 Commercial real estate mortgages 6,359 3,283 403 10,045 5,057 (551) (56) 4,450 Commercial business loans and leases 1,766 5,437 427 7,630 2,390 (981) (120) 1,289 Consumer loans and leases 2,773 5,511 318 8,602 700 2,463 (7) 3,156 ----- ----- --- ----- --- ----- -- ----- Total loans and leases 15,311 17,455 1,452 34,218 4,753 8,964 (835) 12,882 Investment securities 3,177 950 118 4,245 208 2,829 48 3,085 Federal funds sold 154 706 281 1,141 338 (536) (223) (421) --- --- --- ----- --- ---- ---- ---- Total 18,642 19,111 1,851 39,604 5,299 11,257 (1,010) 15,546 ------ ------ ----- ------ ----- ------ ------ ------ Interest-bearing liabilities: Deposits: Regular savings 176 732 8 916 (96) 1,515 (19) 1,400 NOW accounts (749) 351 (99) (497) (527) 48) 24 (651) Money market access accounts 3,640 1,468 620 5,728 (857) ,768) 213 (3,412) Brokered deposits -0- -0- -0- -0- 550 (550) (550) Certificates of deposit 10,974 682 144 11,800 (4,368) 1,258 (181) (3,291) ------ --- --- ------ ------ ----- ---- ------ Total deposits 14,041 3,233 673 17,947 (5,298) (693) (513) (6,504) Borrowed funds 2,879 2,569 394 5,842 (982) 5,723 (398) 4,343 ----- ----- --- ----- ---- ----- ---- ----- Total 16,920 5,802 1,067 23,789 (6,280) 5,030 (911) (2,161) ------ ----- ----- ------ ------ ----- ---- ------ Net interest income (fully taxable equivalent) $ 1,722 $13,309 $ 784 $ 15,815 $ 11,579 $ 6,227 $ (99) $ 17,707 ======== ======= ======= ======== ======== ======== ======= ======== (1) Loans and leases include portfolio loans and loans held for sale.
17 20 Net interest income increased by $15.8 million, or 14.4%, during 1995. This increase was primarily attributable to an increase in the average balance of interest-earning assets and, to a lesser extent, an increase in the net interest rate spread from 4.01% to 4.06% during 1994 and 1995, respectively. Interest income increased by $39.6 million, or 20.1%, during 1995, primarily as a result of a $34.2 million, or 10.1%, increase in interest on loans and leases available for sale and held for investment (collectively, "loans and leases"). The increase in interest on loans and leases was attributable to both a $200.5 million, or 10.0%, increase in the average balance of loans and leases, which reflected increases in the average balances of all loan categories, and an increase in the weighted average yield on loans and leases from 8.48% during 1994 to 9.26% during 1995, which also reflected increases in all loan categories. At December 31, 1995, the percentage of the Company's loans and leases which had adjustable or floating interest rates amounted to 65.7%. Interest expense increased by $23.8 million, or 27.3%, during 1995 primarily as a result of a $17.9 million, or 26.3% increase in interest expense on interest-bearing deposits. The increase in interest expense on interest-bearing deposits was primarily attributable to an increase in the weighted average rate thereon from 3.69% in 1994 to 4.39% in 1995, which reflected the generally higher interest rate environment, and to a lesser extent a $115.7 million, or 6.3%, increase in the average balance of interest-bearing deposits, which reflected the aggregate acquisition of $156.9 million of deposits during the year in connection with the acquisition of Bankcore, Inc. ("Bankcore") on July 1, 1995 and the branch offices of Fleet Bank of Maine in Aroostook County, Maine on June 15, 1995. Interest expense also increased during 1995 as a result of a $5.8 million, or 30.7% increase in interest on borrowings, which consist of advances from the Federal Home Loan Bank of Boston and securities sold under agreements to repurchase. This increase reflected both an increase in the weighted average rate and average balance of the Company's borrowings. Net interest income increased by $17.7 million, or 19.3%, during 1994. This increase was primarily attributable to an increase in the net interest rate spread from 3.60% during 1993 to 4.01% during 1994 and, to a lesser extent, an increase in the average balance of interest-earning assets. Interest income increased by $15.5 million, or 8.6%, during 1994, primarily as a result of a $12.9 million, or 8.2%, increase in interest on loans and leases. The increase in interest on loans and leases reflected substantial increases in the average balance of residential loans and consumer loans and leases and, to a lesser extent, an increase in the weighted average yield on loans and leases from 8.29% during 1993 to 8.48% during 1994 as a result of increases in the yields on commercial real estate loans and commercial business loans and leases. Interest expense decreased by $2.2 million, or 2.4%, during 1994 as a result of a decrease in the weighted average rate on interest-bearing liabilities from 4.14% during 1993 to 3.92% during 1994, which more than offset a $67.8 million, or 3.1%, increase in the average balance of such liabilities from 1993 to 1994. Interest expense also increased during 1994 as a result of a $4.3 million, or 29.5%, increase in interest on borrowings, which was primarily attributable to a $106.2 million, or 38.9%, increase in the average balance of borrowings during 1994. Provision for Loan Losses. The provision for loan losses increased $573 thousand from $1.9 million in 1994 to $2.4 million in 1995. In 1994 the provision for loan losses decreased $7.9 million from $9.8 million in 1993 to $1.9 million in 1994. The lower provisions in 1995 and 1994 as compared with 1993 resulted from management's ongoing evaluation of the adequacy of the allowance for loan and lease losses which includes, among other procedures, monitoring trends in nonperforming loans, delinquent loans and net charge-offs, as well as new loan originations and other asset quality factors. Although management utilizes its best judgment in providing for possible losses, there can be no assurance that the Company will not have to change its provisions for possible loan losses in subsequent periods to a higher level from that recorded during 1995. Changing economic and business conditions in Northern New England, fluctuations in local markets for real estate, future changes in nonperforming asset trends, large upward movements in market based interest rates or other reasons could affect the Company's future provision for loan losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's allowance for loan and lease losses. Such agencies may require the Company to recognize changes to the allowance for loan and lease losses based on their judgment about information available to them at the time of examination. The Company was most recently examined by the Federal Reserve Board as of December 31, 1994; the Bank was most recently examined by the FDIC and the Maine Bureau of Banking as of December 31, 1994; and Portsmouth was most recently examined by the Comptroller of the Currency as of December 31, 1994. Noninterest Income. Noninterest income was $21.8 million for 1995, $18.5 million for 1994 and $19.7 million for 1993. The $3.3 million, or 17.9%, increase in 1995 compared with 1994 resulted primarily from a $2.5 million increase in mortgage banking services income, a $1.5 million increase in customer services related income and a $535 thousand increase in net securities gains which were offset in part by a $1.3 million decrease in other noninterest income. The $1.2 million decrease in 1994 compared with 1993 resulted primarily from a $2.5 million decrease in gains on sales of consumer loans, a $1.4 million decrease in net securities transactions and a $572 thousand decrease in loan related services income which were offset in part by a $1.9 million increase in mortgage banking services income and a $1.2 million increase in other noninterest income. 18 21 The following table sets forth certain information relating to mortgage banking activities.
- -------------------------------------------------------------------------------- At or for the Year Ended December 31, - -------------------------------------------------------------------------------- (In Thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Residential mortgages serviced for investors $2,511,795 $2,001,208 $1,512,974 ========== ========== ========== Residential mortgage sales income $ 4,269 $ 1,869 $ 3,407 Residential mortgage servicing income 6,303 6,196 2,769 ---------- ---------- ---------- Total mortgage banking services income $ 10,572 $ 8,065 $ 6,176 ========== ========== ==========
In 1995 total mortgage banking income increased by $2.5 million, or 31.1%, from $8.1 million in 1994 to $10.6 million in 1995. In 1994 mortgage banking income increased by $1.9 million, or 30.6%, compared with 1993, primarily due to an increased level of residential mortgage servicing income offset somewhat by a decline in residential mortgage sales income. In 1993 total mortgage banking services income was negatively impacted by accelerated amortization and write downs of purchased mortgage servicing rights which had declined in value as a result of a downward movement in interest rates. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights -- An Amendment of FASB Statement No. 65," which changed the method of accounting for certain mortgage banking activities. The Company elected early adoption of SFAS No. 122 and as a result capitalized $2.5 million of originated mortgage servicing rights in 1995. Income related to the capitalization of originated mortgage servicing rights is included in residential mortgage sales income. In 1995, residential mortgage sales income increased $2.4 million from $1.9 million in 1994 to $4.3 million in 1995. The increase in residential mortgage sales income was primarily related to the adoption of SFAS No. 122 as noted above. Also included in residential mortgage sales income in 1995 is $642 thousand in gains recognized on the sale of residential mortgage servicing rights. There were no sales of residential mortgage servicing rights in 1994 or 1993. Excluding the income related to the Company's adoption of SFAS No. 122 and the gains recognized on the sale of mortgage servicing rights, mortgage sales income would have decreased by $783 thousand in 1995 as compared with 1994. The decrease in mortgage sales income, excluding the income related to SFAS No. 122 and the gains on sales of mortgage servicing, was in part attributable to a more competitive market for retail originations and correspondent loan purchases as well as an increase in the amount of costs directly allocated to retail mortgage originations. Residential mortgage servicing income increased $107 thousand, or 1.7%, in 1995 as compared with 1994 and increased $3.4 million, or 123.8%, in 1994 as compared with 1993. The Company's portfolio of residential mortgages serviced for investors increased by $510.6 million, net of amortization and prepayments, or 25.5%, during 1995 after an increase of $488.2 million, or 32.3%, during 1994. These increases were primarily attributable to the Company's strategy to originate fixed-rate residential real estate mortgages for sale in the secondary market while retaining the rights to service these loans and the Company's selective purchase of mortgage servicing rights for portfolios of residential mortgages. Residential mortgage servicing income was negatively impacted in 1995 by the Company's adoption of SFAS No. 122, which effectively accelerated mortgage servicing income into the current period as a component of residential mortgage sales income and increased the amount of capitalized mortgage servicing rights. The mortgage servicing rights that have been created as a result of the adoption of SFAS No. 122 are amortized and recorded as an offset to mortgage servicing income. In conjunction with the adoption of SFAS No. 122, the Company elected to accelerate the amortization of capitalized mortgage servicing rights and excess servicing fees related to numerous pools of loans with small outstanding balances which, from an ongoing operational standpoint, were inefficient to amortize on a monthly basis. The cumulative impact of accelerating amortization of capitalized mortgage servicing rights and excess servicing fees associated with small pools of loans with small outstanding balances and the amortization expense related to adoption of SFAS No. 122 during 1995 was $445 thousand. The net gains on sale of consumer loans of $2.6 million in 1993 resulted primarily from the Company's decision to exit its unprofitable retail credit card product line. The generation of mortgage sales income and the recognition of net gains on the sales of securities, consumer loans and other assets are dependent on market and economic conditions and, accordingly, there can be no assurance that the income and net gains reported in prior periods can be achieved in the future or that there will not be significant inter-period variations in the results from such activities. Customer services income increased $1.5 million, or 22.7%, in 1995 as compared with 1994. The increase in customer services income in 1995 reflects the Company's focus on increasing the number and volume of transaction accounts, the increased use of and fees generated by ATM machines and the increased volume associated with the expansion of the retail branch franchise from 67 offices at December 31, 1994 to 77 offices at December 31, 1995. Other noninterest income decreased $1.3 million in 1995 as compared with 1994 primarily as a result of $1.3 million of interest income accrued and received on federal tax receivables during 1994. 19 22 Noninterest Expenses. The following table sets forth information relating to the Company's noninterest expenses during the periods indicated.
