-----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, Pc7dDRv87Slrvz2/8GKwIl1mIcDvyy95aKIgSH4ty6FumvbjP6okGVBjD3fP1PYj lyseR7eihKItbYbSsa/DMQ== 0000950135-98-003273.txt : 19980515 0000950135-98-003273.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950135-98-003273 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: 010437984 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16947 FILM NUMBER: 98620035 BUSINESS ADDRESS: STREET 1: ONE PORTLAND SQ STREET 2: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112 BUSINESS PHONE: 2077618500 MAIL ADDRESS: STREET 1: P O BOX 9540 CITY: PORTLAND STATE: ME ZIP: 04112-9540 10-Q 1 PEOPLES HERITAGE FINANCIAL 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1998 OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-16947 PEOPLES HERITAGE FINANCIAL GROUP, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Maine 01-0437984 ------------------------------ ------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) One Portland Square, Portland, Maine 04112 --------------------------------------- ---------- (Address of principal executive offices (Zip Code) (207) 761-8500 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of shares outstanding of each of the Registrant's classes of common stock as of May 1, 1998 is: Common stock, par value $.01 per share 44,256,029 - -------------------------------------- ------------- (Class) (Outstanding) 2 INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE - --------------------- ---- Item 1. Financial Statements (unaudited). Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3 Consolidated Statements of Income - Three months ended March 31, 1998 and 1997 4 Consolidated Statements of Changes in Shareholders' Equity - Three months ended March 31, 1998 and 1997 5 Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 PART II. OTHER INFORMATION Item 1. Legal proceedings 30 Item 2. Changes in securities 30 Item 3. Defaults upon senior securities 30 Item 4. Submission of matters to a vote of security holders 30 Item 5. Other information 31 Item 6. Exhibits and reports on Form 8-K 31
2 3 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA) (UNAUDITED)
March 31, December 31, 1998 1997 ---------- ------------ ASSETS Cash and due from banks $ 390,508 $ 339,270 Federal funds sold 88,757 6,091 Securities available for sale, at market value 1,221,505 1,268,055 Loans held for sale, market value $847,240 and $362,397 842,414 360,631 Loans and leases: Residential real estate mortgages 1,287,257 1,476,516 Commercial real estate mortgages 1,120,823 1,104,654 Commercial business loans and leases 620,747 576,649 Consumer loans and leases 1,366,880 1,331,546 ---------- ---------- 4,395,707 4,489,365 Less: Allowance for loan and lease losses 66,184 68,085 ---------- ---------- Net loans and leases 4,329,523 4,421,280 ---------- ---------- Premises and equipment 78,739 75,968 Goodwill and other intangibles 117,359 118,019 Mortgage servicing rights 69,373 50,808 Other assets 171,347 155,215 ---------- ---------- $7,309,525 $6,795,337 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings $ 758,326 $ 747,538 Money Market and NOW accounts 1,297,620 1,166,245 Certificates of deposit (including certificates of $100 or more of $405,113 and $377,752) 2,184,911 2,144,006 Demand deposits 835,468 744,851 ---------- ---------- Total deposits 5,076,325 4,802,640 ---------- ---------- Federal funds purchased and securities sold under repurchase agreements 356,252 370,219 Borrowings from the Federal Home Loan Bank of Boston 1,185,063 940,991 Other borrowings 18,791 18,762 Other liabilities 82,391 87,659 ---------- ---------- Total liabilities 6,718,822 6,220,271 ---------- ---------- Company obligated, mandatory redeemable securities of subsidiary trust holding solely parent junior subordinated debentures 100,000 100,000 Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, none issued) -- -- Common stock (par value $0.01 per share, 100,000,000 shares authorized, 28,576,885 shares issued) 286 286 Paid in capital 271,790 271,790 Retained earnings 238,173 224,784 Accumulated other comprehensive income: Net unrealized gain (loss) on securities available for sale 2,980 3,565 Treasury stock at cost (745,776 shares and 839,586 shares) (22,526) (25,359) ---------- ---------- Total shareholders' equity 490,703 475,066 ---------- ---------- $7,309,525 $6,795,337 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 3 4 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA) (UNAUDITED)
Three Months Ended March 31 ---------------------------- 1998 1997 ----------- ----------- Interest and dividend income: Interest on loans and leases $ 109,532 $ 83,742 Interest and dividends on securities 19,700 18,181 ----------- ----------- Total interest and dividend income 129,232 101,923 ----------- ----------- Interest expense: Interest on deposits 42,491 35,358 Interest on borrowed funds 19,371 8,852 ----------- ----------- Total interest expense 61,862 44,210 ----------- ----------- Net interest income 67,370 57,713 Provision for loan and lease losses 999 -- ----------- ----------- Net interest income after provision for loan and lease losses 66,371 57,713 ----------- ----------- Noninterest income: Customer services 6,330 5,339 Mortgage banking services 4,793 4,231 Insurance commissions 2,898 -- Trust and investment advisory services 2,590 1,887 Net securities gains 825 3 Other noninterest income 1,157 874 ----------- ----------- 18,593 12,334 ----------- ----------- Noninterest expenses: Salaries and employee benefits 27,019 21,183 Occupancy 4,436 3,810 Data processing 3,929 3,657 Equipment 3,309 2,927 Distributions on securities of subsidiary trust 2,244 1,510 Amortization of goodwill and deposit premiums 2,713 1,881 Advertising and marketing 1,888 1,520 Merger expenses 900 -- Other noninterest expenses 8,113 6,746 ----------- ----------- 54,551 43,234 ----------- ----------- Income before income tax expense 30,413 26,813 Applicable income tax expense 10,382 9,803 ----------- ----------- Net income $ 20,031 $ 17,010 =========== =========== Basic weighted average shares outstanding 27,800,104 28,355,812 Diluted weighted average shares outstanding 28,394,434 28,874,214 Earnings per share: Basic $ 0.72 $ 0.60 Diluted 0.71 0.59
See accompanying Notes to Consolidated Financial Statements. 4 5 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA) (UNAUDITED)
Net Par Paid in Retained Unrealized Treasury Value Capital Earnings Gain (Loss) Stock Total ----- -------- -------- ----------- -------- -------- Balances at December 31, 1996 $286 $271,790 $170,855 $ (582) $ (5,339) $437,010 Treasury stock issued for employee benefit plans (207,222 shares at an average price of $11.52) --- --- 494 --- $ 3,086 $ 3,580 Change in unrealized gains (losses) on securities available for sale, net of tax --- --- --- (4,712) --- (4,712) Net Income --- --- 17,010 --- --- 17,010 Cash dividends $0.18 --- --- (5,052) --- --- (5,052) ---- -------- -------- ------- -------- -------- Balances at March 31, 1997 $286 $271,790 $183,307 $(5,294) $ (2,253) $447,836 ==== ======== ======== ======= ======== ======== Balances at December 31, 1997 $286 $271,790 $224,784 $ 3,565 $(25,359) $475,066 Treasury stock issued for employee benefit plans (93,810 shares at an average price of $24.41) --- --- (544) --- 2,833 2,289 Change in unrealized gains (losses) on securities available for sale, net of tax --- --- --- (585) --- (585) Net Income --- --- 20,031 --- --- 20,031 Cash dividends $0.22 --- --- (6,098) --- --- (6,098) ---- -------- -------- ------- -------- -------- Balances at March 31, 1998 $286 $271,790 $238,173 $ 2,980 $(22,526) $490,703 ==== ======== ======== ======= ======== ========
