-----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, Mb9AEYntNK688H2zXKMQh8Ce1Fcub5vM+ncfXbq0WJXIdFk+8ovRbbtGrOsvE5Kw R0UGmVGYTGoPkWI4hXu4Ig== 0000950135-98-005934.txt : 19981118 0000950135-98-005934.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950135-98-005934 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750836 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 GROUP 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 September 30, 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 the Registrant's common stock as of November 1, 1998 is: Common stock, par value $.01 per share 87,785,748 - -------------------------------------- ------------ (Class) (Outstanding) 1 2 INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets September 30, 1998 and December 31, 1997 3 Consolidated Statements of Income - Three and Nine Months ended September 30, 1998 and 1997 4 Consolidated Statements of Changes in Shareholders' Equity - Nine months ended September 30, 1998 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 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 30 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 30 Item 6 Exhibits and reports on Form 8-K 30
2 3 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
September 30, December 31, 1998 1997 ------------- ------------ (Unaudited) ASSETS Cash and due from banks $ 399,387 $ 424,567 Federal funds sold 189,909 13,091 Securities available for sale, at market value 1,881,830 1,802,758 Securities held to maturity - 28,184 Loans and leases held for sale 485,125 398,369 Loans and leases: Residential real estate mortgages 2,408,216 2,635,663 Commercial real estate mortgages 1,420,859 1,405,357 Commercial business loans and leases 844,297 786,578 Consumer loans and leases 1,752,859 1,696,623 ----------- ----------- 6,426,231 6,524,221 Less: Allowance for loan and lease losses 88,671 89,983 ----------- ----------- Net loans and leases 6,337,560 6,434,238 ----------- ----------- Premises and equipment 109,841 114,729 Goodwill and other intangibles 119,440 127,416 Mortgage servicing rights 56,797 59,702 Other assets 302,840 265,188 ----------- ----------- $ 9,882,729 $ 9,668,242 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings $ 1,023,404 $ 1,084,158 Money Market and NOW accounts 1,643,803 1,522,252 Certificates of deposit (including certificates of $100 or more of $552,100 and $586,467DDD 2,870,173 2,921,452 Brokered Deposits 255,116 249,990 Demand deposits 1,089,676 969,567 ----------- ----------- Total deposits 6,882,172 6,747,419 Federal funds purchased and securities sold under repurchase agreements 440,273 568,535 Borrowings from the Federal Home Loan Bank of Boston 1,576,986 1,394,746 Other borrowings 28,876 18,909 Other liabilities 103,768 117,850 ----------- ----------- Total liabilities 9,032,075 8,847,459 ----------- ----------- 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, 200,000,000 shares authorized, 89,937,187 and 89,324,737 shares issued) 900 893 Paid in capital 441,818 436,367 Retained earnings 341,702 303,864 Accumulated other comprehensive income: Net unrealized gain on securities available for sale 6,242 5,805 Treasury stock, at cost (2,153,377 shares and 1,739,347 shares) (40,008) (26,146) ----------- ----------- Total shareholders' equity 750,654 720,783 ----------- ----------- $ 9,882,729 $ 9,668,242 =========== ===========
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)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (Unaudited) Interest and dividend income: Interest on loans and leases $ 150,616 $ 132,199 $ 453,583 $ 374,154 Interest and dividends on securities 27,041 31,203 81,723 90,093 ----------- ----------- ----------- ----------- Total interest and dividend income 177,657 163,402 535,306 464,247 ----------- ----------- ----------- ----------- Interest expense: Interest on deposits 59,907 55,240 181,343 160,039 Interest on borrowed funds 26,429 20,827 79,985 51,343 ----------- ----------- ----------- ----------- Total interest expense 86,336 76,067 261,328 211,382 ----------- ----------- ----------- ----------- Net interest income 91,321 87,335 273,978 252,865 Provision for loan and lease losses 3,721 1,423 9,702 3,385 ----------- ----------- ----------- ----------- Net interest income after provision for loan and lease losses 87,600 85,912 264,276 249,480 ----------- ----------- ----------- ----------- Noninterest income: Customer services 8,413 7,402 24,435 21,683 Mortgage banking services 4,606 6,492 18,984 16,961 Insurance commissions 3,362 - 9,050 - Trust and investment advisory services 4,113 2,928 11,469 8,416 Net securities gains 1,456 594 3,506 1,372 Other noninterest income 3,727 3,077 10,072 8,057 ----------- ----------- ----------- ----------- 25,677 20,493 77,516 56,489 ----------- ----------- ----------- ----------- Noninterest