- -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Salaries and employee benefits $48,878 $43,563 $38,636 Occupancy 7,531 7,438 6,794 Data processing 7,073 6,174 4,965 Deposit and other assessments 3,474 5,735 5,843 Equipment 4,902 4,413 4,329 Collection and carrying costs of nonperforming assets 1,485 4,295 11,640 Advertising and marketing 3,710 3,692 2,026 Other noninterest expenses: Amortization of goodwill 1,812 1,688 2,623 Other 13,792 13,760 10,887 ------ ------ ------ Total other noninterest expenses 15,604 15,448 13,510 ------ ------ ------ Total noninterest expenses $92,657 $90,758 $87,743 ======= ======= =======
Total noninterest expense increased by $1.9 million, or 2.1%, from 1994 to 1995 and $3.0 million, or 3.4%, from 1993 to 1994. During the past few years the Company has emphasized building a customer focused, highly profitable, community banking franchise in Northern New England. The current strategy of the Company includes controlled asset growth, new product development, enhancement of alternative delivery systems, geographic expansion in New Hampshire, greater market share in existing markets, revenue enhancement and diversification. As the Company made investments in new systems, products and employees during the past two years to support the current business strategy, the Company was also able to substantially reduce collection and carrying cost of nonperforming assets. Salaries and employee benefits expense increased by $5.3 million, or 12.2%, from 1994 to 1995 and by $4.9 million, or 12.8%, from 1993 to 1994. These increases were attributable to staff additions related to the Company's mortgage banking operations, severance and other employee related costs associated with the acquisitions of Mid Maine Savings Bank ("MMSB") and Bankcore, initiation of supermarket banking and Sunday banking hours, expanded telephone banking services, expanded operations staff to support new deposit products and start-up costs associated with trust services at the Bank. Data processing expenses increased by $899 thousand, or 14.6%, from 1994 to 1995 and by $1.2 million, or 24.4% from 1993 to 1994. The investment in expanded operational capabilities to support new product offerings and improve customer service and a higher level of transactions related to the larger mortgage servicing portfolio were the primary factors behind the increases in data processing expenses during 1995 and 1994. Deposit and other assessment expenses consist primarily of deposit insurance paid by the Company's subsidiary banks to either the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"). At December 31, 1995, the Company had approximately 84.0% of its deposits insured by the BIF and 16.0% by the SAIF. The $2.3 million decrease in deposit and other assessment expenses in 1995 compared with 1994 is directly attributable to the reduction in deposit insurance premiums from $0.23 per $100.00 of deposits to $0.04 per $100.00 of deposits beginning in June, 1995 paid by the Bank and Portsmouth to the BIF compared with $0.23 per $100.00 of deposits for all of 1994. There has been much discussion but no clear resolution regarding the recapitalization of the SAIF. It is anticipated based on various proposed legislation pending in the U.S. Congress, that there will be a one-time assessment on all SAIF-insured institutions and that the BIF and the SAIF funds will eventually be merged together. If an assessment of between $0.65 and $0.85 per $100.00 of assessable deposits was effected on SAIF deposits of the Company's banking subsidiaries, the one-time assessment would aggregate between $2.5 million and $3.3 million on a pre-tax basis. The Company continued to benefit in 1995 from lower collection and carrying costs associated with the reduction of nonperforming assets. In 1995 collection and carrying cost of nonperforming assets decreased by $2.8 million, or 65.4%, from $4.3 million in 1994 to $1.5 million in 1995. This followed a reduction of $7.3 million, or 63.1%, in 1994 from $11.6 million in 1993. See "Financial Condition - Nonperforming Assets" below. Advertising and marketing expenses increased by $18 thousand, or 0.5%, from 1994 to 1995 and by $1.7 million, or 82.2%, from 1993 to 1994. The significant increase in advertising and marketing expenses in 1994 and in 1995 from the 1993 level is a reflection of the Company's business strategy to improve the visibility of its products and services, communicate its improved financial condition and take advantage of the opportunity created by the confusion and related customer dissatisfaction caused by major changes that have occurred and are anticipated to occur in the structure of the banking industries in Maine and New Hampshire. Amortization of goodwill increased by $124 thousand, or 7.4%, from 1994 to 1995 and decreased by $935 thousand, or 35.6%, from 1993 to 1994. The increase in goodwill in 1995 reflects the amortization of goodwill created in the Bankcore acquisition. The decrease in goodwill from 1993 to 1994 resulted primarily from the Company's decision in 1993 to accelerate the amortization of goodwill associated with Peoples Heritage Leasing Company's (a wholly-owned subsidiary of the Bank, formerly known as Northeast Leasing) acquisition of assets (primarily leases) of Emerald Leasing Co. in 1988. Amortization of goodwill associated with Emerald Leasing Co. was $914 thousand during 1993, including a $520 thousand write-off of the remaining balance during the fourth quarter of 1993. For additional discussion and disclosure relating to goodwill, refer to Notes 1 and 8 to the Consolidated Financial Statements. During 1995 the Company completed the acquisition and operational conversion of Bankcore and the purchase and operational conversion of all of Fleet Bank of Maine's branches located in Aroostook County, Maine. During 1994 the Company completed the merger and operational conversion of MMSB into the Company and closed the New 20 23 Hampshire operations center and consolidated its operations. The Company remains committed to controlling the growth of operating expenses and is planning various initiatives in 1996 which management anticipates will improve the efficiency of existing operations and facilitate the successful conversion of operations and systems of pending acquisitions, as discussed below. Income Tax Expense (Benefit). The Company recognized income tax expense of $17.2 million and $9.6 million in 1995 and 1994, respectively, and a $2.3 million income tax benefit in 1993. The effective tax rate (benefit) was 33.6% in 1995, 27.4% in 1994 and (17.0%) in 1993. The Company adopted SFAS No. 109 as of January 1, 1993. At the time of adoption of SFAS No. 109, the Company (prior to the merger of MMSB) determined that its net deferred tax asset exceeded the amount previously reported under APB Opinion 11 at January 1, 1993 by $5.7 million. Under SFAS No. 109, however, the Company established a valuation allowance against the deferred tax asset which, in its opinion, at the time was not more likely than not to be realized. The $5.7 million valuation allowance offset the positive impact of adjusting the Company's deferred tax assets and liabilities as provided for under SFAS No. 109. At December 31, 1993, this valuation allowance was reversed because the Company then believed, as a result of recent profitable operations, that it was more likely than not that all net deferred taxes would be realized. MMSB also adopted SFAS No. 109 as of January 1, 1993 and determined that its deferred tax asset exceeded the amount previously reported under APB Opinion 11. Since MMSB was also not in a position to substantiate that it was more likely than not that it would be able to utilize the net deferred tax assets, it established a valuation allowance for $3.4 million. At December 31, 1993, MMSB was still not able to substantiate that it was more likely than not that it would be able to utilize the net deferred tax asset. Upon the acquisition of MMSB by the Company in 1994, the Company recorded a one-time $1.7 million tax benefit from the reversal of the valuation allowance for net deferred tax assets. This one-time tax benefit is reflected in the Company's 1994 income tax expense. For additional information relating to income taxes, refer to Note 11 of the Consolidated Financial Statements. FINANCIAL CONDITION. Set forth below is a discussion of the material changes in the Company's financial condition from December 31, 1994 to December 31, 1995. General. At December 31, 1995, the Company had consolidated assets of $3.1 billion, an increase of $295.5 million, or 10.6%, from December 31, 1994. A significant percentage of the increase in assets during 1995 was attributable to the Company's purchase of all the branches and associated deposits of Fleet Bank of Maine located in Aroostook County, which added $46.1 million in assets, and the acquisition of Bankcore, which added $132.8 million in assets. The change in assets consisted of a $120.7 million increase in net loans and leases, $59.9 million increase in loans held for sale, a $56.2 million increase in securities available for sale, a combined $51.9 million increase in cash and due from banks and federal funds sold and a $6.7 million increase in all other assets. The change in liabilities and shareholders' equity consisted of a $298.2 million increase in deposits, a $53.2 million increase in securities sold under repurchase agreements, a $41.2 million increase in total shareholders' equity and $12.8 million increase in all other liabilities and borrowings, which were in part offset by a $110.0 million decrease in borrowings from the Federal Home Loan Bank of Boston. Securities Available for Sale. Securities available for sale increased by $56.2 million, or 13.1%. The primary reason behind the increase in securities available for sale in 1995 was the increase in securities sold under repurchase agreements which are collateralized by U.S. Government obligations and by mortgage-backed securities, which increased by $53.2 million in 1995. The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at December 31, 1993 and decided to classify all of its investment securities as available for sale. Securities available for sale are reported at fair value, with net unrealized gains and losses, net of related income taxes, reported as a separate component of shareholders' equity. The Company had a net unrealized gain of $3.5 million at December 31, 1995 compared with a net unrealized loss of $14.6 million one year earlier as a result of the lower interest rate environment at year end 1995 as compared with year end 1994. The changes in the investment securities portfolio reflect the Company's efforts to meet asset and liability objectives and otherwise manage its liquidity and funding needs within the parameters of current accounting policies. For additional information see "Risk Management" below and Notes 1 and 3 of the Consolidated Financial Statements. Loans Held for Sale. Loans held for sale increased by $59.9 million, or 539.9%, from $11.1 million at December 31, 1994 to $71.0 million at December 31, 1995. This increase was due to an increased volume of residential mortgages being originated for sale in the secondary market at the end of 1995 as compared with 1994, which was attributable to favorable interest rates for refinancing of existing mortgages and an increase in the volume of loans originated through the Bank's correspondent network. For additional information in this regard, see Notes 1 and 4 to the Consolidated Financial Statements and discussion of "Loans and Leases" below. Loans and Leases. Total loans and leases increased by $119.4 million, or 5.7%. The increase in loans and leases was comprised of a $67.1 million, or 25.3%, increase in commercial business loans and leases, a $48.9 million, or 8.1%, increase in consumer loans and leases, and a $28.3 million, or 4.8%, increase in commercial real estate mortgages, which were in part offset by a $25.0 million, or 4.0%, decrease in residential real estate mortgages. A significant percentage of the increase in loans was attributable to $78 million of loans acquired in the Bankcore acquisition and $16.5 million of loans acquired in connection with the acquisition of the Fleet Bank of Maine branch offices in Aroostook County, Maine. 21 24 The following table sets forth loans held for sale and total loans and leases originated, purchased, sold and repaid during 1995 and 1994.
- -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Originations and purchases: Residential real estate mortgages $ 675,342 $ 387,984 Commercial real estate mortgages 121,600 158,866 Commercial business loans and leases 379,638 276,172 Consumer loans and leases 268,044 293,181 ------- ------- Total originations and purchases 1,444,624 1,116,203 --------- --------- Loans acquired through acquisitions 94,452 -0- Total originations, purchases and acquisitions 1,539,076 1,116,203 --------- --------- Sales and principal reductions: Sales 552,774 272,357 Principal reductions 807,056 710,224 ------- ------- Total sales and principal reductions 1,359,830 982,581 --------- ------- Net increase in loans held for sale and loans and leases $ 179,246 $ 133,622 ========== ==========
In addition to scheduled contractual amortization and prepayments, loan principal reductions include charge-offs of $13.0 million and $11.8 million for the years ended December 31, 1995 and 1994, respectively, as well as transfers from loans to other real estate owned and repossessions. Residential real estate mortgage originations increased by $287.4 million, or 74.1%, from $388.0 million in 1994 to $675.3 million in 1995. The Company has continued its strategy to originate fixed-rate residential loans for sale to the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and other institutional investors in the secondary market, as well as to generally retain adjustable-rate loans in its portfolio. The increase in residential mortgage originations in 1995 reflected a lower interest rate environment during the second half of 1995 and a substantial increase in loans originated through the Bank's correspondent network. Residential real estate mortgage originations from correspondent lenders increased by $285.0 million, or 304.7%, from $93.5 million in 1994 to $378.5 million in 1995. Commercial real estate mortgage originations declined by $37.3 million, or 23.5%, in 1995 as compared with 1994. The Company continues to de-emphasize commercial real estate loans and to reduce its relative exposure to such loans in favor of other types of loans. The Company's business plan is to continue to lend within its geographic markets to sound commercial businesses which collateralize their borrowings with existing and operational commercial real estate properties, as well as ongoing refinances of existing commercial real estate mortgages in the Company's loan portfolio. The increase in the balance of commercial real estate loans from December 31, 1994 to December 31, 1995 was largely attributable to the Company's acquisitions during the period. See Note 5 to the Consolidated Financial Statements. Commercial business loan and lease originations increased by $103.5 million, or 37.5%, in 1995 as compared with 1994. This increase was consistent with the Company's business strategy to focus on lending to sound, small and medium sized business customers within its geographical markets. Consumer loan originations decreased by $25.1 million, or 8.6%, in 1995 compared with 1994. The decrease in consumer loan originations in 1995 was directly attributable to the decrease in indirect consumer loan originations which decreased by $35.2 million from $101.6 million in 1994 to $66.4 million in 1995. This decrease was primarily attributable to decreased originations of indirect mobile home loans. Exclusive of indirect consumer loan originations, consumer loan originations increased by $28.4 million, or 14.8%, in 1995 compared with 1994. The growth in consumer loan originations and outstanding balances was concentrated in home equity loans. See Note 5 to the Consolidated Financial Statements. Nonperforming Assets. Nonperforming assets declined by $11.4 million, or 21.5%, during 1995 and by $37.6 million, or 41.5%, during 1994. Nonperforming loans decreased by $7.2 million, or 17.2%, during 1995 and by $19.2 million, or 31.2%, during 1994. Other nonperforming assets decreased by $4.2 million and by $18.5 million, or 38.5% and 63.2%, in 1995 and 1994, respectively. Nonperforming assets as a percentage of total assets decreased from 1.90% at December 31, 1994 to 1.35% at December 31, 1995. The Company continues to focus on asset quality issues even though the levels of nonperforming loans and assets have been substantially reduced. Significant resources continue to be allocated to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions continue to focus on the further reduction of nonperforming asset levels. Despite the ongoing focus on asset quality and the 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 business 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 charge-offs, 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. 22 25 The following table sets forth information regarding nonperforming assets at the dates indicated.
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, December 31, December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Residential real estate mortgages: Nonaccrual loans $ 4,990 $ 1,799 $ 1,819 Accruing loans which are 90 days overdue 2,724 2,883 2,930 Troubled debt restructurings -- -- 111 ------ ------ ------ Total 7,714 4,682 4,860 ------ ------ ------ Commercial real estate mortgages: Nonaccrual loans 13,247 20,413 24,453 Accruing loans which are 90 days overdue -- -- 279 Troubled debt restructurings 2,595 5,704 14,406 ------ ------ ------ Total 15,842 26,117 39,138 ------ ------ ------ Commercial business loans and leases: Nonaccrual loans 6,235 6,270 12,232 Accruing loans which are 90 days overdue -- -- 318 Troubled debt restructurings 1,859 2,013 2,404 ------ ------ ------ Total 8,094 8,283 14,954 ------ ------ ------ Consumer loans and leases: Nonaccrual loans 2,846 2,727 1,828 Accruing loans which are 90 days overdue 532 468 633 Troubled debt restructurings -- -- 26 ------ ------ ------ Total 3,378 3,195 2,487 ------ ------ ------ Total nonperforming loans and leases: Nonaccrual loans 27,318 31,209 40,332 Accruing loans which are 90 days overdue 3,256 3,351 4,160 Troubled debt restructurings 4,454 7,717 16,947 ------ ------ ------ Total nonperforming loans 35,028 42,277 61,439 ------ ------ ------ Other nonperforming assets: Other real estate owned, net of related reserves 5,073 6,658 19,002 In-substance foreclosures, net of related reserves -- 2,096 8,224 Repossessions, net of related reserves 1,528 1,976 1,961 ------ ------ ------ Total other nonperforming assets 6,601 10,730 29,187 ------ ------ ------ Total nonperforming assets $41,629 $53,014 $90,626 ======= ======= ======= Total nonperforming loans as a percentage of total loans (1) 1.58% 2.01% 3.22% Total nonperforming assets as a percentage of total assets 1.35 1.90 3.43 Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 1.87 2.51 4.67 (1) Exclusive of loans held for sale.