5 6 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31 - ------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------ Cash flows from operating activities: Net Income $ 20,031 $ 17,010 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 999 --- Provision for depreciation 2,760 2,494 Amortization of goodwill and other intangibles 2,716 1,868 Net increase (decrease) in net deferred tax liabilities (6,824) 3,894 Net (gains) losses realized from other real estate owned (65) (169) Net (gains) losses realized from sales of securities and consumer loans (825) (3) Net (gains) realized from sales of loans held for sale (a component of mortgage banking services) (1,717) (2,366) Net decrease (increase) in mortgage servicing rights (18,565) 6,234 Proceeds from sales of loans held for sale 1,901,558 334,191 Residential loans originated and purchased for sale (2,381,624) (346,972) Net decrease (increase) in interest and dividends receivable and other assets (18,995) (14,046) Net increase (decrease) in other liabilities 2,320 (17,911) ----------- --------- Net cash provided (used) by operating activities $ (498,231) $ (15,776) ----------- --------- - ------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sales of securities available for sale $ 106,958 $ 52,742 Proceeds from maturities and principal repayments of securities available for sale 183,486 121,317 Purchases of securities available for sale (244,420) (308,888) Net (increase) decrease in loans and leases 91,458 1,651 Net additions to premises and equipment (5,531) (807) Net (increase) decrease in repossessed assets owned 174 1,567 ----------- --------- Net cash provided (used) by investing activities $ 132,125 $(132,418) ----------- --------- - ------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase (decrease) in deposits $ 273,685 $ (39,253) Net increase (decrease) in securities sold under repurchase agreements (8,974) (1,020) Proceeds from Federal Home Loan Bank of Boston borrowings 915,000 90,911 Payments on Federal Home Loan Bank of Boston borrowings (670,928) (96,318) Net increase (decrease) in other borrowings 29 (6,274) Proceeds from issuance of subsidiary trust --- 98,406 Sale of treasury stock 2,289 3,580 Cash dividends paid to shareholders (6,098) (5,052) ----------- --------- Net cash provided by financing activities $ 505,003 $ 44,980 ----------- --------- Increase (decrease) in cash and cash equivalents $ 138,897 $(103,214) Cash and cash equivalents at beginning of period 230,368 359,995 ----------- --------- Cash and cash equivalents at end of period $ 369,265 $ 256,781 =========== ========= - ----------------------------------------------------------------------------------------- For the three months ended March 31, 1998 and 1997, interest of $61,485 and $45,129 and income taxes of $633 and $2,152 were paid, respectively. During the quarters ended March 31, 1998 and 1997, $1,408 and $2,538 of loans were transferred to other real estate owned. The Company also originated loans to finance the sales of other real estate owned of $2,106 and $3,604 during the three months ended March 31, 1998 and 1997, respectively.
See accompanying notes to Consolidated Financial Statements. 6 7 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (IN THOUSANDS) (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and predominant practices within the banking industry. The Company has not changed its accounting and reporting policies from those disclosed in its 1997 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations and other data for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 1998. Certain amounts in the prior periods have been reclassified to conform to the current presentation. NOTE 2 - OTHER COMPREHENSIVE INCOME Statement of Financial Accounting Standards ("SFAS") No. 130. "Reporting Comprehensive income," was issued in July 1997. The Company adopted SFAS No. 130 on January 1, 1998, as required. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components. The main objective of the statement is to report a measure of all changes in equity that result from transactions and other economic events of the period other than transactions with owners. Such components of total comprehensive income for the Company are net income and unrealized gains on securities available for sale, net of tax. The following is a reconciliation of comprehensive income for the quarter ended March 31, 1998 and 1997. 1998 1997 -------- -------- Net Income $ 20,031 $ 17,010 Other comprehensive income, net of tax Unrealized gains on securities: Unrealized holding losses arising during the period (1,121) (4,714) Less: reclassification adjustment for gains included in net income (net of tax of$289 and $1) (536) (2) -------- -------- Net (585) (4,712) -------- -------- Comprehensive Income $ 19,446 $ 12,298 ======== ======== Accumulated Other comprehensive income Unrealized Gains on Securities ---------------- Balance at December 31, 1997 $ 3,565 Change, Net of tax (585) -------- Balance at March 31, 1998 $ 2,980 ======== 7 8 NOTE 3: SHAREHOLDERS' EQUITY On April 28, 1998, stockholders of the Company approved an amendment to the Company's articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 200,000,000 and the Board of Directors of the Company approved a 2 for 1 split of the outstanding common stock effective as of May 8, 1998. References to authorized common stock and outstanding shares in the Consolidated Financial Statements have not been adjusted to reflect these actions. 8 9 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS The results of Atlantic Bancorp, the parent company of Atlantic Bank N.A., and Morse, Payson and Noyes, an insurance brokerage firm, which were accounted for as purchase, are included from the date of acquisition October 1, 1997 and October 10, 1997, respectively. RESULTS OF OPERATIONS SUMMARY Peoples Heritage Financial Group the ("Company") reported net income of $20.0 million, $.71 per diluted share for the first quarter of 1998. This compares with $17.0 million, or $.59 per diluted share, for the first quarter of 1997 and $20.0 million, or $.71 per diluted share, for the fourth quarter of 1997. First quarter return on equity was 16.85%, which compared to 15.55% in the first quarter of 1997 and 17.12% in the fourth quarter of 1997. The first quarter return on assets was 1.17%, which compared to 1.28% for the same period in 1997 and 1.23% in the fourth quarter. Earnings per share growth of 20%, when compared with the same period last year, was driven by a 17% growth in net interest income, primarily as a result of strong loan growth, which was generated both through acquisitions and internally and by a 51% growth in non-interest income. This was partially offset by a $999 thousand provision for loan losses compared to no provision in 1997 and an increase of 24% in non-interest expenses (exclusive of merger expenses). Selected quarterly data is provided in Table 1. 9 10
- --------------------------------------------------------------------------------------------------- TABLE 1 - SELECTED QUARTERLY DATA 1998 1997 1997 1997 1997 (Dollars in Thousands) First Fourth Third Second First - --------------------------------------------------------------------------------------------------- Net interest income $67,370 $66,588 $61,963 $59,925 $57,713 Provision for loan losses 999 --- --- --- --- ------- ------- ------- ------- ------- Net interest income after loan loss provision 66,371 66,588 61,963 59,925 57,713 ------- ------- ------- ------- ------- Noninterest income (excluding securities transactions) 17,768 18,180 14,192 12,372 12,331 Securities gains 825 --- 48 --- 3 Noninterest expenses (excluding merger charges) 53,651 52,789 47,212 44,605 43,234 Merger charges 900 354 --- --- --- ------- ------- ------- ------- ------- Income before income taxes 30,413 31,625 28,991 27,692 26,813 Income tax expense 10,382 11,628 10,385 9,904 9,803 ------- ------- ------- ------- ------- Net income $20,031 $19,997 $18,606 $17,788 $17,010 ======= ======= ======= ======= ======= Basic earnings per share $ 0.72 $ 0.72 $ 0.68 $ 0.64 $ 0.60 Diluted earnings per share $ 0.71 $ 0.71 $ 0.66 $ 0.63 $ 0.59 Return on average assets(1) 1.17% 1.23% 1.30% 1.30% 1.28% Return on average equity(1) 16.85% 17.12% 16.70% 16.35% 15.55% Efficiency ratio(2) 60.38% 60.00% 58.94% 58.56% 59.57%