23 26 It is the policy of the Company to place all commercial real estate mortgages 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. All such loans 90 days or more past due, whether on nonaccrual status or not, are considered as nonperforming loans. Residential real estate mortgages and consumer loans and leases are placed on nonaccrual status generally at 90 days or more past due or when in management's judgment the collectibility of interest and/or principal is doubtful. It is also the policy of the Company to place on nonaccrual and therefore nonperforming status loans currently less than 90 days past due or performing in accordance with their loan 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. At December 31, 1995, $11.9 million of commercial real estate and commercial business loans and leases, or 49.7%, of total nonperforming loans were on nonaccrual status and thus disclosed as nonperforming loans even though they were less than 90 days past due. Nonperforming residential real estate mortgages increased by $3.0 million from December 31, 1994 to December 31, 1995. As a percentage of total residential real estate loans, nonperforming residential real estate increased from .74% at year end 1994 to 1.27% at year end 1995. This increase was attributable to the low level of nonperforming loans at year end 1994 and an increase in past due loans during 1995 to levels approaching but still below national and regional averages. Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure generally is classified as other real estate owned until it is sold. When property is acquired as other real estate owned, it is recorded at the lower of carrying or fair value at the date of acquisition or classification and any writedown resulting therefrom is charged to the allowance for loan and lease losses. Interest accrual ceases on the date of acquisition, and all costs incurred from that date in maintaining the property and subsequent reductions in value are expensed and are included in collection and carrying costs of nonperforming assets (a component of noninterest expenses). For further information, see Note 1 to the Consolidated Financial Statements. The following table summarizes the gross activity in other real estate owned during the periods indicated.
- -------------------------------------------------------------------------------- Activity Amount - -------------------------------------------------------------------------------- Balance at December 31, 1993 $ 19,002 Property acquired through foreclosure or deed-in-lieu thereof 7,279 Sales and rental proceeds (net of losses) (19,647) Writedowns and provisions for losses (credited to operations) 24 -------- Balance at December 31, 1994 $ 6,658 -------- Property acquired through foreclosure or deed-in-lieu thereof 11,112 Property acquired through acquisition 2,910 Sales and rental proceeds (net of gains) (16,044) Writedowns and negative provisions for losses (credited to operations) (437) -------- Balance at December 31, 1995 $ 5,073 ======== - --------------------------------------------------------------------------------
Potential Nonperforming Assets. The total of commercial real estate and commercial business loans and leases which are internally graded substandard or lower, according to the Company's internal loan grading system, but which are still in a performing status, or in other words, the population from which future nonperforming loans would most likely arise, has continued to decrease since the middle of 1992. At December 31, 1995 and 1994, the Company had classified a total of $79.8 million and $99.9 million, respectively, of commercial real estate mortgages and commercial business loans and leases as substandard or lower on its risk rating system. Included in this amount at December 31, 1995 was the Company's $23.9 million of nonperforming commercial real estate and business loans. In the opinion of management, the remaining $55.9 million of commercial real estate mortgages and commercial business loans and leases classified as substandard at December 31, 1995 evidence one or more weaknesses or potential weaknesses and, depending on the regional economy and other factors, may become nonperforming assets in future periods. These loans are net of previously established specific reserves which have resulted in chargeoffs, but not general reserves which have been established based on the Company's internal rating of such loans and evaluation of the adequacy of its allowance for loan losses. 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 chargeoffs of loans deemed uncollectible. 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, as discussed above under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Provision for Loan Losses." 24 27 The following table sets forth information concerning the activity in the Company's allowance for loan and lease losses during the periods indicated.
- -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Average loans and leases outstanding $2,209,900 $2,009,372 $1,900,105 ========== ========== ========== Allowance at the beginning of the period $ 50,484 $ 52,804 $ 54,604 Additions due to acquisitions and purchases 2,314 -- -- Charge-offs: Residential real estate mortgages 1,467 1,857 2,438 Commercial real estate mortgages 7,339 5,168 6,254 Commercial business loans and leases 1,914 3,023 8,594 Consumer loans and leases 2,262 1,714 3,084 ----- ----- ----- Total loans charged off 12,982 11,762 20,370 ------ ------ ------ Recoveries: Residential real estate mortgages 245 408 540 Commercial real estate mortgages 4,626 4,184 5,676 Commercial business loans and leases 1,615 2,506 1,260 Consumer loans and leases 406 487 l,316 --- --- ---- Total loans recovered 6,892 7,585 8,791 ----- ----- ----- Net charge-offs 6,090 4,177 11,578 Additions charged to operating expenses 2,430 1,857 9,779 ----- ----- ----- Allowance at end of period $ 49,138 $ 50,484 $ 52,804 ========== ========== ========== Ratio of net charge-offs to average loans and leases outstanding 0.28% 0.21% 0.61% Ratio of allowance to total loans and leases at end of period 2.22% 2.41% 2.76% Ratio of allowance to nonperforming loans at end of period 140.28% 119.41% 85.95% - --------------------------------------------------------------------------------
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, - -------------------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------------------- PERCENT OF Percent of TOTAL LOANS Total Loans BY CATEGORY by Category AMOUNT TO TOTAL LOANS Amount to Total Loans - -------------------------------------------------------------------------------------------- Residential real estate mortgages $ 2,872 27.4% $ 3,078 30.1% Commercial real estate mortgages 29,240 28.1 30,545 28.4 Commercial business loans and leases 8,201 15.0 8,219 12.7 Consumer loans and leases 8,824 29.5 8,642 28.8 ----- ---- ----- ---- $ 49,138 100.0% $50,484 100.0% ======== ===== ======= ===== - --------------------------------------------------------------------------------------------
Deposits. Total deposits increased by $298.2 million, or 14.4%, for the year ended December 31, 1995 primarily as a result of acquiring deposits through acquisition and the success of the Company's relationship banking products. The change in deposits was comprised of a $172.9 million, or 62.6%, increase in money market accounts, a $111.8 million, or 11.0%, increase in certificates of deposit and a combined $71.6 million, or 17.3%, increase in NOW and demand deposits, which were offset in part by a $58.2 million, or 16.1%, decrease in regular savings. The changes in deposit balances reflect the Company's current strategy to emphasize relationship banking, cash management services, core deposits and the deposit mix of the acquisitions completed in 1995. Deposits acquired through acquisitions in 1995 totaled $156.9 million. Other Interest-Bearing Liabilities. Other interest-bearing liabilities consist of borrowings from the Federal Home Loan Bank, securities sold under repurchase agreements, federal funds purchased, debentures and Federal Reserve Bank treasury tax and loan note option borrowings. Total interest-bearing liabilities decreased from $461.4 million at December 31, 1994 to $412.8 million at December 31, 1995, a net decrease of $48.6 million or 10.5%. The decrease in total interest-bearing liabilities other than deposits reflects the Company's efforts to replace higher-costing borrowings with lower-costing core deposits. Federal Home Loan Bank borrowings remain the largest non-deposit related interest-bearing funding source for the Company. In 1995 the Company reduced borrowings from the Federal Home Loan Bank by $110.0 million, or 30.4%, to $252.4 million at December 31, 1995. Federal Home Loan Bank borrowings are secured by qualified residential loans, certain investment securities and certain other assets available to be pledged. At December 31, 25 28 1995, the Company estimates its additional available borrowing capacity from the Federal Home Loan Bank to be approximately $391.0 million. Securities sold under repurchase agreements increased by $53.3 million, or 61.5%, from $86.6 million at December 31, 1994 to $139.9 million at December 31, 1995. The increase in securities sold under repurchase agreements is directly related to the expansion of both public finance activities and commercial cash management services at the Company's banking subsidiaries during 1995. For additional discussion of securities sold under repurchase agreements, see Note 12 to the Consolidated Financial Statements below. The debentures, which are included as part of Other Borrowings in the Consolidated Balance Sheets, are five-year notes which were issued in conjunction with the Bankcore acquisition on July 1, 1995, which had an outstanding balance of $7.8 million at December 31, 1995. As part of its asset and liability management and liquidity and funds management, the Company actively evaluates its funding sources and strategies to reduce and manage the vulnerability of its operations to changes in interest rates. See "Interest Rate Risk Management" and "Liquidity Risk Management" below. Capital Resources. Consistent with its long-term goal of operating a safe, sound and profitable financial organization, the Company strives to maintain a strong capital base. The Company's shareholders' equity base totaled $270.5 million and $229.3 million or 8.8% and 8.2% of total assets at December 31, 1995 and 1994, respectively. The $41.2 million, or 18.0%, increase in shareholders equity was attributable to net income of $34.0, a $11.3 million net unrealized gain (net of tax effect) in the market value of securities available for sale, $11.3 million related to the reissuance of treasury stock in conjunction with the Bankcore acquisition and $1.5 million of treasury stock sales related to various employee benefit plans of the Company, the effects of which were offset in part by $8.6 million in dividends paid to shareholders and $8.3 million in treasury stock purchases. As authorized by the Board of Directors, and in anticipation of the Bankcore acquisition, the Company initiated a share repurchase program on December 20, 1994 and repurchased 751,600 shares of its common stock for a total cost of $9.6 million during 1994 and 1995. A total of 646,600 of these shares, with a total cost of $8.3 million, were repurchased in 1995; the balance were repurchased in 1994. All shares repurchased as part of the share repurchase program were reissued in conjunction with the Bankcore acquisition on July 1, 1995. The Company does not currently anticipate repurchasing any additional shares. For additional discussion of capital resources, see Note 14 to the Consolidated Financial Statements and regulatory capital requirements under "Regulatory Environment" below. RISK MANAGEMENT The Company's success is largely dependent upon its ability to strategically manage financial as well as nonfinancial risks. Prominent nonfinancial challenges facing the Company and addressed through the Company's strategic planning process include competition from bank and nonbank financial service companies, changing regulatory and political environments, rapid advances in technology based information systems and demographic and economic changes. The significant financial risks actively managed by the Company include: a) credit risk; b) interest rate risk, including asset and liability management; c) liquidity risk; and d) off-balance sheet risks and commitments. Credit Risk Management. The loan portfolio accounted for 72.0% of the assets of the Company at December 31, 1995 and represents its primary source of credit risk. The Company has dedicated and will continue to dedicate a substantial amount of time and resources to the management of credit risk within its loan portfolio. The Company has established systems of checks and balances to manage the origination, control and collection of loan assets. See related discussion of credit risk management issues above under "Results of Operations, Provision for Loan Losses," "Financial Condition - Nonperforming Assets," and Note 5 to the Consolidated Financial Statements. Interest Rate Risk and Asset Liability Management. The Company's actions in regard to interest rate risk and asset and liability management are the responsibility of a Liquidity and Funds Management Committee which reports to the Board of Directors and is comprised of members of the Company's senior management. The Liquidity and Funds Management Committee is actively involved in formulating the economic projections the Company uses in its planning and budgeting process and establishes policies which monitor and coordinate the Company's sources, uses and pricing of funds. Interest rate risk can be defined as the exposure of the Company's net income or financial position to adverse movements in interest rates. In addition to directly impacting net interest income, changes in the level of interest rates also affect (i) the amount of loans originated by an institution, (ii) the ability of borrowers to repay adjustable-rate loans, (iii) the average maturity of mortgage loans, which tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially higher than current mortgage loans rates (due to refinancings of loans at lower rates), (iv) the value of an institution's interest-earning assets and the resultant ability to realize gains on the sale of such assets, and (v) the carrying value of investment securities classified as available for sale and resultant adjustments to shareholders' equity. The principal objective of the Company is to maintain an appropriate balance between income growth and the risks associated with maximizing income through the mismatch of the timing of interest rate changes between assets and liabilities. Perfectly matching asset and liability maturities and interest rate changes can eliminate interest rate risk, but net interest income is not always enhanced. The Company seeks to reduce the volatility of its net interest income by managing the relationship of interest-rate sensitive assets to interest-rate sensitive liabilities. To meet its asset and liability management objectives, the Company has undertaken various steps to increase the ability of the rates earned on its interest-earning assets to change in accordance with market rates of interest and to reduce the average maturity of such assets. A principal focus in recent years has been on the origination of adjustable-rate residential loans and consumer loans, which generally have shorter maturities than fixed-rate residential loans. 26 29 The Company also originates adjustable-rate and fixed-rate commercial real estate mortgages and commercial business loans and leases, which collectively also generally mature or reprice more quickly than fixed-rate residential loans. Net interest income sensitivity to movements in interest rates is measured through use of a simulation model which analyzes resulting net income under various interest rate scenarios. Projected net interest income is modeled based on both an immediate rise or fall in interest rates ("rate shock") as well as gradual movements in interest rates over a twelve month period. The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities and factors in budget projections for anticipated activity levels by major product lines of the Company. The simulation model incorporates assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also takes into account the Company's ability to exert greater control over the setting of interest rates on certain deposit products than it has over variable and adjustable rate loans which are tied to published indices, such as designated prime lending rates and the rate on U.S. Treasury Bills. Based on the information and assumptions in effect at December 31, 1995, management of the Company believes that a 200 basis point gradual change in interest rates over a twelve month period, up or down, would not significantly affect the Company's annualized net interest income. As a result of the Company's business strategy to increase noninterest income related to mortgage banking services, the Company has grown its portfolio of residential mortgages serviced for investors. As a result of that strategy, as well as the adoption of SFAS No. 122, the level of mortgage servicing rights has increased significantly. In order to mitigate the prepayment risk associated with mortgage servicing rights and protect economic value, in 1995 the Company purchased a constant maturity treasury floor ("CMT") for $555 thousand. The cost of the CMT is being amortized over five years using the straight line method of amortization. The CMT's value is related to movements in market interest rates to which it is indexed (based on a $30 million, 10 year Constant Maturity Treasury Yield) and the remaining term of the CMT. The CMT's value is inversely related to movements in market interest rates. As interest rates decline, the value of the CMT increases. Market interest rate movements also influence the behavior of borrowers, which impacts the value of mortgage servicing rights as a result of an increase or decrease in mortgage loan prepayment speeds. The value of mortgage servicing rights generally increases as market interest rates increase and declines as rates decrease. While not accorded hedge accounting treatment due to the uncertainty of strict correlation, in the event that interest rates fall any resulting increase in the value of the CMT is intended to offset, in part, the prospective impairment to mortgage servicing rights. The CMT is included in other assets on the Company's balance sheet at December 31, 1995 at amortized cost of $462 thousand, which approximates market value. Liquidity Risk Management. The Company seeks to maintain various sources of funding and prudent levels of liquid assets in order to satisfy its varied liquidity demands. Many factors affect the Company's ability to meet its liquidity needs, including its mix of assets and liabilities, reputation and credit standing in the marketplace, interest rates and general economic conditions. The Company's actual inflow and outflow of funds is detailed in the Consolidated Statements of Cash Flows. Each of the Company's banking subsidiaries monitors its liquidity in accordance with guidelines established by the Company and applicable regulatory requirements. The primary sources of funds of the Company's banking subsidiaries are deposits, borrowings from the FHLB of Boston and other sources, cash flows from operations, prepayments and maturities of outstanding loans, leases, investments and mortgage-backed securities and the sale of mortgage loans. During 1995 and 1994, the Company's banking subsidiaries used their sources of funds primarily to meet ongoing commitments to pay maturing savings certificates and savings withdrawals, pay off maturing brokered deposits, fund loan and lease commitments and maintain a substantial portfolio of investment securities. Management believes that the Company's banking subsidiaries currently have adequate liquidity available to respond to both expected and unexpected liquidity demands, according to the measurement system established during 1991 and set forth in the Company's contingency liquidity plan. This system, the Reactive Capacity Adequacy Report System, measures the net amount of marketable assets, after deducting pledged assets, plus lines of credit, primarily with the FHLB, which are available to fund liquidity requirements. It then measures the adequacy of that amount against the amount of sensitive or volatile liabilities. These include core deposit balances in excess of $100 thousand, term deposits with short maturities and credit commitments outstanding. This evaluation is conducted at each subsidiary and consolidated for the Company on a monthly basis. It allows the Company to manage its liquidity position and funding sources in order to ensure that it has continuing ability to meet its ongoing commitment to pay maturing savings certificates and savings withdrawals, fund loan and lease commitments, meet contractual maturities on borrowings and maintain a significant portfolio of investment securities. The Company's liquidity management policies currently include requirements that the Company maintain a minimum liquidity ratio of no less than 15% with a target of 20%. The Company's consolidated liquidity position increased during 1995 as net cash, short-term and marketable assets amounted to 22.2% of net deposits and short-term liabilities at December 31, 1995 as compared to 20.0% at December 31, 1994. A secondary source of liquidity, not included in the liquidity ratio calculation, is represented by asset-based liquidity. Asset-based liquidity consists chiefly of single-family mortgage loans which qualify for secondary market sale. The liquidity needs of the Company on a parent-only basis consist primarily of dividends to shareholders and expenses for general corporate purposes. The primary source of parent-only company cash flow is dividends received from subsidiary banks. For additional information, see Notes 2 and 4 to the Consolidated Financial Statements. Off-Balance Sheet Risks and Commitments. COMMITMENTS TO EXTEND CREDIT. At December 31, 1995 and 1994, the total approved loan commitments outstanding amounted to $188.4 million and $132.0 million, respectively. At the same dates, commitments under unused lines of credit amounted to $263.0 million and $214.4 million, respectively. The unadvanced portion of construction loans amounted to $18.7 million and $15.7 million, respectively. 27 30 LETTERS OF CREDIT AND STAND-BY LETTERS OF CREDIT. Letters of credit and standby letters of credit amounted to $11.8 million and $8.5 million, respectively, at December 31, 1995 and 1994. The credit risk involved in issuing letters of credit is essentially the same as involved in extending loans to customers. DERIVATIVES. The Company has only limited involvement with off-balance sheet derivative financial instruments and does not use them for trading purposes. The Company has explored and utilized in the past certain financial techniques, such as interest rate exchange agreements, to assist in the management of interest rate risk. The Company believes that such techniques have benefits under certain market and economic conditions. At December 31, 1995, the Company did not have any interest rate exchange agreements in place. The Company makes use of forward commitments to sell loans as part of its mortgage banking business. Forward commitments are used in the normal course of business to reduce the Company's exposure to fluctuations in interest rates. For additional information, see Note 15 to the Consolidated Financial Statements. COUNTERPARTY RISK. The Company does business with a variety of financial institutions and other companies in the normal course of business. The Company is subject to potential financial loss if the counterparty is unable to complete an agreed upon transaction. The Company controls counterparty risk through financial analysis, dollar limits and other monitoring procedures. REGULATORY ENVIRONMENT Compliance with Laws and Regulations Banks and bank holding companies are subject to a broad scope of laws and regulations. The Company believes that it is in material compliance with all applicable federal and state laws and regulations. Regulatory Capital Requirements Under Federal Reserve Board (FRB) guidelines, bank holding companies such as the Company are required to maintain capital based on "risk-adjusted" assets. Under risk based capital guidelines, categories of assets with potentially higher credit risk require more capital than assets with lower risk. In addition to balance sheet assets, bank holding companies are required to maintain capital, on a risk adjusted basis, to support certain off-balance sheet activities such as loan commitments. The FRB standards classify capital into two tiers, Tier I and Total. Tier I risk based capital consists of common stockholder's equity, noncumulative and cumulative (bank holding companies only) perpetual preferred stock, and minority interests, less goodwill. Total risk based capital consists of Tier 1 capital plus a portion of the general allowance for loan losses, hybrid capital instruments, term subordinated debt and intermediate preferred stock. In addition to risk-based capital requirement, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier I capital. The FDIC has promulgated similar regulations and guidelines regarding the capital adequacy of state-chartered banks which are not members of the Federal Reserve System, which apply to the Bank. The Comptroller of the Currency also has adopted similar capital adequacy regulations and guidelines which apply to national banks such as Portsmouth. In each case these requirements are substantially similar to those adopted by the FRB, as described above. The Maine Bureau of Banking has also promulgated a regulation regarding capital adequacy which generally parallels the minimum Tier I leverage capital requirements of the FDIC. The following table sets forth the regulatory capital ratios of the Company, the Bank and Portsmouth at December 31, 1995.
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------- Required Minimums(1) Actual - -------------------------------------------------------------------------------- THE COMPANY Risk-based capital ratios: Tier I 4.00% 12.04% Total 8.00 13.30 Tier I leverage capital ratio (1) 4.00 8.28 THE BANK Risk-based capital ratios: Tier I 4.00 10.78 Total 8.00 12.04 Tier I leverage capital ratio (1) 4.00 7.46 PORTSMOUTH Risk-based capital ratios: Tier I 4.00 10.85 Total 8.00 12.10 Tier I leverage capital ratio (1) 4.00 6.80 - --------------------------------------------------------------------------------
(1) Bank holding companies and banks, including the Company and its banking subsidiaries, may be required to maintain a Tier I leverage capital ratio of 4.0% to 5.0% or more. The Regulatory Agencies have not advised the Company or its subsidiaries of a specific Tier I leverage capital ratio requirement to date. 28 31 Impact of Inflation and Changing Prices. The Consolidated Financial Statements and related Notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. Impending Accounting Changes. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of," which was adopted by the Company on January 1, 1996. This Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to such assets being held and used and for such assets and certain identifiable intangibles to be disposed of. The implementation of this Statement did not and is not expected to have a material effect on the Company's results of operations or financial condition. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective on January 1, 1996. This Statement establishes a fair value based method of accounting for stock-based compensation plans under which compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. However, the statement allows a company to continue to measure compensation cost for such plans under Accounting Principles Board (APB) Opinion No. 25," Accounting for Stock Issued to Employees." Under APB Opinion No. 25, no compensation cost is recorded if, at the grant date, the exercise price of the options is equal to the fair market value of the Company's common stock. The Company has elected to continue to follow the accounting under APB No. 25. SFAS No. 123 requires companies which elect to continue to follow the accounting in APB Opinion No. 25 to disclose in the notes to their financial statements pro forma net income and earnings per share as if the value based method of accounting had been applied. Management has not determined the impact opf the adoption of SFAS No. 123 on the financial position or results of operations of the Company. Acquisitions. On February 16, 1996, Portsmouth acquired five branch offices and approximately $160 million of related deposits from Fleet Bank NH. Two of these offices are located in Manchester, New Hampshire and the others are located in Bedford, Nashua and Littleton, New Hampshire. In addition to various assets related to the acquired branches, Portsmouth also acquired approximately $216.4 million of loans in connection with this transaction, which consisted primarily of $178.6 million of single-family residential loans The Company, First Coastal and Bank of New Hampshire Corporation ("BNHC"), a New Hampshire-chartered bank holding company, have entered into an Agreement and Plan of Merger, dated as of October 25, 1995 (the "Agreement"), which provides, among other things, for (i) the merger of First Coastal with and into BNHC (the "Merger") and (ii) the conversion of each share of BNHC Common Stock outstanding immediately prior to the Merger (other than any dissenting shares under New Hampshire law and certain shares held by the Company) into the right to receive two shares of the Company's Common Stock, subject to possible adjustment under certain circumstances. Based on 4,064,165 shares of BNHC Common Stock outstanding as of December 31, 1995, a maximum of 8,128,330 shares of Common Stock of the Company will be issuable upon consummation of the Merger. Consummation of the Merger is subject to various conditions, including approval of the Agreement by the stockholders of the Company and BNHC, which have been obtained, the receipt of all required regulatory approvals and confirmation from the independent accountants of the Company and BNHC that the Merger shall be accounted for as a pooling-of-interests. BNHC conducts its business through 29 offices of Bank of New Hampshire, its wholly-owned subsidiary, located throughout the southern, central, seacoast and lakes region of New Hampshire. At December 31, 1995, BNHC had $977.8 million of total assets and $84.5 million of stockholders' equity. 29 32 CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- (In Thousands, Except Number of Shares and Per Share Data) 1995 1994 - -------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 124,153 $ 99,741 Federal funds sold 58,255 30,735 Securities available for sale, at market value (Notes 3, 12, 13) 485,218 429,003 Loans held for sale, market value $71,872 in 1995 and $11,163 in 1994, respectively (Note 4) 70,979 11,092 Loans and leases (Note 5 and 13): Residential real estate mortgages 607,369 632,361 Commercial real estate mortgages 623,686 595,355 Commercial business loans and leases 332,755 265,644 Consumer loans and leases 653,827 604,918 ------- ------- 2,217,637 2,098,278 Less: Allowance for loan and lease losses (Note 6) 49,138 50,484 ------ ------ Net loans and leases 2,168,499 2,047,794 --------- --------- Premises and equipment (Note 7) 44,358 35,915 Goodwill and other intangibles (Note 8) 21,176 18,985 Mortgage servicing rights (Note 9) 20,309 17,275 Other real estate and repossessed assets owned (Note 10) 6,601 10,730 Deferred income taxes (Note 11) 26,621 30,542 Interest and dividends receivable 21,634 18,929 Other assets 30,866 32,441 ------ ------ $3,078,669 $2,783,182 ========== ==========
See accompanying notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------------- (In Thousands, Except Number of Shares and Per Share Data) 1995 1994 - -------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings $ 303,504 $ 361,657 Money market access accounts 448,998 276,064 Certificates of deposit (including certificates of $100 or more of $103,730 and $81,911, respectively) 1,124,104 1,012,326 NOW accounts 215,529 195,161 Demand deposits 269,830 218,559 ------- ------- 2,361,965 2,063,767 --------- --------- Federal funds purchased 1,500 4,404 Securities sold under repurchase agreements (Note 12) 139,942 86,631 Borrowings from the Federal Home Loan Bank of Boston (Note 13) 252,446 362,450 Other borrowings 18,928 7,902 Deferred income taxes (Note 11) 10,400 4,884 Other liabilities (Note 16) 23,020 23,879 ------ ------ Total liabilities 2,808,201 2,553,917 --------- --------- Commitments and contingent liabilities (Notes 14, 15 and 16) Shareholders' equity (Notes 2, 3, 14 and 18): Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued -- -- Common stock, par value $0.01; 30,000,000 shares authorized, 17,468,220 shares issued 175 175 Paid-in capital 186,900 186,900 Retained earnings 88,951 62,235 Net unrealized gain (loss), net of applicable income taxes, on securities available for sale 2,247 (9,085) Treasury stock at cost (524,062 shares and 760,327 shares, respectively) (7,805) (10,960) ------ ------ Total shareholders' equity 270,468 229,265 ------- ------- $ 3,078,669 $ 2,783,182 =========== ===========
See accompanying notes to Consolidated Financial Statements. 30 33
CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ In Thousands, Except Number of Shares and Per Share Data 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Interest and dividend income: Interest on loans and leases (Note 5) $ 203,968 $ 170,038 $ 157,239 Interest on mortgage-backed investments 12,627 12,409 10,266 Interest on other investments 17,312 12,417 12,446 Dividends on equity securities 1,692 1,532 1,082 ----- ----- ----- Total interest and dividend income 235,599 196,396 181,033 ------- ------- ------- Interest expense: Interest on deposits 86,171 68,224 74,728 Interest on borrowed funds 24,892 19,050 14,707 ------ ------ ------ Total interest expense 111,063 87,274 89,435 ------- ------ ------ Net interest income 124,536 109,122 91,598 Provision for loan losses (Note 6) 2,430 1,857 9,779 - ----- ----- ----- Net interest income after provision for loan losses 122,106 107,265 81,819 ------- ------- ------ Noninterest income: Mortgage banking services (Note 9) 10,572 8,065 6,176 Customer services 8,298 6,765 6,671 Trust and investment advisory services 1,621 1,569 1,373 Loan related services 1,059 1,016 1,588 Net securities gains (losses) (Note 3) 116 (419) 1,001 Net gains on sales of consumer loans (Note 5) -- 33 2,576 Other noninterest income 160 1,489 319 --- ----- --- 21,826 18,518 19,704 ------ ------ ------ Noninterest expenses: Salaries and employee benefits (Note 16) 48,878 43,563 38,636 Occupancy 7,531 7,438 6,794 Data processing 7,073 6,174 4,965 Equipment 4,902 4,413 4,329 Advertising and marketing 3,710 3,692 2,026 Deposit and other assessments 3,474 5,735 5,843 Collection and carrying costs of nonperforming assets 1,485 4,295 11,640 Other noninterest expenses (Note 8) 15,604 15,448 13,510 - ------ ------ ------ 92,657 90,758 87,743 ------ ------ ------ Income before income tax expense (benefit) 51,275 35,025 13,780 Applicable income tax (benefit) (Note 11) 17,243 9,588 (2,339) -- ------ ----- ------ Net income $ 34,032 $ 25,437 $ 16,119 ============ ============ ============ Weighted average shares outstanding 16,569,063 16,719,800 16,601,195 Earnings per share $ 2.05 $ 1.52 $ 0.97