- -------------------------------------------------------------------------------- (1) Annualized. (2) Excludes securities transactions, merger charges and expenses related to Company-obligated, mandatory redeemable securities of subsidiary trust holding solely parent company junior subordinated debentures. 10 11 RESULTS OF OPERATIONS NET INTEREST INCOME The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. For purposes of the tables 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. Information is based on average daily balances during the indicated periods. The Company's taxable-equivalent net interest income increased at an annualized rate of 5.2% from the fourth quarter and 16.9% from the first quarter of 1997 due to loan growth and the impact of the acquisition of Atlantic Bancorp ("Atlantic") in the fourth quarter of 1997. Table 2 shows the quarterly amounts of net interest income by category and Table 3 shows the changes in tax equivalent net interest income by category due to changes in rate and volume. The first quarter of 1998 net interest margin was 4.30% compared to 4.51% for the fourth quarter of 1997 and 4.73% for the first quarter of 1997. The decline in the margin primarily reflects the significant increase in mortgage loans held for sale, relatively low yielding assets, which are funded by FHLB borrowings, relatively expensive funding and the increased pressure of competitive pricing on loans and deposits. It is expected that the average balance of mortgage loans held for sale will decline in the second quarter, but that competitive pressure on pricing of loans and deposits will continue. See "Interest Rate Risk and Asset Liability Management" below section. 11 12
- ---------------------------------------------------------------------------------------------------------------------------- TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES 1998 1997 First Fourth ----------------------------------- --------------------------------- Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate ---------- ---------- --------- ---------- -------- --------- (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $1,985,800 $ 38,453 7.75% $1,674,623 $ 32,855 7.85% Commercial real estate mortgages 1,117,302 26,498 9.62 1,108,045 27,163 9.73 Commercial loans and leases 589,227 13,465 9.07 555,593 13,424 9.59 Consumer loans and leases 1,362,268 31,269 9.31 1,317,785 31,111 9.37 ---------- ---------- ---------- -------- Total loans and leases 5,054,597 109,685 8.76 4,656,046 104,553 8.93 ---------- ---------- ---------- -------- Securities available for sale (3) 1,226,514 19,249 6.29 1,210,385 19,537 6.38 Federal funds sold 39,047 572 6.69 34,696 533 6.14 ---------- ---------- ---------- -------- Total earning assets 6,320,158 129,506 8.27 5,901,127 124,623 8.40 ---------- ---------- ---------- -------- Nonearning assets 602,368 557,775 ---------- ---------- Total assets $6,922,526 $6,458,902 ========== ========== Interest-bearing deposits: Regular savings $ 748,107 4,955 2.69 $ 753,240 5,115 2.69 NOW and money market accounts 1,195,327 8,164 2.77 1,107,320 7,376 2.64 Certificates of deposits 2,149,069 29,371 5.54 2,078,809 28,903 5.52 ---------- ---------- ---------- -------- Total interest-bearing deposits 4,092,503 42,490 4.21 3,939,369 41,394 4.17 Borrowed funds 1,438,318 19,371 5.46 1,171,162 16,479 5.58 ---------- ---------- ---------- -------- Total interest bearing liabilities 5,530,821 61,861 4.54 5,110,531 57,873 4.49 ---------- ---------- ---------- -------- Demand deposits 746,589 689,228 Other liabilities (3) 67,435 96,869 Securities of subsidiary trust 100,000 103,093 Shareholders' equity (3) 477,681 459,181 ---------- ---------- Total liabilities and Shareholders' equity $6,922,526 $6,458,902 ========== ========== Net earning assets $ 789,337 $ 790,596 ========== ========== Net interest income (fully-taxable equivalent) 67,645 66,750 Less: fully-taxable equivalent adjustments (275) (162) ---------- -------- Net interest income $ 67,370 $ 66,588 ========== ======== Net interest rate spread (fully-taxable equivalent) 3.73% 3.91% Net interest margin (fully-taxable equivalent) 4.30% 4.51%
(1) Annualized. (2) Loans and leases include loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale. 12 13
- ---------------------------------------------------------------------------------------------------------------------------- TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES 1998 1997 Third Second ----------------------------------- --------------------------------- Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate ---------- ---------- --------- ---------- -------- --------- (Dollars in Thousands) Loans and leases(2): Residential real estate mortgages $1,396,461 $ 27,455 7.86% $1,309,724 $ 25,910 7.91% Commercial real estate mortgages 992,632 24,078 9.62 974,276 23,266 9.58 Commercial loans and leases 531,187 12,700 9.64 510,203 12,213 9.60 Consumer loans and leases 1,146,586 27,384 9.48 1,067,538 25,111 9.43 ---------- ---------- ---------- -------- Total loans and leases 4,066,866 91,617 8.96 4,656,046 3,861,741 8.98 ---------- ---------- ---------- -------- Securities available for sale(3) 1,171,323 18,833 6.41 1,190,142 19,058 6.42 Federal funds sold 11,249 194 6.90 8,544 127 5.96 ---------- ---------- ---------- -------- Total earning assets 5,249,438 110,644 8.39 5,060,427 105,685 8.37 ---------- ---------- ---------- -------- Nonearning assets 428,694 413,966 ---------- ---------- Total assets $5,678,132 $5,474,393 ========== ========== Interest-bearing deposits: Regular savings $ 743,465 5,020 2.68 $ 754,428 5,042 2.68 NOW and money market accounts 1,013,670 6,502 2.54 1,011,486 6,292 2.49 Certificates of deposits 1,818,595 24,927 5.44 1,791,015 24,268 5.44 Total interest-bearing deposits 3,575,730 36,449 4.04 3,556,929 35,602 4.01 Borrowed funds 882,057 11,956 5.38 730,820 9,933 5.45 ---------- ---------- ---------- -------- Total interest bearing liabilities 4,457,787 48,405 4.31 4,287,749 45,535 4.26 ---------- ---------- ---------- -------- Demand deposits 619,933 585,412 Other liabilities(3) 60,400 61,674 Securities of subsidiary trust 100,000 100,000 Shareholders' equity(3) 440,012 439,558 ---------- ---------- Total liabilities and Shareholders' equity $5,678,132 $5,474,393 ========== ========== Net earnings asset $ 791,651 $ 772,678 ========== ========== Net interest income (fully-taxable equivalent) 62,239 60,150 Less: fully-taxable equivalent adjustments (276) (225) ---------- -------- Net interest income $ 61,963 $ 59,925 ========== ======== Net interest rate spread (fully-taxable equivalent) 4.08% 4.11% Net interest margin (fully-taxable equivalent) 4.73% 4.76%
(1) Annualized. (2) Loans and leases include loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale. 13 14
- ----------------------------------------------------------------------------------------- TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES 1997 First ----------------------------------- Average Yield/(1) Balance Interest Rate ---------- ---------- --------- (Dollars in Thousands) Loans and leases(2): Residential real estate mortgages $1,327,467 $ 25,954 7.82% Commercial real estate mortgages 966,083 22,870 9.60 Commercial loans and leases 479,822 11,467 9.69 Consumer loans and leases 1,026,128 23,553 9.31 ---------- -------- Total loans and leases 3,799,500 83,844 8.91 ---------- -------- Securities available for sale(3) 1,091,909 17,795 6.56 ---------- -------- Federal funds sold 25,340 430 6.88 ---------- -------- Total earning assets 4,916,749 102,069 8.38 ---------- -------- Nonearning assets 471,757 ---------- Total assets $5,388,506 ========== Interest-bearing deposits: Regular savings $ 760,705 5,013 2.67 NOW and money market accounts 980,957 6,166 2.55 Certificates of deposits 1,808,264 24,179 5.42 ---------- -------- Total interest-bearing deposits 3,549,926 35,358 4.04 Borrowed funds 689,014 8,853 5.21 ---------- -------- Total interest bearing liabilities 4,238,940 44,211 4.23 ---------- -------- Demand deposits 549,552 Other liabilities(3) 105,182 Securities of subsidiary trust 50,806 Shareholders' equity (3) 444,026 ---------- Total liabilities and shareholders' equity $5,388,506 ---------- Net earning assets $ 677,809 ========== Net interest income (fully-taxable equivalent) 57,858 Less: fully-taxable equivalent adjustments (145) -------- Net interest income $ 57,713 ======== Net interest rate spread (fully-taxable equivalent) 4.15% Net interest margin (fully-taxable equivalent) 4.73%