See accompanying notes to Consolidated Financial Statements. 31 34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Net Number Unrealized (In Thousands, Except Number of Shares Par Paid-in Retained Loan to Gain Treasury of Shares and Per Share Data) Issued Value Capital Earnings ESOP (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1992 17,450,302 $175 $186,649 $26,112 $ (108) $ -0- $ (13,515) $ 199,313 Proceeds from sale of stock (net of issue cost) 17,918 -0- 251 -0- -0- -0- -0- 251 Treasury stock purchased (8,044 shares at an average price of $9.74) -0- -0- -0- -0- -0- -0- (79) (79) Treasury stock issued for s employee benefit plan (85,491 shares at an average price of $9.23) -0- -0- -0- (451) -0- -0- 1,241 790 Principal reduction in loan to ESOP -0- -0- -0- -0- 108 -0- -0- 108 Implementation of change in accounting for investments in debt and equity securities, net of tax effect of $1,609 -0- -0- -0- -0- -0- 2,609 -0- 2,609 Net income -0- -0- -0- 16,119 -0- -0- -0- 16,119 --- --- --- ------ --- ----- --- ------ Balances at December 31, 1993 17,468,220 175 186,900 41,780 -0- 2,609 (12,353) 219,111 Treasury stock purchased (105,000 shares at an average price of $12.02) -0- -0- -0- -0- -0- -0- (1,262) (1,262) Treasury stock issued for employee benefit plans (179,426 shares at an average price of $7.42) -0- -0- -0- (1,027) -0- -0- 2,655 1,628 Change in unrealized gains (losses) on securities available for sale, net of tax of $6,859 -0- -0- -0- -0- -0- (11,694) -0- (11,694) Net income -0- -0- -0- 25,437 -0- -0- -0- 25,437 Cash dividends $0.24 per share -0- -0- -0- (3,955) -0- -0- -0- (3,955) --- --- --- ------ --- ----- --- ------ Balances at December 31, 1994 17,468,220 175 186,900 62,235 -0- (9,085) (10,960) 229,265 Treasury stock purchased (647,357 shares at an average price of $12.85) -0- -0- -0- -0- -0- -0- (8,317) (8,317) Treasury stock issued for employee benefit plans (132,022 shares at an average price of $9.76) -0- -0- -0- (401) -0- -0- 1,908 1,507 Reissuance of treasury stock pursuant to acquisition (751,600 shares at $15.00) -0- -0- -0- 1,710 -0- -0- 9,564 11,274 Changes in unrealized gains (losses) on securities available for sale, net of tax effect of $6,515 -0- -0- -0- -0- -0- 11,332 -0- 11,332 Net income -0- -0- -0- 34,032 -0- -0- -0- 34,032 Cash dividends $0.52 per share -0- -0- -0- (8,625) -0- -0- -0- (8,625) --- --- --- ------ --- ------ --- ------ Balances at December 31, 1995 17,468,220 $175 $186,900 $ 88,951 $ -0- $ 2,247 $ (7,805) $ 270,468 ========== ==== ======== ======== ===== ======= ========= ========= - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 32 35
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 34,032 $ 25,437 $ 16,119 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,430 1,857 9,779 Provision for depreciation 4,418 3,959 3,903 Provision for losses and writedowns (credits) of other real estate owned (958) 143 2,658 Amortization of goodwill and other intangibles 2,098 1,932 2,913 Amortization and sale of servicing rights 6,067 1,743 2,266 Deferred income tax expense (benefit) (note 11) 2,922 (3,050) (5,974) Net (gains) losses realized from sales of other real estate owned 585 299 (521) Net (gains) losses realized from sales of securities and consumer loans (116) 384 (3,577) Net (gains) losses realized from sales of loans held for sale (a component of mortgage banking services) 510 543 (3,407) Gains on capitalized servicing (8,524) (1,100) (883) Proceeds from sales of securities held for sale -- -- 36,469 Proceeds from maturities and principal repayments of securities held for sale -- -- 55,185 Purchases of securities held for sale -- -- (73,205) Proceeds from sales of loans held for sale 552,774 271,257 257,117 Residential loans originated and purchased for sale (613,171) (218,034) (292,684) Net (increase) decrease in net deferred tax assets -- (19) 793 Net (increase) decrease in interest and dividends receivable and other assets (1,130) 8,655 7,225 Net increase (decrease) in other liabilities (859) 10,323 (1,293) ---- ------ ------ Net cash provided (used) by operating activities $ (18,922) $ 104,329 $ 12,883 --------- --------- --------- - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sales of investment securities $ -- $ -- $ 2,070 Proceeds from maturities and principal repayments of investment securities -- -- 79,543 Purchases of investment securities -- -- (180,196) Proceeds from sales of securities available for sale 9,192 64,960 -- Proceeds from maturities and principal repayments of securities available for sale 135, 972 110,446 -- Purchases of securities available for sale (183,418) (164,304) -- Net (increase) decrease in loans and leases (128,136) (184,040) (52,188) Proceeds from sale of loans -0- 590 17,846 Purchase of mortgage servicing rights (577) (11,435) (5,882) Premiums paid on deposits purchased (4,290) (75) -- Net additions to premises and equipment (12,861) (4,657) (2,482) Proceeds from sales of other real estate owned 8,872 6,884 9,819 Net (increase) decrease in repossessed assets owned 634 3,049 6,283 --- ----- ----- Net cash provided (used) by investing activities $(174,612) $(178,582) $(125,187) --------- --------- --------- - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 33 36
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase (decrease) in deposits $ 298,198 $ (10,724) $ (5,134) Net increase (decrease) in securities sold under repurchase agreements 53,311 18,181 23,173 Proceeds from Federal Home Loan Bank of Boston borrowings 415,998 390,284 168,250 Payments on Federal Home Loan Bank of Boston borrowings (526,002) (279,594) (112,050) Payoff of subordinated capital notes -- -- (5,000) Net increase (decrease) in other borrowings 11,026 5,043 919 Loans to Employee Stock Option Plan -- -- 108 Sale of treasury stock 1,507 1,628 790 Issuance of treasury stock for acquisition 11,274 -- -- Purchase of treasury stock (8,317) (1,262) (79) Net proceeds from sale of stock -- -- 251 Cash dividends paid to shareholders (8,625) (3,955) -- ------ ------ ---- Net cash provided by financing activities $ 248,370 $ 119,601 $ 71,228 --------- --------- --------- Increase (decrease) in cash and cash equivalents 54,836 45,348 (41,076) Cash and cash equivalents at beginning of period 126,072 80,724 121,800 ------- ------ ------- Cash and cash equivalents at end of period $ 180,908 $ 126,072 $ 80,724 ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of information: Interest paid on deposits and borrowings $ 110,401 $ 86,627 $ 89,987 Income taxes paid (refunded) 11,872 (271) (2,707) Noncash investing transactions: Investment securities transferred to securities available for sale to adopt SFAS No. 115 $ -- $ -- $ 335,103 Securities held for sale transferred to securities available for sale to adopt SFAS No. 115 -- -- 119,754 Securities held for sale transferred to investment securities -- -- 33,692 Investment securities transferred to securities held for sale -- -- 14,018 Loans transferred to other real estate 11,024 4,079 9,271 Loans originated to finance the sales of other real estate owned 6,020 12,161 22,794 Increases (decreases)resulting from the adoption of SFAS No. 115: Securities available for sale Deferred income taxes - liabilities 6,515 (6,859) 1,609 Net unrealized gain (loss) on securities available for sale, net of tax 11,332 (11,694) 2,609 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (All Dollar Amounts Expressed in Thousands, Except Per 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 and investment advisory services, and are conducted through the Company's direct wholly-owned subsidiaries located in Maine and New Hampshire. 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 the Comptroller of the Currency, the Maine Bureau of Banking 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., the Company's direct wholly-owned subsidiaries Peoples Heritage Savings Bank (the "Bank") and First Coastal Banks, Inc. ("First Coastal"), which wholly owns The First National Bank of Portsmouth ("Portsmouth"), and other subsidiaries which are wholly-owned by the Company's direct wholly-owned 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. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that effect 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 possible loan and lease losses and the net deferred tax asset. Securities Available for Sale Securities available for sale consist of debt and equity securities that the Company anticipates could be made 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 recorded in and reported as a separate component of shareholders' equity. When a decline in market value of a security is considered other than temporary, the loss is charged to net securities gains (losses) in the consolidated statements of operations as a writedown. Premiums and discounts are amortized and accreted over the term of the securities on the level yield method. Gains and losses on the sale of investment securities are recognized at the time of the sale using the specific identification method. Loans Held for Sale Loans originated for the purpose of potential subsequent sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimate of market value. Loans Loans are carried at the principal amounts outstanding reduced by partial charge-offs and net deferred loan fees. 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 charged to 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. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan,: and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." 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. At adoption, the Company reclassified $2.2 million of insubstance foreclosures and related reserves of $96 thousand to loans and leases and allowance for loan and lease losses, respectively. 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 deemed uncollectible. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans. 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. 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. Other Real Estate and Repossessed Assets Owned Other real estate and repossessed assets owned is comprised of (i) properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure and (ii) other assets repossessed in connection with non-real estate loans. Other real estate and repossessed assets owned are initially carried at the lower of cost or fair value of the collateral less estimated cost to sell. Losses arising from the acquisition of such properties are 35 38 charged against the allowance for loan losses. Operating expenses and any subsequent provisions to reduce the carrying value are charged to current period earnings. Gains upon disposition are reflected in earnings as realized; losses are charged to the valuation allowance. Restrictions on Cash Availability 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. 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. Goodwill and Other Intangibles Goodwill is amortized on a straight-line basis over periods of fifteen and 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 events or changed circumstances may affect the underlying basis of the asset. Mortgage Banking Residential real estate mortgages originated for the purpose of potential subsequent sale are classified as held for sale. Forward commitments to sell residential real estate mortgages are contracts which the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. In the event the Company is unable to originate loans to fulfill the contracts, it would normally purchase loans from correspondents or in the open market to deliver against the contract. Such loans are also classified as held for sale. In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122 changed the Company's method of accounting for certain mortgage banking activities. The Company elected early adoption of SFAS No. 122 effective for all mortgage banking activities in 1995 and as a result capitalized $2.3 million of originated mortgage servicing rights, net of amortization. When loans are sold, a gain or loss is recognized to the extent that the sale proceeds exceed or are less than the carrying value of the loans. Gains and losses 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 and to ensure that the carrying value of the remaining mortgage servicing rights do not exceed the present value of the estimated future net servicing income. 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. Pension Accounting The Company provides pension benefits to its employees under a noncontributory defined benefit plan which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 and recognizes costs over the estimated employee service period. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold minus federal funds purchased. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability 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. To the extent that current available information raises doubt as to the realization of some portion or all of the deferred tax assets, a valuation allowance must be 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. Earnings Per Share Earnings per share have been computed on the basis of the weighted average number of shares of common stock outstanding. Common stock equivalents were not considered in the calculation of weighted average shares outstanding since their effect was not material. 36 39 2. CONDENSED PARENT INFORMATION Condensed Financial Statements of the Parent Company
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- Balance Sheets 1995 1994 - -------------------------------------------------------------------------------- Assets Cash and due from banks $ 22,059 $ 6,914 Investment in bank subsidiaries 230,261 202,059 Goodwill 14,392 15,896 Amounts receivable from subsidiaries 8,432 459 Other assets 4,095 4,337 ----- ----- Total assets $279,239 $229,665 ======== ======== Liabilities and shareholders' equity Amounts payable to subsidiaries $ 132 $ 85 Notes payable 7,836 -- Other liabilities 803 315 Shareholders' equity 270,468 229,265 ------- ------- Total liabilities and shareholders' equity $279,239 $229,665 ======== ======== - -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- Statements of Operations 1995 1994 1993 - -------------------------------------------------------------------------------- Operating income: Dividends from banking subsidiaries $ 20,157 $ 9,540 $ 1,009 Gain (loss) on intercompany loan sales -0- (430) 262 Other operating income 322 132 40 --- --- -- Total operating income 20,479 9,242 1,311 ------ ----- ----- Operating expenses: Interest on borrowings 363 -0- 138 Amortization of goodwill 1,505 1,505 1,505 Amortization of acquisition premiums 359 359 305 Other operating expenses 1,502 813 600 ----- --- --- Total operating expenses 3,729 2,677 2,548 ----- ----- ----- Income (loss) before income taxes and equity in undistributed net income (loss) of subsidiaries 16,750 6,565 (1,237) Income tax benefit (413) (389) (153) ---- ---- ---- Income (loss)before equity in undistributed net income of subsidiaries 17,163 6,954 (1,084) Equity in undistributed net income of subsidiaries 16,869 18,483 17,203 ------ ------ ------ Net income $ 34,032 $ 25,437 $ 16,119 ======== ======== ======== - -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- Statements of Cash Flows 1995 1994 1993 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 34,032 $ 25,437 $ 16,119 Adjustments to reconcile net income to net cash (used) provided by operating activities: Undistributed net income from subsidiaries (16,869) (18,483) (17,203) Amortization of goodwill 1,505 1,505 1,505 Amortization of acquisition premiums 359 359 305 Loss (gain) on intercompany loan sales -0- 430 (292) (Increase) decrease in amounts receivable from subsidiaries (7,973) (459) 4 (Increase) in other assets (119) (130) (103) Increase (decrease) in amounts payable to subsidiaries 47 79 (530) Increase (decrease) in other liabilities 488 (325) (2,219) -------- ------- -------- Net cash (used) provided by operating activities 11,470 8,413 (2,414) -------- ------- -------- Cash flows from investing activities: Reissuance of treasury stock pursuant to acquisition 11,274 -- -- Issuance of notes payable pursuant to acquisition (net) 7,836 -- -- Capital invested in subsidiaries -0- -0- (2,600) -------- ------- -------- Net cash used by investing activities 19,110 -0- (2,600) -------- ------- -------- Cash flows from financing activities: Dividends paid to shareholders (8,625) (3,955) -- Treasury stock acquired (8,317) (1,262) (79) Treasury stock sold 1,507 1,628 790 Net proceeds from sale of stock -- -- 251 -------- -------- -------- Net cash provided (used) by financing activities (15,435) (3,589) 962 -------- -------- -------- Net increase (decrease) in cash and due from banks 15,145 4,824 (4,052) Cash and due from banks at beginning of year 6,914 2,090 6,142 -------- -------- -------- Cash and due from banks at end of year $ 22,059 $ 6,914 $ 2,090 ======== ======== ======== - -------------------------------------------------------------------------------- Supplemental disclosure information: Interest paid on borrowings $ 363 $ -- $ 138 - --------------------------------------------------------------------------------
37 40 3. SECURITIES AVAILABLE FOR SALE A summary of the amortized cost and market values of securities available for sale follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Gross Unrealized Gross Unrealized Market Cost Holding Gains Holding Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995: U.S. Government obligations and obligations of U.S. Government agencies and corporations $248,096 $1,828 $ (227) $249,697 Tax-exempt bonds and notes 10,271 30 (2) 10,299 Other bonds and notes 5,368 55 (6) 5,417 Mortgage-backed securities 194,018 2,224 (419) 195,823 -------- ------ -------- -------- Total debt securities 457,753 4,137 (654) 461,236 -------- ------ -------- -------- Federal Home Loan Bank of Boston stock 23,793 0 0 23,793 Other equity securities 160 29 0 189 -------- ------ -------- -------- Total equity securities 23,953 29 0 23,982 -------- ------ -------- -------- Total securities available for sale $481,706 $4,166 $ (654) $485,218 ======== ====== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
The excess of market value over amortized cost of $3.5 million, net of tax effect of $1.3 million, is recorded in and reported as a separate component of shareholders' equity.
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Gross Unrealized Gross Unrealized Market Cost Holding Gains Holding Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994: U.S. Government obligations and obligations of U.S. Government agencies and corporations $225,058 $ 9 $ (5,847) $219,220 Tax-exempt bonds and notes 11,192 6 (113) 11,085 Other bonds and notes 2,751 0 (45) 2,706 Mortgage-backed securities 180,930 69 (8,533) 172,466 -------- ------ -------- -------- Total debt securities 419,931 84 (14,538) 405,477 -------- ------ -------- -------- Federal Home Loan Bank of Boston stock 23,236 0 0 23,236 Other equity securities 171 119 0 290 -------- ------ -------- -------- Total equity securities 23,407 119 0 23,526 -------- ------ -------- -------- Total securities available for sale $443,338 $ 203 $(14,538) $429,003 ======== ====== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
The excess of amortized cost over market value of $14.3 million, net of tax effect of $5.3million is recorded in and reported as a separate component of shareholders' equity. - -------------------------------------------------------------------------------- The amortized cost and market values of debt securities available for sale at December 31, 1995 by contractual maturity 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.
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Cost Market Value - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995: Due in one year or less $133,891 $134,342 Due after one year through five years 129,243 130,484 Due after five years through ten years 34,718 35,029 Due after ten years 159,901 161,381 ------- ------- Total debt securities $457,753 $461,236 ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
38 41 A summary of realized gains and losses on securities available for sale for 1995, 1994 and 1993 follows:
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS GROSS Gross Gross Gross Gross REALIZED REALIZED Realized Realized Realized Realized GAINS LOSSES Gains Losses Gains Losses - ------------------------------------------------------------------------------------------------------------------------------------ Sales of U.S. Government obligations and obligations of U.S. Government agencies and corporations $ 31 $ 84 $ 32 $773 $ 561 $-0- Sales of other bonds and notes 16 3 -0- 25 6 34 Sales of mortgage-backed securities -0- 0 54 -0- -0- -0- Sales of equity securities 244 87 298 5 468 -0- ---- ---- ---- ---- ------ --- Total $290 $174 $384 $803 $1,035 $34 ==== ==== ==== ==== ====== === - ------------------------------------------------------------------------------------------------------------------------------------
4. LOANS HELD FOR SALE The following table summarizes the book value and estimated market value of loans held for sale at the dates indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ ESTIMATE OF Estimate of BOOK VALUE MARKET VALUE Book Value Market Value - ------------------------------------------------------------------------------------------------------------------------------------ Fixed-rate residential real estate loans having a weighted average note rate of 7.31% and 7.71% at December 31, 1995 and 1994, respectively $70,979 $71,872 $11,092 $11,163 ===== ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------------
Included in the portfolio of residential real estate loans held for sale are gross unrealized gains of $1.8 million and $122 thousand and gross unrealized losses of $874 thousand and $51 thousand at December 31, 1995 and 1994, respectively. 39 42 5. LOANS AND LEASES The Company's lending activities are conducted principally in Maine and New Hampshire. 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, - -------------------------------------------------------------------------------- 1995 1994 Residential real estate mortgages: Adjustable-rate $ 402,695 $ 418,653 Fixed-rate 204,674 213,708 ------- ------- 607,369 632,361 ------- ------- Commercial real estate mortgages: Commercial real estate 524,179 520,813 Multi-family residential real estate 60,627 51,485 Construction and development 38,880 23,057 ------ ------ 623,686 595,355 ------- ------- Commercial business loans and leases: Business loans 259,826 207,594 Lines and letters of credit 61,989 48,842 Leases 10,940 9,208 ------ ----- 332,755 265,644 ------- ------- Consumer loans and leases: Home equity 256,813 217,889 Mobile home 196,408 201,297 Automobile 109,738 106,666 Home improvement, second mortgage and land 36,900 32,921 Boat and recreational vehicle 17,013 18,836 Other 36,955 27,309 ------ ------ 653,827 604,918 ------- ------- Total loans and leases $2,217,637 $2,098,278 ========== ========== - --------------------------------------------------------------------------------
Loan and lease balances are stated net of deferred loan fees totaling $3,897 and $5,676 at December 31, 1995 and 1994, respectively. During 1993 the Company sold substantially all of its credit card portfolio in order to exit its unprofitable retail credit product lines. As a result of this sales transaction, the Company realized a $2.6 million gain. Related Party Transactions Loans to officers, directors and related parties are made in the ordinary course of business and on the same terms and conditions prevailing at the time for comparable transactions. A summary of loans to related parties during 1995 and 1994 follows: - -------------------------------------------------------------------------------- Balance at December 31, 1993 $ 18,488 Loans made/advanced and additions 1,089 Repayments and reductions (4,898) Other changes 76 -- Balance at December 31, 1994 $ 14,603 Loans made/advanced and additions 500 Repayments and reductions (1,866) Other changes (1,386) ------ Balance at December 31, 1995 $ 11,865 ========
- -------------------------------------------------------------------------------- Nonperforming loans The following table sets forth information regarding nonperforming loans at the dates indicated:
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 Residential real estate mortgages: Nonaccrual loans $ 4,990 $ 1,799 Accruing loans which are 90 days overdue 2,724 2,883 ------- ------- Total 7,714 4,682 ------- ------- Commercial real estate mortgages: Nonaccrual loans 13,247 20,413 Troubled debt restructurings 2,595 5,704 ------- ------- Total 15,842 26,117 ------- ------- Commercial business loans and leases: Nonaccrual loans 6,235 6,270 Troubled debt restructurings 1,859 2,013 ------- ------- Total 8,094 8,283 ------- ------- Consumer loans and leases: Nonaccrual loans 2,846 2,727 Accruing loans which are 90 days overdue 532 468 ------- ------- Total 3,378 3,195 ------- ------- Total nonperforming loans: Nonaccrual loans 27,318 31,209 Accruing loans which are 90 days overdue 3,256 3,351 Troubled debt restructurings 4,454 7,717 ------- ------- Total nonperforming loans $35,028 $42,277 ======= ======= - --------------------------------------------------------------------------------
40 43 The ability and willingness of the residential real estate, commercial real estate, commercial business and consumer borrowers to repay loans is generally dependent on current economic conditions and real estate values within the borrowers' geographic areas. During 1995 and 1994, the Company's policy was generally to limit new loans to one borrower to $8.0 million. These limitations are substantially below the limitations set forth in applicable laws and regulations. Interest income that would have been recognized for 1995, 1994 and 1993, if nonperforming loans at December 31, 1995, 1994 and 1993 had been performing in accordance with their original terms, approximated $4.1 million, $4.8 million and $6.8 million, respectively. The actual amount that was collected on these loans during the periods and included in interest income approximated $1.5 million, $1.5 million and $2.5 million, respectively. As a result, the reduction in interest income for 1995, 1994, and 1993 associated with nonperforming loans held at the end of such periods approximated $2.6 million, $3.3 million and $4.3 million, respectively. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Account ing by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These statements require changes in both the disclosure and impairment measurement of nonperforming loans. Certain loans which had previously been reported as nonperforming and certain in-substance foreclosures are currently required to be disclosed as impaired loans. At adoption, the Company reclassified $2.2 million of in-substance foreclosures and related reserves of $96 thousand to loans and the allowance for loan losses, respectively. Prior year balances were not reclassified as management deemed the amounts to be immaterial. Restructured accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure, these loans may be removed from impaired loan status provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. Restructured, accruing loans entered into prior to the adoption of these statements are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms. Impaired loans are commercial, commercial real estate, and individually significant mortgage and consumer loans for which 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 are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or 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. Factors considered by management in determining impairment include payment status and collateral value. 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 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, 1995, total impaired loans were $24.4 million, of which $21.8 million had related allowances of $4.9 million. During the year ended December 31, 1995, the income recognized related to impaired loans was $1.5 million and the average balance of outstanding impaired loans was $29.1 million. The Company recognizes interest on impaired loans on a cash basis when the ability to collect the principal balance is not in doubt; otherwise, cash received is applied to the principal balance of loan. 6. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses follow:
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Balance at beginning of period $ 50,484 $ 52,804 $ 54,604 Allowance on acquired portfolios 2,314 -0- -0- Provisions charged to operations 2,430 1,857 9,779 Loans and leases charged off (12,982) (11,762) (20,370) Recoveries 6,892 7,585 8,791 ----- ----- ----- Balance at end of period $ 49,138 $ 50,484 $ 52,804 ======== ======== ======== - --------------------------------------------------------------------------------
7. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Land $ 9,837 $ 8,100 Buildings and improvements 31,915 28,569 Leasehold improvements 8,365 7,203 Furniture, fixtures and equipment 33,599 25,426 ------ ------ 83,716 69,298 ------ ------ Less accumulated depreciation and amortization 39,358 33,383 ------ ------ $44,358 $35,915 ======= ======= - --------------------------------------------------------------------------------
41 44 8. GOODWILL AND OTHER INTANGIBLES A summary of goodwill and other intangibles follows:
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------- Goodwill $19,145 $17,506 Core deposit premiums 2,031 1,479 ----- ----- $21,176 $18,985 ======= ======= - --------------------------------------------------------------------------------
Amortization of goodwill is included in other noninterest expenses and amounted to $1,813, $1,688 and $2,623 for the years ended December 31, 1995, 1994 and 1993, respectively. Amortization of core deposit premiums is included in interest on deposits and amounted to $286, $244 and $290 for the years ended December 31, 1995, 1994 and 1993, respectively. 9. MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights for the years ended December 31, 1995, 1994 and 1993 follows:
- -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Balance at beginning of period $ 17,275 $ 6,483 $ 1,985 Mortgage servicing rights capitalized 9,101 12,535 6,764 Amortization charged against mortgage service fee income (3,483) (1,743) (2,266) Mortgage servicing rights sold (2,584) -0- -0- ------ - - Balance at end of period $ 20,309 $ 17,275 $ 6,483 ======== ======== ======= - --------------------------------------------------------------------------------
Residential real estate mortgages are originated by the Company generally for sale into the secondary market. Such loans are sold to institutional investors such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Under loan sale and servicing agreements with these investors, the Company generally continues to service the residential real estate mortgages. The Company pays the investor an agreed-upon rate on the loan, which, including a guarantee fee paid to FNMA and FHLMC, 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. As required by SFAS No. 122, the Company capitalizes mortgage servicing rights at their fair value upon sale of the related loans. The Company periodically purchases residential mortgage servicing rights through a closed bid process from brokers representing financial institutions with mortgage servicing portfolios available for sale. The payment made to purchase such mortgage servicing rights is capitalized by the Company upon consummation of the purchase agreement. Residential real estate mortgages serviced for investors at December 31, 1995, 1994 and 1993 amounted to $2.5 billion, $2.0 billion and $1.5 billion, respectively. Mortgage servicing rights are generally amortized on a level yield 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 and to ensure that the carrying value of the remaining mortgage servicing rights do not exceed the present value of the estimated future net servicing income. In evaluating the fair value of the carrying value of mortgage servicing rights, the Company assesses the estimated life of its servicing portfolio based on data which is disaggregated by note rate, note type and note term. 10. OTHER REAL ESTATE AND REPOSSESSED ASSETS OWNED The following table summarizes the composition of other real estate and repossessed assets owned, net of related reserves:
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Real estate properties acquired in settlement of loans $ 5,073 $ 6,658 In-substance foreclosures -0- 2,096 Other assets repossessed in settlement of non- real estate loans 1,528 1,976 ----- ----- $ 6,601 $10,730 ======= ======= - --------------------------------------------------------------------------------
As a result of the adoption of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," the Company reclassified $2.2 million of in-substance foreclosures and related reserves of $96 thousand to loans and leases and allowance for loan and lease losses, respectively. 11. INCOME TAXES The current and deferred components of income tax expense (benefit) follow:
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Current (including $805, $302, and $113, respectively, of state income tax) $14,321 $ 12,638 $ 3,635 Deferred 2,922 (3,050) (5,974) ----- ------ ------ $17,243 $ 9,588 $(2,339) ======= ======== ======= - --------------------------------------------------------------------------------
42 45 The following table reconciles the expected income tax expense (benefit) (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense (benefit):
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Computed tax expense (benefit) $ 17,946 $ 12,259 $ 4,823 State income tax, net of federal benefits 523 196 72 Dividends received deduction -- (1) (2) Benefit of tax-exempt income (507) (399) (252) Amortization of goodwill and other intangibles 839 842 1,146 Low income/rehabilitation credits (1,265) (1,265) (1,264) Book net operating loss carryback limitation -- -- (351) Tax bad debt reserve recapture on acquisition -- 1,022 -- Change in valuation allowance -- (3,124) (5,865) Change in federal tax rate -- -- (478) Other, net (293) 58 (168) -------- -------- ------- $ 17,243 $ 9,588 $(2,339) ======== ======== ======= - --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 follow:
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan and lease losses $18,459 $17,746 Reserve for mobile home dealers 2,119 1,384 Accrued pension expense 848 319 Difference of tax and book basis of other real estate owned 391 1,398 Deferred loan fees 206 1,310 Interest accrued and payments received on nonperforming loans for tax purposes 842 1,071 Unrealized depreciation on investment securities -- 5,272 Other 3,756 2,024 ----- ----- Total gross deferred tax assets 26,621 30,542 ------ ------ Less: valuation allowance -- -- ------ ------ Net deferred tax assets 26,621 30,542 ------ ------ Deferred tax liabilities: Difference of tax and book basis of leases 420 842 Difference of tax and book basis of premises and equipment 1,041 1,010 Difference of tax and book basis of securities 522 1,119 Tax bad debts reserve 5,518 -- Unrealized appreciation of investment securities 1,243 -- Other 1,656 1,913 ----- ----- Total gross deferred tax liabilities 10,400 4,884 ------ ----- Net deferred tax asset $16,221 $25,658 ======= ======= - --------------------------------------------------------------------------------
In assessing the realizability of deferred tax assets, the Company considers whether more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. The Company estimates that substantially all of its gross deferred assets and liabilities will reverse within the next five years. In order to fully realize the net deferred tax asset, the Company will need to generate future taxable income of approximately $46.3 million. Pre-tax book income for the year ended December 31, 1995 was $51.3 million. Based upon the level of 1995 taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, the Company believes it is more likely than not that it will realize the benefits of these deductible temporary differences at December 31, 1995. Accordingly, no valuation allowance has been recorded at December 31, 1995. 12. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The weighted average interest rate on reverse repurchase agreements was 4.78% and 4.82% at December 31, 1995 and 1994, respectively. These borrowings were scheduled to generally mature within 180 days. These borrowings were collateralized by FHLMC and FNMA securities and U.S. Government obligations with an aggregate market value of $154,846 and $96,416 at December 31, 1995 and 1994, respectively, and an aggregate amortized cost of $153,545 and $100,216 at December 31, 1995 and 1994, respectively. Securities sold under agreements to repurchase averaged $113,599 and $75,870 during the years ended December 31, 1995 and 1994, respectively. The maximum amount outstanding at any month-end during the years ended December 31, 1995 and 1994 was $167,618 and $110,176, respectively. 13. 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, 1995 - -------------------------------------------------------------------------------- Principal Interest Maturity Amounts Rates Dates - -------------------------------------------------------------------------------- $ 31,500 4.26% - 6.57% 1996 72,950 5.82% - 6.87% 1997 82,500 5.30% - 6.02% 1998 64,000 5.71% - 5.78% 2000 1,496 6.70% - 6.90% 2005 - -------- $252,446 ======== - --------------------------------------------------------------------------------