(1) Annualized. (2) Loans and leases include loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale. 14 15
- ----------------------------------------------------------------------------------------------- TABLE 3 - RATE VOLUME ANALYSIS Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997 - ----------------------------------------------------------------------------------------------- Quarterly Change from Previous year due to changes in: -------------------------------------------- Total Volume Rate(1) Change ------- ------- ------- (Dollars in Thousands) Interest Income: Loans and leases $27,574 $(1,733) $25,841 Securities available for sale 2,177 (723) 1,454 Federal funds sold 233 (91) 142 ------- ------- ------- Total interest income 29,984 (2,547) 27,437 ------- ------- ------- Interest expense: Deposits Regular savings (83) 25 (58) NOW and money market accounts 1,347 651 1,998 Certificates of deposit 4,555 637 5,192 ------- ------- ------- Total deposits 5,819 1,313 7,132 ------- ------- ------- Borrowed funds 9,626 892 10,518 ------- ------- ------- Total interest expense 15,445 2,205 17,650 ------- ------- ------- Net interest income (fully taxable equivalent) $14,539 $(4,752) $ 9,787 ======= ======= =======
(1) Includes changes in interest income and expense not due solely to volume or rate changes. 15 16 NON-INTEREST INCOME First quarter non-interest income of $18.6 million increased at an annualized rate of 9.2% from the fourth quarter of 1997 and 51% from the first quarter of 1997. The 1998 quarter included $2.9 million of insurance brokerage firm, commissions from the fourth quarter acquisition of Morse, Payson and Noyes an insurance which was accounted for as a purchase. Consequently, its income and expenses is not reflected in the first quarter of 1997. Other significant increases from the first quarter were a $991 thousand increase in customer service income, a $703 thousand increase in trust and investment advisory services income, a $562 thousand increase in mortgages banking services income and a $822 thousand increase in net securities gain. The increase from the fourth quarter of 1997 resulted primarily from an $825 thousand increase in securities gains. Customer services income of $6.3 million increased 1% from the fourth quarter and 19% from the first quarter of 1997. The increases were attributable to increased fees due to growth in transaction accounts and increases in ATM fees. Trust and investment advisory income increased at an annualized rate of 52% from the fourth quarter and 37% from the first quarter of 1997. The increase in income reflects the continued growth in trust assets under management. Assets under management were $2.5 billion, $2.2 billion and $1.2 billion at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. Mortgage banking services income of $4.8 million, $6.0 million and $4.2 million provided 26% of noninterest income for the quarter ended March 31, 1998 compared to 33% and 34% for the quarters ended December 31, 1997 and March 31, 1997, respectively. The Company did not record a gain on sale of servicing rights during the first quarter of 1998 while the quarters ended December 31, 1997 and March 31, 1997 included $325 thousand and $1.3 million of such gains, respectively. The Company expects to continue to sell servicing rights periodically in the future. The Company had $3.1 million in mortgage servicing income in the first quarter compared to $1.9 million in each of the fourth and first quarters of 1997. The significant increase was due to the $1 billion increase in residential mortgages serviced for investors from $4.0 billion at December 31, 1997 to $5.0 billion at March 31, 1998. This compared to a servicing portfolio of $3.3 billion at March 31, 1997. Capitalized mortgage servicing rights amounted to $69.4 million at March 31, 1998, which compared to $50.8 million at December 31, 1997 and $27.1 million at March 31, 1997. Loan origination volumes increased significantly in the first quarter of 1998 as well as in the third and fourth quarters of 1997. Consequently, capitalized mortgage servicing rights increased $18.6 million in the first quarter of 1998 compared to the fourth quarter of 1997 and increased $42.3 million when compared to the first quarter of 1997. See Table 4 and 5 for details. Since mortgage servicing rights are an interest-rate sensitive asset, the value of the Company's mortgage servicing rights and the related mortgage banking income may be adversely impacted if mortgage interest rates decline and actual or expected loan prepayments increase. To mitigate the prepayment risk associated with adverse changes in interest rates and the resultant impairment to mortgage servicing rights and effects on mortgage banking income, the Company has established a hedge program against a portion of mortgage servicing rights to protect its value and mortgage banking income. There is no guarantee that significant declines in interest rates will not have a material impact on the Company's mortgage servicing rights and mortgage banking income or that the hedge program will be successful in protecting against such a decline. 16 17 - ------------------------------------------------------------------------------------------------------------- TABLE 4 - MORTGAGE BANKING
At or for the Three Months Ended March 31 December 31, September 30, June 30, March 31, 1998 1997 1997 1997 1997 ---------- ------------ ------------- ---------- ---------- (Dollars in Thousands) Residential mortgages serviced for investors at end of period $5,024,085 $4,026,003 $3,388,310 $2,905,274 $3,346,804 ========== ========== ========== ========== ========== Residential mortgage sales income $ 1,717 $ 3,765 $ 2,141 $ 1,617 $ 1,113 Residential mortgage servicing income, net 3,076 1,920 2,045 1,925 1,865 Gain on sale of mortgage servicing --- 325 802 --- 1,253 ---------- ---------- ---------- ---------- ---------- Total $ 4,793 $ 6,010 $ 4,988 $ 3,542 $ 4,231 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------- MORTGAGE SERVICING RIGHTS Balance at beginning of period $ 50,808 $ 36,976 $ 34,426 $ 27,080 $ 33,314 Mortgage servicing rights capitalized and purchased 33,453 22,192 13,759 8,562 6,299 Amortization charged against mortgage servicing fee income (3,303) (2,114) (1,556) (1,216) (1,248) Mortgage servicing rights sold (11,585) (16,246) (9,653) --- (11,285) ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 69,373 $ 50,808 $ 36,976 $ 34,426 $ 27,080 ========== ========== ========== ========== ========== - -------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE Non-interest expense increased $8.9 million from the first quarter of 1997 and 12% annualized from the fourth quarter, excluding merger related expenses, amortization of intangibles and distribution on securities of subsidiary trust. The increases were primarily related to the acquisitions of Atlantic and Morse Payson and Noyes in the fourth quarter of 1997. Since both were accounted for as purchases, the amortization of goodwill increased $832 thousand when compared to the first quarter of last year and $254 thousand when compared with the fourth quarter. The efficiency ratio was 60.38%, 60.00% and 59.57% for the quarters ended March 31, 1998, December 31, 1997 and March 31, 1997, respectively. Salaries and benefits expense of $27.0 million increased $5.8 million from the first quarter of last year and $921 thousand from the fourth quarter. First quarter full-time equivalent employees were 2,584 at March 31, 1998 compared to 2,365 at March 31, 1997 and 2,560 at December 31, 1997. The increase is reflective of the recent acquisitions. Occupancy expense increased $626 thousand from last year and $649 thousand from the fourth quarter. The increased expenses were to accommodate the expansion of operations as the recent acquisitions were assimilated. The Company had 143 branch offices at March 31, 1998 compared to 132 at March 31, 1997 and 142 at December 31, 1997. 