43 46
- -------------------------------------------------------------------------------- December 31, 1994 - -------------------------------------------------------------------------------- Principal Interest Maturity Amounts Rates Dates - -------------------------------------------------------------------------------- $ 54,000 4.08% - 6.31% 1995 25,500 4.26% - 5.87% 1996 252,950 5.62% - 6.87% 1997 30,000 5.30% 1998 - -------- $362,450 ======== - --------------------------------------------------------------------------------
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 1 to 4 family properties, certain unencumbered investment securities and other qualified assets. 14. SHAREHOLDERS' EQUITY Regulatory Capital Requirements At December 31, 1995 and 1994, the Company and each of its banking subsidiaries were in compliance with all applicable regulatory capital requirements and had capital ratios in excess of federal 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 Company's subsidiary 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 subsidiary banks to the Company. In addition, there are informal regulatory commitments which could affect the Bank's ability to distribute dividends 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. 15. 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 interest rate exchange agreements and 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, 1995 and 1994 follow:
- -------------------------------------------------------------------------------- Contract or Notional Amount - -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Financial instruments with contract amounts which represent credit risk: Commitments to originate loans $188,430 $131,973 Unused lines and standby letters of credit 274,778 222,609 Loans serviced with recourse 48,213 74,103 Unadvanced portions of construction loans 18,680 15,673 Financial instruments with notional or contract amounts which exceed the amount of credit risk: Forward commitments to sell loans $128,000 $ 11,670 - --------------------------------------------------------------------------------
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. 44 47 Included in commitments to originate loans, the Company had guaranteed the rate on $83.3 million in fixed rate residential real estate loans with a weighted average interest rate of 7.26% which were substantially hedged by the $128.0 million in forward sales commitments noted above. 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. Derivative Financial Instruments The Company has only limited involvement with derivative financial instruments. 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. Legal Proceedings The Company and certain of its subsidiaries have been named as defendants in various legal proceedings arising from their normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, based upon the opinions of counsel, any such liability will not have a material effect on the consolidated financial position or results of operations 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 $2.8 million, $3.0 million and $2.6 million for the years ended 1995, 1994 and 1993, respectively. Approximate minimum lease payments over the remaining terms of the leases at December 31, 1995 follow:
- -------------------------------------------------------------------------------- 1996 $ 2,892 1997 2,837 1998 2,572 1999 2,472 2000 2,338 2001 and after 8,212 ----- $21,323 ======= - --------------------------------------------------------------------------------
16. EMPLOYEE BENEFIT PLANS Defined Benefit Pension Plan The Company has a noncontributory defined benefit plan covering substantially all 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. 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 following tables set forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1994.
- -------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $14,635 and $12,787 $ 15,181 $ 13,367 ======== ======== Projected benefit obligation for service rendered to date $ 16,599 $ 14,680 Plan assets at fair value, primarily listed stocks and corporate bonds (16,475) (12,974) ------- ------- Plan assets less than projected benefit obligation 124 1,706 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (1,170) (2,753) Unrecognized prior service cost 872 786 Unrecognized net asset being recognized over 20.5 years 1,203 1,328 ----- ----- Accrued pension cost included in other liabilities $ 1,029 $ 1,067 ======== ======== - --------------------------------------------------------------------------------
Net pension cost for 1995, 1994 and 1993 included the following components:
- -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost during the period $ 1,193 $ 987 $ 806 Interest cost on projected benefit obligation 1,053 989 900 Actual return on plan assets (2,762) 72 (1,103) Net amortization and deferral 1,580 (1,250) (116) ----- ------ ---- Net periodic pension cost $ 1,064 $ 798 $ 487 ======= ======= ======= - --------------------------------------------------------------------------------
45 48 The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations was 7.0% for both 1995 and 1994. The expected long-term rate of return on assets was 8.0% for both 1995 and 1994. Thrift Incentive Plan The Company also 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 1995, 1994 and 1993 was $659 thousand, $620 thousand and $462 thousand, respectively. Profit Sharing Employee Stock Ownership Plan In 1989 the Company also 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 for 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 1995, 1994 and 1993 the Directors voted to contribute 3%, 5% and 9% of eligible compensation, respectively. The approximate expense of this contribution for 1995, 1994 and 1993 was $850 thousand, $1.4 million and $2.1 million, respectively. Stock Option Plans The Company has adopted a Stock Option and Stock Appreciation Rights Plan for key employees. The maximum number of shares which may be granted under the Plan is 1,670,000 shares, of which 1,454,130 options were outstanding and 190,038 shares had been issued upon the exercise of stock options cumulatively through December 31, 1995. All options have been issued at not less than fair market value at the date of grant and expire 10 years (10 years plus one month in the case of non-qualified options) from the date granted. In addition, the Plan authorizes the Company to issue stock appreciation rights (SARs) to optionees under certain terms and conditions. During 1995 the Company granted employees options to purchase 399,139 shares of common stock at $21.00 per share. During 1994 the Company granted options to purchase 487,436 shares of common stock at between $12.88 and $14.75 per share. The Company has adopted a Stock Option Plan for nonemployee directors. The maximum number of shares which may be granted under the plan is 75,000 shares, of which 18,000 options, all of which were granted in 1995 at $13.63 per share, were outstanding and -0- shares had been issued upon the exercise of the stock options cumulatively through December 31, 1995. All options have been issued at not less than fair market value at the date of grant and expire 10 years from date of grant. A summary of option activity follows:
- -------------------------------------------------------------------------------- Year Ended December 31, - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Outstanding at beginning of period 1,135,683 817,256 Granted during the year 417,139 487,436 Cancelled during the year 24,902 72,133 Exercised during the year 73,790 96,876 Outstanding at end of period 1,454,130 1,135,683 Exercisable at end of period 636,029 249,873 Average price of options exercisable $ 9.73 $ 6.70 Price range of options $2.75 - $21.00 $2.75 - $14.75 Average price of options outstanding $ 13.36 $ 10.31 SARs outstanding at end of period 2,500 2,500 - --------------------------------------------------------------------------------
Employee Stock Purchase Plan The Company also has adopted 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 676,000 shares. Employees have the right to authorize payroll deductions up to 10% of their salary. As of December 31, 1995, 300,318 shares had been purchased under this plan. Supplemental Retirement Plans During 1990 the Company adopted supplemental retirement plans for several key officers. These plans were designed to offset the impact of changes in the Pension Plan which reduced benefits for highly paid employees. The cost of these plans was $ 537 thousand, $342 thousand and $512 thousand for 1995, 1994 and 1993, respectively. Postretirement Benefits Other Than Pensions The Company sponsors a postretirement benefit program which provides medical coverage and life insurance benefits to employees and directors who meet minimum age and service requirements. Active employees and directors accrue benefits over a 25 year period. The Company recognizes 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. 46 49 The following reconciles the program's funded status with amounts recognized in the Company's Consolidated Balance Sheet at December 31, 1995 and 1994
- -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 1,840 $ 1,994 Fully eligible active program participants 311 463 Other active program participants 542 1,255 --- ----- 2,693 3,712 Plan assets -- -- ------ ------ Accumulated postretirement benefit obligation in excess of plan assets 2,693 3,712 Unrecognized net gain 485 5 Unrecognized prior service cost (2,290) (3,062) ------ ------ Accrued postretirement benefit cost included in other liabilities $ 888 $ 655 ======= ======= - --------------------------------------------------------------------------------
Net postretirement benefit cost for the year ended December 31, 1995, 1994 and 1993 included the following components:
- -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost $ 29 $ 73 $ 72 Interest cost 187 242 242 Amortization of accumulated postretirement obligation 141 170 170 --- --- --- Net periodic postretirement benefit cost $357 $485 $484 ==== ==== ==== - --------------------------------------------------------------------------------
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) was assumed in 1995 and 1994. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point would increase the accumulated postretirement benet obligation as of December 31, 1995 by $151 thousand and the aggregate of the service and interest cost components of net periodic post retirement benefit cost for the year ended December 31, 1995 by $10 thousand. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7% in 1995 and 1994. Currently, the Company pays retiree benefit premiums directly on a monthly basis rather than through a formal funded trust. Consequently, the postretirement benefit program neither requires nor has any plan assets. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", issued in December 1991 and effective beginning with 1992 financial statements, requires disclosure of 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 many 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, INTEREST-BEARING DEPOSITS IN BANKS 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 AVAILABLE FOR SALE AND LOANS HELD FOR SALE. Fair values, including fair values of mortgage-backed securities, 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 are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality. 47 50 For certain variable-rate consumer loans, including home equity lines of credit and credit card receivables, carrying value approximates fair value. This method of estimating the fair value of the credit card portfolio excluded the value of the ongoing customer relationships, a factor which can represent a significant premium over book value. Lease financing receivables are similar to loans in many respects, fair values are provided and were estimated using the methodologies used for the loan portfolio. 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. INTEREST AND DIVIDENDS RECEIVABLE. The carrying amount of interest and dividends receivable approximates its fair value. DEPOSITS. The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on the deposit products of similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding ("deposit base intangibles"). BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON, SUBORDINATED CAPITAL NOTES AND OTHER BORROWINGS. The fair value of the Company's long-term borrowings is estimated based on quoted market prices for the issues for which there is a market, or by discounting cash flows based on current rates available to the Company for similar types of borrowing arrangem ents. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value. OFF-BALANCE SHEET INSTRUMENTS: INTEREST RATE EXCHANGE AGREEMENTS. Fair values for interest rate exchange agreements are based on established pricing models. 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 excess servicing recognizable upon sale of loans net of any cost to the Company if it fails to meet its sale obligation. Of the $128.0 million of forward sales commitments at December 31, 1995, the Company had $71.9 million available to sell at that date as well as sufficient loan originations subsequent to December 31, 1995 to fulfill the commitments. Consequently, the Company has no unmet sales obligation to value and due to the short-term nature of the commitments has not estimated the value of the fees and servicing. LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing arrangements with investors, the Company has recourse obligation to those serviced loan portfolios. In the event of foreclosure on a serviced loan, the Company is obligated to repay the investor to the extent of the investor's remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while the Company cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant. A summary of the fair values of the Company's significant financial instruments and certain non-financial instruments at December 31, 1995 and 1994 follows:
- ---------------------------------------------------------------------------------------------------------------- 1995 1994 - ---------------------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair VALUE VALUE Value Value - ---------------------------------------------------------------------------------------------------------------- On-Balance Sheet Assets and Liabilities Assets: Cash and cash equivalents $ 182,408 $ 182,408 $ 130,476 $ 130,476 Securities available for sale 485,218 485,218 429,003 429,003 Loans held for sale 70,979 71,872 11,092 11,163 Loans and leases 2,168,499 2,220,318 2,047,794 2,006,506 Mortgage servicing rights 20,309 22,140 17,275 21,052 Interest and dividend receivable 21,634 21,634 18,929 18,929 Liabilities: Deposits (with no stated maturity) $1,237,861 $1,237,861 $1,051,441 $1,051,441 Time deposits 1,124,104 1,141,268 1,012,326 991,665 Borrowings 412,816 414,000 461,387 452,689 Interest payable 4,762 4,762 4,099 4,099 - ----------------------------------------------------------------------------------------------------------------
48 51 18. MERGERS AND ACQUISITIONS (UNAUDITED) Completed During 1995 and 1994 On July 1, 1995, Bankcore, Inc. ("Bankcore"), the New Hampshire based holding company for North Conway Bank, was acquired and North Conway Bank merged into Portsmouth. At the time of the acquisition, Bankcore had $132.8 million in total assets and shareholders' equity of $17.8 million. The Bankcore acquisition was treated as a purchase for accounting purposes, and, accordingly, the Company's financial statements reflect the acquisition from the time of purchase only. As a result of the transaction, $3.4 million in goodwill was created and is being amortized over 15 years. On June 15, 1995, the Company purchased all the branches and associated deposits, as well as certain loans, of Fleet Bank of Maine located in Aroostook County, Maine. Five of the seven Branches purchased were merged with and into existing branches of the Bank. The purchase resulted in the transfer of $46.1 million in deposits and $17.1 million in loans. On July 31, 1994, Mid Maine Savings Bank, F.S.B. ("MMSB"), headquartered in Auburn, Maine, was merged into the Bank, and was accounted for under the pooling-of-interest method. Accordingly, the consolidated financial statements of the Company have been restated to reflect the acquisition at the beginning of each period presented. At July 31, 1994, MMSB had total assets of $170.5 million and total shareholders' equity of $11.4 million. Substantially concurrently with the merger of MMSB into the Bank, the Bank sold all the assets and liabilities relating to MMSB's Hampton (New Hampshire) Division to Portsmouth. Pending at December 31, 1995 On September 29, 1995 and amended as of October 31, 1995, the Company entered into an agreement with Shawmut Bank NH ("Shawmut") to acquire five branches of Shawmut (the "Branch Acquisition"). The purchase will result in the transfer of approximately $212 million in loans to the Company and its assumption of approximately $160 million in deposits. The purchase was completed during the first quarter of 1996. On October 25, 1995, the Company, First Coastal and the Bank of New Hampshire Corporation ("BNHC") entered into an Agreement and Plan of Merger (the "Agreement"), pursuant to which, among other things, First Coastal will merge into BNHC (the "Merger"). Simultaneous with the Merger, each share of common stock of BNHC will be converted into and represent the right to receive two shares of common stock of the Company. At December 31, 1995, BNHC had 4,064,156 shares of common stock outstanding. At December 31, 1995, BNHC had total assets of $977.8 million and total shareholders' equity of $84.5 million. Consummation of the Merger is subject to, among other things, the receipt of all necessary regulatory and shareholder approvals. The Merger is expected to be accounted for as a pooling of interests and to be completed during the second quarter of 1996. The following pro forma condensed balance sheet was prepared as if the pending acquisitions noted above had been completed at December 31, 1995.