17 18 Data processing expense increased $272 thousand from the first quarter of last year and was nearly the same as the fourth quarter. The increase from the first quarter of last year was due to increased volumes from the acquisition of Atlantic. Equipment expense increased $382 thousand from the first quarter of last year and advertising and marketing expense increased $368 thousand. These increases were primarily due to the effect of the acquisitions in the fourth quarter of 1997. Amortization of goodwill and other intangibles increased $832 thousand from last year and $254 thousand from the fourth quarter due the goodwill associated with the recent acquisitions which were accounted for as purchases. Other noninterest expenses, which consist of general and administrative expenses, increased $1.4 million from last year and decreased $1.2 million from the fourth quarter. See Table 5 for details.
- --------------------------------------------------------------------------------------------------------- TABLE 5 - OTHER NON-INTEREST EXPENSES 1998 1997 1997 1997 1997 First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- (Dollar in Thousands) Miscellaneous loan costs $ 797 $1,106 $ 945 $1,231 $ 912 Telephone 1,215 1,294 1,015 1,018 1,005 Postage and freight 1,242 1,074 925 1,004 1,070 Office supplies 1,026 1,151 843 876 824 Deposits and other assessments 445 399 398 378 372 Collection and carrying costs of non-performing assets 505 573 275 9 213 Other 2,883 3,686 2,900 2,866 2,350 ------ ------ ------ ------ ------ Total $8,113 $9,283 $7,301 $7,382 $6,746 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------
TAXES The first quarter effective tax rate was 34% compared to last year's rate of 36% and the fourth quarter rate of 37%. The lower rate for 1998 was due to the reorganization of certain corporate entities. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Company has formed a Year 2000 committee to execute a plan of compliance. The Company believes that, with modifications to existing software and converting new software by its outside computer servicer, the Year 2000 problem will not pose significant operational problems for the Company's computer systems. The Company expects to be Year 2000 compliant by the end of 1998. Management is utilizing internal resources to implement Year 2000 compliance. However, the Company expects to incur $1.5 million in incremental expenses associated with the implementation in 1998. The costs to complete the Year 2000 modifications are based on management's estimates. However, actual results could differ from these plans. 18 19 FINANCIAL CONDITION BALANCE SHEET The discussion and analysis that follows is based upon information set forth in Table 2 regarding average balances, yields and rates. SECURITIES AVAILABLE FOR SALE AND OTHER EARNING ASSETS The Company's securities portfolio averaged $1.2 billion during the first quarter of 1998, the fourth quarter of 1997 and the first quarter of 1997 and consisted primarily of U. S. Treasury securities and mortgage-backed securities, most of which are seasoned 15 year agency securities. Other securities consisted of collateralized mortgage obligations and asset-backed securities. Substantially all securities are AAA or equivalently rated. The average yield on securities was 6.29%, 6.38% and 6.56% for the quarters ended March 31, 1998, December 31, 1997 and March 31, 1997, respectively. The decline in yields is due to reinvestment of maturing securities at lower yields during a declining interest rate environment. Securities available for sale are carried at fair value and had a pretax unrealized gain of $4.2 million and $5.5 million at March 31, 1998 and December 31, 1997, respectively, and a $5.3 million unrealized loss at March 31, 1997. LOANS AND LEASES Average loans of $5.1 billion during the first quarter of 1998 increased $1.3 billion from the first quarter of 1997 and $398.6 million from the fourth quarter of 1997 primarily as a result of the acquisition of Atlantic and internal growth in residential and consumer loans. Loans as a percent of average earning assets rose from 78.9% at the end of 1997 to 80.0% due to large volume increases in loans held for sale. Average residential real estate loans (which includes loans held for sale) of $2.0 billion grew 50% from last year and 18.6% from the fourth quarter. Excluding the Atlantic acquisition of $156 million in loans, residential real estate loans increased 37.8% from the first quarter of 1997. Large volume increases in mortgages held for sale accounted for the growth as lower long-term interest rates spurred an increase in the retail and correspondent originations. It is anticipated that loans held for sale, which amounted to stood at $842 million at March 31, 1998, will decline in the second quarter. First quarter originations were $2.3 billion, of which $1.9 billion represented correspondent production. This compares to $428.1 million and $339.1 million, respectively in the first quarter of 1997 and $2.0 billion and $1.5 billion, respectively, in the fourth quarter. Total originations increased 15% from the fourth quarter and 437% from the first quarter of 1997. At March 31, 1998, 51.6% of portfolio loans were fixed rate and 49.4% were variable rate loans. The Company sells substantially all its production that conforms to federal agency standards into the secondary market. Average commercial real estate loans of $1.1 billion increased 15.7% from the first quarter of last year and 1% from the fourth quarter of 1997. Excluding the Atlantic acquisition of $102.0 million in loans, commercial real estate loans grew 5%. The growth is consistent with the Company's focus on lending to small and medium size business customers within its geographic market. The average yield on commercial real estate loans during the first quarter of 1998 was 9.62% as compared to 9.73% and 9.60% in the fourth quarter and the first quarter of 1997, respectively. The slight decrease in yields is reflective of market conditions and increased competition. 19 20 Average commercial loans of $589.2 million during the first quarter of 1998 increased 6.0% from the fourth quarter and 22.8% from the first quarter of 1997. Excluding the Atlantic acquisition, commercial loans increased 16.4 % from the first quarter of 1997. The yield on commercial loans decreased to 9.07% in the first quarter of 1998 from 9.59% in the fourth quarter and from 9.69% in the first quarter of 1997. This decrease is reflective of increased competition. Average consumer loans grew at an annualized rate of 13.6% from the fourth quarter and 32.8% from last year. Excluding the Atlantic acquisition, consumer loans increased 25.9%. The increase was primarily in indirect auto loans, student loans and home equity loans. Mobile home loans continue to decline as the Company has emphasized other types of consumer loan products. ASSET QUALITY As shown in Table 6, nonperforming assets were $57.2 million at March 31, 1998, which represented 0.78% of total assets. This compares to $51.2 million at December 3, 1997 and $45.2 million at March 31, 1997. The increase from the first quarter of 1997 was primarily due to the Atlantic acquisition and the increase from the fourth quarter was limited to a few credits becoming