- -------------------------------------------------------------------------------------------------------------------------- December 31, 1995 - -------------------------------------------------------------------------------------------------------------------------- Branch Pro Forma Pro Forma PHFG BNHC Acquisition Adjustments Combined - -------------------------------------------------------------------------------------------------------------------------- Assets: Investments(1) $ 543,473 $323,430 $(31,265) $ 0 $ 835,638 Total loans and leases, net 2,168,499 549,043 212,358 0 2,929,900 Other assets 366,697 105,363 19,330 0 491,390 ---------- -------- -------- ------- ---------- Total assets $3,078,669 $977,836 $200,423 0 $4,256,928 ========== ======== ======== ======= ========== Liabilities and equity: Deposits $2,361,965 $837,726 $160,056 0 $3,359,747 Borrowings 412,816 44,116 40,000 0 496,932 Other liabilities 33,420 11,537 367 1,802 47,126 ---------- -------- -------- ------- ---------- Total liabilities 2,808,201 893,379 200,423 1,802 3,903,805 ---------- -------- -------- ------- ---------- Shareholders' equity 270,468 84,457 0 (1,802) 353,123 ---------- -------- -------- ------- ---------- Total liabilities and shareholders equity $3,078,669 $977,836 $200,423 $ 0 $4,256,928 ========== ======== ======== ======= ========== - -------------------------------------------------------------------------------------------------------------------------- (1) Includes federal funds sold - --------------------------------------------------------------------------------------------------------------------------
49 52 The following pro forma condensed consolidated statement of operations was prepared as if the pending and completed acquisitions noted above had all been completed at January 1, 1995.
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Branch Pro Forma Pro Forma PHFG BNHC Acquisition Bankcore(1) Adjustments Combined - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 235,599 $ 70,926 $16,449 $4,393 $ 0 $ 327,367 Interest expense 111,063 23,831 11,567 2,226 0 148,687 ---------- --------- ------- ------ ------- ---------- Net interest income 124,536 47,095 4,882 2,167 0 178,680 Provision for loan losses 2,430 1,800 0 109 0 4,339 ---------- --------- ------- ------ ------- ---------- Net interest income after provision for loan losses 122,106 45,295 5,116 2,058 0 174,575 Noninterest income 21,826 10,130 301 1,007 0 33,264 Non-interest expense (2) 92,657 38,839 1,884 2,390 (3,667) 132,103 ---------- --------- ------- ------ ------- ---------- Income before income taxes 51,275 16,586 3,299 675 3,667 75,502 Income tax expense 17,243 6,132 1,155 (115) 1,283 25,698 ---------- --------- ------- ------ ------- ---------- Net income 34,032 10,454 $ 2,144 $ 790 $ 2,384 49,804 ========== ========= ======= ====== ======= ========== Earnings per common share $ 2.05 $ 2.57 $ 2.02 Average shares outstanding 16,569,063 4,064,165 24,697,393 - ------------------------------------------------------------------------------------------------------------------------------------ (1) Reflects the operations of Bankcore for the six months ended June 30, 1995; subsequent to June 30, 1995 the operations of Bankcore are included in the operations of PHFG. (2) The operations of BNHC include nonrecurring charges of $3.7 million related to the Merger eliminated for pro forma presentation. - ------------------------------------------------------------------------------------------------------------------------------------
This unaudited pro forma information may not be indicative of the results that would actually have occurred if the combination had been in effect on the dates indicated or which may obtained in the future. The pro forma information does not give effect to anticipated cost savings in connection with the Merger and the Branch Acquisition. 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ FIRST SECOND THIRD FOURTH First Second Third Fourth QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 55,025 $ 57,197 $61,509 $61,868 $44,704 $ 47,483 $50,759 $ 53,451 Interest expense 25,213 27,137 29,203 29,510 20,880 21,051 21,943 23,401 Provision for loan losses 580 590 630 630 1,001 751 -0- 105 Net interest income after provision for loan losses 29,232 29,470 31,676 31,728 22,823 25,681 28,816 29,945 Noninterest income 4,588 5,288 6,035 5,79 5,269 4,434 4,830 4,371 Net gains (losses) on sales of securities and consumer loans (92) (53) 39 222 427 (42) 2 (773) Noninterest expenses 22,924 22,691 23,509 23,533 21,494 21,752 24,160 23,353 Income before income taxes 10,804 12,014 14,241 14,216 7,025 8,321 9,488 10,190 Income tax expense 3,540 4,094 4,902 4,707 2,179 2,458 1,941 3,009 Net income 7,264 7,920 9,339 9,509 4,846 5,863 7,547 7,181 Earnings per share $ 0.44 $ 0.49 $ 0.55 $ 0.56 0.29 $ 0.35 $ 0.45 $ 0.43 - ------------------------------------------------------------------------------------------------------------------------------------
50 53 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, 1995 and 1994, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1, the Company changed its method of accounting for mortgage servicing rights effective January 1, 1995. January 17, 1996 Boston, Massachusetts 51 54 [text for 52, 53, 54 & 55 intentionally omitted] SHAREHOLDER INFORMATION ANNUAL MEETING The 1996 Annual Meeting of the Shareholders of Peoples Heritage Financial Group, Inc. will be held at 10:30 a.m. on Tuesday, April 23, 1996 at the Portland Marriott at Sable Oaks, 200 Sable Oaks Drive, South Portland, Maine. CORPORATE HEADQUARTERS One Portland Square, Portland, Maine Mail Address: P.O. Box 9540, Portland, ME 04112-9540 Contact: Brian S. Arsenault, Corporate Communications Officer (207)761-8517 * 1-800-462-3666 or Peter J. Verrill, Executive Vice President, Chief Operating Officer and Chief Financial Officer (207)761-8507 STOCK LISTING Peoples Heritage Financial Group, Inc. is traded over the counter on the NASDAQ National Market System under the symbol: PHBK. FORM 10-K AND OTHER REPORTS Peoples Heritage will send a copy of its 1995 Annual Report on 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: Chemical Mellon Securities Transfer Services 450 West 33rd Street, 15th Floor, New York, New York 10001 Phone: 1-800-526-0801 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS KPMG Peat Marwick LLP 99 High Street, Boston, MA 02110 RESEARCH COVERAGE Recent research coverage on Peoples Heritage Financial Group, Inc. is available from Salomon Brothers, Inc., Maine Securities Corp., Legg Mason Wood Walker, Inc., Keefe, Bruyette & Woods, Inc., Friedman Billings Ramsey & Co., Merrill, Lynch, Pierce, Fenner & Smith, Inc., H. C. Wainwright & Co., First Albany Corp. and Tucker Anthony, Inc. MARKET MAKERS The following companies have generally been market makers for Peoples Heritage Financial Group, Inc. Common Stock as of December 31, 1995: Advest, Inc. A.G. Edwards & Sons, Inc. Bear, Stearns & Co., Inc. Dean Witter Reynolds, Inc. First Albany Corporation Friedman Billings Ramsey & Co. Herzog, Heine, Geduld, Inc. Keefe, Bruyette & Woods, Inc. Knight Securities, L.P. Legg Mason Wood Walker, Inc. Livada Securities, Inc. Macallister Pitfield Mackay Merrill Lynch, Pierce, Fenner Morgan Stanley & Co., Inc. Nash Weiss/Div. of Shatkin Inv. PaineWebber, Inc. Prudential Securities Inc. Ryan Beck & Co., Inc. Salomon Brothers, Inc. Sherwood Securities Corp. Smith Barney, Inc. Troster Singer Corp. Tucker Anthony Incorporated COMMON STOCK PRICES Market prices for Peoples Heritage Financial Group, Inc.'s common stock and dividends declared per quarter during 1995 and 1994 are as follows:
- ------------------------------------------------------------------------------ Dividends Declared Per Market Price 1995 Quarters Share During Quarter High Low - ------------------------------------------------------------------------------ First $.11 $14 $11 3/4 Second .13 16 3/4 12 3/8 Third .13 20 1/2 15 1/4 Fourth .15 22 7/8 18 1/4 1994 Quarters - ------------------------------------------------------------------------------ First $.00 $12 1/2 $10 1/8 Second .06 14 10 1/8 Third .08 15 12 1/4 Fourth .10 15 1/8 10 3/8 - ------------------------------------------------------------------------------
As of December 31, 1995, the Company had approximately 4,288 shareholders of record of the 16,944,158 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. EX-21 11 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 Information relating to certain of the subsidiaries of Peoples Heritage Financial Group, Inc. is set forth below: Direct Subsidiaries: Name Jurisdiction of Incorporation ---- ----------------------------- Peoples Heritage Bank Maine First Coastal Banks, Inc. New Hampshire Indirect Subsidiaries: Name Jurisdiction of Incorporation ---- ----------------------------- The First National Bank of Portsmouth(1) United States Heritage Investment Planning Group, Inc. (2) Maine Peoples Heritage Leasing Corp. (2) Maine Peoples Heritage Mortgage Corporation(2) Maine - -------------------------- (1) Subsidiary of First Coastal Banks, Inc. (2) Subsidiary of Peoples Heritage Bank. EX-23 12 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Peoples Heritage Financial Group, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 33-22205, 33-22206 and 33-80310) on Form S-8 of Peoples Heritage Financial Group, Inc. of our report dated January 17, 1996, which referred to a change in the Company's method of accounting for mortgage servicing rights, relating to the consolidated balance sheets of Peoples Heritage Financial Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, which report is incorporated by reference in the December 31, 1995 Annual Report on Form 10-K of Peoples Heritage Financial Group, Inc. KPMG Peat Marwick LLP Boston, Massachusetts March 28, 1996 EX-27 13 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF PEOPLES HERITAGE BANK FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 124,153 0 58,255 0 485,218 0 0 2,217,637 49,138 3,078,669 2,361,965 184,280 33,420 0 175 0 0 270,293 3,078,669 203,968 29,939 1,692 235,599 86,171 24,892 124,536 2,430 116 92,657 51,275 51,275 0 0 34,032 2.05 0 8.70 27,318 3,256 4,454 55,900 50,484 12,982 6,892 49,138 49,138 0 0
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