nonaccrual during the quarter. The Company continues to monitor the asset quality with regular reviews of its portfolio in accordance with its lending and credit polices. The Company's residential loan portfolio accounted for 29% of the total loan portfolio at March 31, 1998 as compared with 32% at March 31, 1997 and 33% at December 31, 1997. The reductions are consistent with the strategy of the Company to reduce lower yielding residential loans as a percentage of the overall loan portfolio. The Company's residential loans are generally secured by 1-4 family homes, and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At March 31, 1998, 0.58% of the Company's residential loans were nonperforming, as compared with .50% at December 31, 1997 and .43% at March 31, 1997. The Company's commercial real estate loan portfolio accounted for 25% of the total loan portfolio at March 31, 1998 and December 31, 1997 and 26% at March 31, 1997. It is the intention of the Company to maintain commercial real estate loans as a percentage of the overall loan portfolio at the same or lower levels in the future. At March 31, 1998, 1.59% of the Company's commercial real estate loans were nonperforming, as compared with 1.51% at December 31, 1997 and 1.81% at March 31, 1997. The Company's commercial business loans portfolio accounted for 14% of the total loan portfolio at March 31, 1998 and 1997, as compared with 13% at December 31, 1997. Commercial business loans are not concentrated in any particular industry, but reflect the broad-based economies of Maine, New Hampshire and northeastern Massachusetts. The Company's commercial business loans are generally to small and medium size businesses located within its geographic market area. At March 31, 1998, 2.6% of the Company's commercial business loans were non-performing, as compared with 1.4% at March 31, 1997 and 2.0% at December 31, 1997. The Company's consumer loan portfolio accounted for 31% of the total loan portfolio at March 31, 1998, as compared with 30% at December 31, 1997 and 28% at March 31, 1997. The Company has a diversified consumer loan portfolio comprised of 34% home equity loans, 25% automobile loans, 14% mobile home loans and 27% other loans types. At March 31, 1998, 0.68% of the Company's consumer loans were nonperforming, as compared with 0.60% at December 31, 1997 and .062% at March 31, 1997. 20 21 TABLE 6 - NONPERFORMING ASSETS - -------------------------------------------------------------------------------------------------------------------
March 31 December 31, September 30, June 30, March 31, 1998 1997 1997 1997 1997 -------- ------------ ------------- -------- --------- (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $ 7,439 $ 7,357 $ 6,474 $ 5,406 $ 5,053 ------- ------- ------- ------- ------- Commercial real estate loans: Nonaccrual loans 16,862 15,654 16,147 16,785 15,854 Troubled debt restructuring 947 1,073 1,121 1,356 1,473 ------- ------- ------- ------- ------- Total 17,809 16,727 17,268 18,141 17,327 ------- ------- ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 15,875 11,668 8,390 7,732 6,875 Troubled debt restructurings 207 114 118 193 199 ------- ------- ------- ------- ------- Total 16,082 11,782 8,508 7,925 7,074 ------- ------- ------- ------- ------- Consumer loans and leases: Nonaccrual loans 9,343 7,967 6,548 6,564 6,439 ------- ------- ------- ------- ------- Total nonperforming loans: Nonaccrual loans 49,519 42,646 37,559 36,487 34,221 Troubled debt restructurings 1,154 1,187 1,239 1,549 1,672 ------- ------- ------- ------- ------- Total 50,673 43,833 38,798 38,036 35,893 ------- ------- ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 3,568 4,873 5,057 5,652 7,390 Repossessions, net of related reserves 3,005 2,507 1,837 2,564 1,964 ------- ------- ------- ------- ------- Total other nonperforming assets 6,573 7,380 6,894 8,216 9,354 ------- ------- ------- ------- ------- Total nonperforming assets $57,246 $51,213 $45,692 $46,252 $45,247 ======= ======= ======= ======= ======= Accruing loans which are 90 days overdue $ 8,953 $ 8,355 $ 6,324 $ 4,894 $ 5,820 ======= ======= ======= ======= ======= Total nonperforming loans as a percentage of total loans (1) 1.15% 0.98% 0.99% 1.01% 0.98% Total nonperforming assets as a percentage of total assets 0.78% 0.75% 0.75% 0.83% 0.83% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 1.30% 1.14% 1.16% 1.23% 1.24% - -------------------------------------------------------------------------------------------------------------------
(1) Exclusive of loans held for sale. 21 22 PROVISION/ALLOWANCE FOR LOAN LOSSES The Company provided $999 thousand for loan and lease losses in the first quarter of 1998. No provision was made in the first or fourth quarters of 1997. As shown in Table 7, net charge-offs for the first quarter of 1998 were $2.9 million, or 23 basis points of average loans outstanding, compared to $2.2 million, or 19 basis points of average loans outstanding, for the quarter ended December 31, 1997 and $887 thousand, or 9 basis points of average loans outstanding, for the first quarter of 1997. At March 31, 1998, the allowance for loan and lease losses amounted to $66.2 million or 1.51% of total loans, as compared to 1.52% at December 31, 1997 and 1.82% at March 31, 1997. The ratio of the allowance for loan and lease losses to nonperforming loans was 131% at March 31, 1998 compared to 155% and 186% at December 31 and March 31, 1997, respectively. Management considers the allowance appropriate and adequate to cover potential losses inherent in the loan portfolio based on the current economic environment. Provisions for loan losses are attributable to management's ongoing evaluation of the adequacy of the allowance for loan and lease losses, which includes, among other procedures, consideration of the character and size of the loan portfolio, monitoring trends in nonperforming loans, delinquent loans and net charge-offs, as well as new loan originations and other asset quality factors. Although management utilizes its best judgment in providing for possible losses, there can be no assurance that the Company will not have to change its provisions for loan losses in subsequent periods. Changing economic and business conditions in northern New England, fluctuations in local markets for real estate, future changes in nonperforming asset trends, large upward movements in market-based interest rates or other reasons could affect the Company's future provisions for loans losses. Based on anticipated growth in assets, it is likely that the Company will continue providing for loan losses at increasing levels in 1998. 22 23 TABLE 7 - ALLOWANCE FOR LOAN AND LEASE LOSSES - ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1997 1997 1997 First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) Average loans and leases outstanding during the period (1) $ 5,054,597 $ 4,656,046 $ 4,066,866 $ 3,861,741 $ 3,799,500 =========== =========== =========== =========== =========== Allowance at beginning of period $ 68,085 $ 62,961 $ 64,783 $ 66,601 $ 67,488 Additions due to acquisitions and purchases --- 7,361 --- --- --- Charge-offs: Residential real estate mortgages 789 608 247 425 516 Commercial real estate mortgages 371 649 188 214 261 Commercial business loans and leases 419 1,844 1,452 1,021 323 Consumer loans and leases 2,982 2,765 2,684 1,522 1,568 ----------- ----------- ----------- ----------- ----------- Total loans charged off 4,561 5,866 4,571 3,182 2,668 ----------- ----------- ----------- ----------- ----------- Recoveries: Residential real estate mortgages 41 253 78 113 90 Commercial real estate mortgages 581 2,138 1,296 448 890 Commercial business loans and leases 456 454 982 563 574 Consumer loans and leases 583 784 393 240 227 ----------- ----------- ----------- ----------- ----------- Total loans recovered 1,661 3,629 2,749 1,364 1,781 ----------- ----------- ----------- ----------- ----------- Net charge-offs 2,900 2,237 1,822 1,818 887 Additions charged to operating expenses 999 --- --- --- --- ----------- ----------- ----------- ----------- ----------- Allowance at end of period $ 66,184 $ 68,085 $ 62,961 $ 64,783 $ 66,601 =========== =========== =========== =========== =========== Ratio of net charge-offs to average loans and leases outstanding during the period-annualized(1) 0.23% 0.19% 0.18% 0.19% 0.09% Ratio of allowance to total loans and leases at end of period(2) 1.51% 1.52% 1.61% 1.73% 1.82% Ratio of allowance to nonperforming loans at end of period 131% 155% 162% 170% 186% Ratio of net chargeoffs as a percent of average outstanding loans-annualized(1) Residential real estate mortgages 0.15% 0.08% 0.05% 0.10% 0.13% Commercial real estate (0.08%) (0.54%) (0.45%) (0.10%) (0.26%) Commercial business loans and leases 0.03%) 1.00% 0.35% 0.36% (0.21%) Consumer loans and leases 0.70% 0.60% 0.80% 0.48% 0.52% - ----------------------------------------------------------------------------------------------------------------------------------
(1) Average loans and leases include portfolio loans and loans held for sale. (2) Excludes loans held for sale. 23 24 DEPOSITS Average deposits of $4.8 billion during the first quarter of 1998 increased 4.5% from the fourth quarter and 18.0% from the first quarter of 1997 primarily as a result of the assumption of $354.4 million of Atlantic deposits in the fourth quarter of 1997. The loan to deposit ratio was 87%, 88% and 93% at March 31, 1998, 1997 and December 31, 1997, respectively. Average transaction accounts (demand deposit, NOW and money market accounts ) of $1.9 billion during the first quarter of 1998 increased 8% from the fourth quarter and 26.9% from the first quarter of 1997. The increase from the fourth quarter was primarily a result of the acquisition of $126 million in brokered money market deposits in the first quarter of 1998. The increase from the first quarter last year was a result of the acquisition of Atlantic is $98 million of transaction deposits. The average rates paid on NOW and money market accounts was 2.77% as compared to 2.64% and 2.55% in the fourth quarter and the first quarter of 1997, respectively. The increase in the 1998 quarter is reflective of the rates paid on the brokered money market deposits of 5.5% and growth in tiered money market accounts. Average savings and time deposit balances of $2.9 billion increased 2.3% from the fourth quarter and 12.8% from the first quarter of 1997. Excluding the acquisition of Atlantic's deposits, the increase from the first quarter was 2.8%. The average rates paid on savings deposits remained relatively unchanged. Time deposit rates increased slightly due to increased competition for deposits to fund loan growth. OTHER FUNDING SOURCES The Company's primary source of funding, other than deposits, are securities sold under repurchase agreements and advances from the Federal Home Loan Bank ("FHLB"). Average FHLB borrowings for the first quarter of 1998 was $1.1 billion compared to $874 million for the quarter ended December 31, 1997 and $464 million for the first quarter of 1997. FHLB borrowings increased because growth in earning assets, particularly mortgages held for sale, exceeded growth in deposits. FHLB collateral consisted primarily of loans with first mortgages secured by 1 - 4 family properties, certain unencumbered securities and other qualified assets. At March 31, 1998, FHLB borrowings amounted to $1.2 billion and the additional borrowing capacity was $678.9 million. It is anticipated that FHLB borrowings will decrease somewhat in the second quarter as mortgages held for sale decline. Average balances for securities sold under repurchase agreements were $253.1 million, $253.8 million and $185.8 million for the quarters ended March 31, 998, December 31, 1997 and March 31, 1997, respectively, and are secured by mortgage backed securities and U. S. Government obligations. 24 25 LIQUIDITY For banks, liquidity represents the ability to meet both loan commitments and deposit withdrawals. Funds to meet these needs generally can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional in-market deposit sources, the Company has many other sources of liquidity, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and other non-relationship funding sources, such as FHLB borrowings, senior or subordinated debt, commercial paper and wholesale purchased funds. Management believes that the high proportion of residential and installment consumer loans in the Company's loan portfolio provides it with an additional amount of contingent liquidity through the conventional securitization programs that exist today. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. CAPITAL At March 31, 1998, shareholders' equity amounted to $491 million. In addition, through a subsidiary trust, the Company has issued $100 million of Capital Securities which mature in 2027 and qualify as Tier 1 Capital. The Company paid a $.22 per share dividend during the first quarter of 1998, representing a 31% dividend payout ratio. See attached Table 8 for information regarding the Company's rate of internal capital generation. There is also a leverage capital ratio requirement. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios, set forth in Table 9. As indicated in such table, the Company's regulatory capital currently substantially exceeds all applicable requirements. The Company's banking subsidiaries are also subject to federal, and in certain cases state, regulatory capital requirements. At March 31, 1998, each of the Company's banking subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency. 25 26 - ----------------------------------------------------------------------------------------------------------------- TABLE 8 - RATE OF INTERNAL CAPITAL GENERATION
1998 1997 1997 1997 1997 First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- Return on assets (1) 01.17% 01.23% 01.30% 01.30% 01.28% Average equity to assets 06.96 07.17 07.75 08.03 08.24 Return on average equity (1) 16.85 17.12 16.70 16.35 15.55 Total dividend payout ratio (1) 31.00 29.00 28.00 28.00 30.00 Earnings retention rate 69.00 71.00 72.00 72.00 70.00 Internal capital generation rate 11.70 12.13 12.03 11.75 10.89 - -----------------------------------------------------------------------------------------------------------------
(1) Annualized - ----------------------------------------------------------------------------------------------------------------- TABLE 9 - REGULATORY CAPITAL REQUIREMENTS
For Capital Actual Adequacy Excess Purposes Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in Thousands) As of March 31, 1998: Total capital (to risk weighted assets) $526,360 11.79% $357,216 8.00% $169,144 3.79% Tier 1 capital (to risk weighted assets) 470,417 10.54 178,608 4.00 291,809 6.54 Tier 1 leverage capital ratio (to average assets) 470,417 6.92 272,111 4.00 198,306 2.92 As of December 31, 1997: Total capital (to risk weighted assets) $505,714 11.95 $338,460 8.00% $167,254 3.95% Tier 1 capital (to risk weighted assets) 452,642 10.70 169,230 4.00 283,412 6.70 Tier 1 leverage capital (to average assets) 452,642 7.16 252,978 4.00 197,664 3.16 - -----------------------------------------------------------------------------------------------------------------
26 27 INTEREST RATE RISK AND ASSET-LIABILITY MANAGEMENT The Company's interest rate risk and asset and liability management are the responsibility of the Company's a Liquidity and Funds Management Committee which reports to the Liquidity and Funds Management Committee of the Board of Directors and is comprised of members of the Company's senior management. The Committee is actively involved in formulating the economic projections used by the Company 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, including mortgage prepayment risk, is by far the most significant non-credit related risk to which the Company is exposed. Net interest income, the Company's primary source of revenue, is affected by changes in interest rates as well as fluctuations in the level and duration of assets and liabilities on the Company's balance sheet. Interest rate risk can be defined as the exposure of the Company's net interest 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 can also affect, (i) the amount of loans originated and sold by the institution, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans, which tend to increase when loan rates are substantially higher than rates on existing loans and, conversely, decrease when rates on existing loans are substantially lower than current loan rates (due to refinancing of loans at lower rates), (iv) the value of the institutions investment securities and mortgage loans and the resultant ability to realize gains on the sale of such assets, (v) the carrying value of investment securities classified as available for sale and the resultant adjustments to shareholders' equity, and (vi) the value of mortgage servicing rights. The primary objective of the Company's asset-liability management is to maximize net interest income while maintaining acceptable levels of interest-rate sensitivity. To accomplish this the Company monitors the Company's interest rate sensitivity by use of a sophisticated simulation model which analyzes resulting net interest income under various interest rate scenarios and anticipated levels of business activity. Complicating management's efforts to measure interest rate risk is the uncertainty of the maturity, repricing, and/or runoff characteristics of some of the Company's assets and liabilities. To cope with these uncertainties, management gives careful attention to its assumptions. For example, many of the Company's interest bearing deposit products (NOW accounts, savings and money market deposits) have no contractual maturity and based on historical experience generally have limited sensitivity to movements in market rates. Because management believes it has some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions based on historical experience are built into the model. Another major assumption built into the model involves the right customers have to prepay loans, often without penalty. The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly. The Company utilizes market consensus prepayment assumptions related to residential mortgages. 27 28 The Company uses simulation analysis to measure the sensitivity of net interest income over a specified time period (generally 1 year) under various interest-rate scenarios using various assumptions such as those discussed above. The Company's policy on interest rate risk specifies that if interest rates were to shift immediately up or down 300 basis points, estimated net interest income should change by less than 10%. Management estimates, based on it's simulation model, that an instantaneous 3% increase in interest rates at March 31, 1998 would result in less than a 3% decrease in net interest income over the next twelve months while a 3% decrease in rates would result in approximately a 3% decrease in net interest income over the next twelve months. It should be emphasized that the results are highly dependent on material assumptions such as those discussed above. It should also be noted that the exposure of the Company's net interest income to gradual and/or modest changes in interest rates is relatively small. For example, using the Company's "most likely" rate scenario, which reflects only modest changes in interest rates for the next twelve months, the net interest income of the Company fluctuates less than 1% compared to a flat scenario. 28 29 COMPLETED ACQUISITION On April 10, 1998, the Company completed the acquisition of CFX Corporation. The acquisition was effected by means of the merger of CFX with and into the Company. Each share of common stock of CFX outstanding prior to the merger (other than dissenting shares) was converted into the right to receive 0.667 of a share of the Company's common stock, which approximated 16,393,709 shares of common stock. The merger was accounted for as a pooling-of-interests. IMPACT OF NEW ACCOUNTING STANDARDS In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits", which revises the required disclosures for employee benefit plans. This Statement will become effective for the Company's 1998 annual financial statements. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk and Asset - Liability Management" on the two preceding pages is incorporated herein by reference. 29 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings: Like some of the larger financial institutions across the country, Peoples Heritage Bank, the Company's Maine-based banking subsidiary, has been served with a class action suit challenging the validity of its mortgage escrow practices. The plaintiff, James Greenwood, filed suit on August 29, 1996 in the United States District Court for the Northern District of New York. The suit seeks an unspecified amount of damages on behalf of the plaintiff and a purported class of similarly situated persons. Management currently is conducting a full assessment of the action and, based on its review to date, believes that the action will not be material to the financial condition of the Company. Management currently believes the action to be without merit and intends to vigorously defend the action. Other than as set forth above, the Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition and results of operations of the Company. Item 2. Changes in securities - not applicable. Item 3. Defaults upon senior securities - not applicable. Item 4. Submission of matters to a vote of security holders. a. An annual meting of shareholders of the Company was held on April 28, 1998 ("Annual Meeting"). b. Not applicable. c. There were 27,825,603 shares of Common Stock of the Company eligible to be voted at the Annual Meeting and 23,288,615 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows: 1. Election of directors for a three-year term. FOR WITHHELD ---------- -------- Robert P. Bahre 23,131,632 156,983 Katherine M. Greenleaf 23,207,511 81,104 Dana S. Levenson 23,209,893 78,722 Pamela P. Plumb 23,210,423 78,192 2. Proposal to increase the number of authorized shares of Common Stock from 100,000,000 to 200,000,000. 30 31 FOR AGAINST ABSTAIN ---------- --------- ------- 20,701,312 2,460,156 127,145 3. Proposal to amend the 1996 Equity Incentive Plan to authorize the issuance of up to an additional 1,750,000 shares of Common Stock. FOR AGAINST ABSTAIN ---------- --------- ------- 15,340,100 4,520,028 161,693 There were 3,266,794 broker non-votes with respect to this proposal. 4. Proposal to ratify the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the year ending December 31, 1998. FOR AGAINST ABSTAIN ---------- --------- ------- 23,171,674 21,631 95,310 Each of the proposals was adopted by the shareholders of the Company. d. Not applicable Item 5. Other Information - None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K. Although the Company did not file any reports on Form 8-K during the reporting period, it did file reports on Form 8-K on April 22, 1998 and April 28, 1998. 31 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEOPLES HERITAGE FINANCIAL GROUP, INC. Date May 14, 1998 By: /s/ William J. Ryan ------------------------------------- William J. Ryan Chairman, President and Chief Executive Officer Date May 14, 1998 By: /s/ Peter J. Verrill ------------------------------------- Peter J. Verrill Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 32 EX-27 2 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1998 MAR-31-1998 390,508 0 88,757 0 1,221,505 0 0 4,395,707 66,184 7,309,525 5,076,325 1,560,106 82,391 0 100,000 0 286 490,417 7,309,525 109,532 19,700 0 129,232 42,491 19,371 67,370 999 825 54,551 30,413 0 0 0 20,031 .72 .71 4.30 49,519 8,953 1,154 0 68,085 4,561 1,661 66,184 66,184 0 0
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