expenses: Salaries and employee benefits 33,271 33,350 103,412 95,744 Data processing 5,408 4,404 14,221 12,637 Occupancy 5,208 4,787 16,651 14,563 Equipment 3,739 4,458 12,510 13,235 Distributions on securities of subsidiary trust 2,265 2,297 6,795 6,072 Amortization of goodwill and other intangibles 2,888 2,044 8,664 5,362 Advertising and marketing 2,021 2,967 6,522 7,171 Merger expenses - 11,031 35,374 11,031 Other noninterest expenses 11,734 11,786 38,323 34,655 ----------- ----------- ----------- ----------- 66,534 77,124 242,472 200,470 ----------- ----------- ----------- ----------- Income before income tax expense 46,743 29,281 99,320 105,499 Applicable income tax expense 14,097 10,848 31,324 37,105 ----------- ----------- ----------- ----------- Net income $ 32,646 $ 18,433 $ 67,996 $ 68,394 =========== =========== =========== =========== Weighted average shares outstanding: Basic 87,722,653 86,851,533 88,151,549 87,485,149 Diluted 89,026,040 88,327,558 89,591,751 88,961,175 Earnings per share: Basic $ 0.37 $ 0.22 $ 0.77 $ 0.79 Diluted 0.37 0.21 0.76 0.77
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) Accumulated Other Par Paid in Retained Comprehensive Treasury Value Capital Earnings Income Stock Total ----- --------- -------- ------------- --------- -------- (Unaudited) Balances at December 31, 1997 $893 $436,367 $303,864 $5,805 $(26,146) $720,783 Cancellation of CFX treasury shares at acquisition (110,586 shares) (1) (1,879) - - 1,880 - Issuance of 727,038 shares of common stock under stock option and purchase plans and related tax effects 8 7,366 - - - 7,374 Treasury stock issued for employee benefit plans (523,057 shares at an average price of $12.60) - - (2,122) - 8,715 6,593 Treasury stock purchased (1,048,040 shares at an average price of $23.34) - - - - (24,457) (24,457) Change in unrealized gains on securities available for sale, net of tax - - - 437 - 437 Net income - - 67,996 - - 67,996 Payment of fractional shares (36) (36) Cash dividends, $0.33 per share - - (28,036) - - (28,036) ---- -------- -------- ------ -------- -------- Balances at September 30, 1998 $900 $441,818 $341,702 $6,242 $(40,008) $750,654 ==== ======== ======== ====== ======== ========
See accompanying Notes to Consolidated Financial Statements. 5 6
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Nine Months Ended September 30, ----------------------------- (Unaudited) 1998 1997 ------------ ------------ Cash flows from operating activities: Net Income $ 67,996 $ 68,394 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 9,702 3,385 Provision for depreciation 11,088 9,471 Amortization of goodwill and other intangibles 8,664 5,362 Net increase (decrease) in net deferred tax liabilities 30,874 8,745 Net (gains) losses realized from sales of securities and consumer loans (3,510) (1,372) Net (gains) realized from sales of loans held for sale (a component of mortgage banking services) 16,564 (6,926) Net decrease (increase) in mortgage servicing rights 2,905 368 Proceeds from sales of loans held for sale 4,464,749 1,662,700 Residential loans originated and purchased for sale (4,568,069) (1,718,797) Net decrease (increase) in interest and dividends receivable and other assets (38,340) (49,723) Net increase (decrease) in other liabilities (45,700) (32,209) ----------- ----------- Net cash provided (used) by operating activities $ (43,077) $ (50,602) =========== =========== Cash flows from investing activities: Proceeds from maturities and principal repayments of investment securities $ - $ 40,606 Purchase of investment securities - (31,009) Proceeds from sales of securities available for sale 385,768 264,977 Proceeds from maturities and principal repayments of securities available for sale 561,014 509,976 Purchases of securities available for sale (992,982) (1,012,048) Net (increase) decrease in loans and leases 86,980 (643,976) Proceeds from sales of loans - 53,102 Net additions to premises and equipment (6,200) (6,950) ----------- ----------- Net cash provided (used) by investing activities $ 34,580 $ (825,322) =========== =========== Cash flows from financing activities: Net increase (decrease) in deposits $ 134,753 $ 271,283 Net increase (decrease) in securities sold under repurchase agreements (13,416) 154,227 Proceeds from Federal Home Loan Bank of Boston borrowings 2,573,945 989,773 Payments on Federal Home Loan Bank of Boston borrowings (2,391,706) (488,712) Net increase (decrease) in other borrowings 9,967 (8,327) Proceeds from issuance of subsidiary trust - 98,347 Issuance of stock 13,931 11,684 Purchase of treasury stock (24,457) (35,721) Cash dividends paid to shareholders (28,036) (28,284) ----------- ----------- Net cash provided by financing activities $ 274,981 $ 964,270 =========== =========== Increase (decrease) in cash and cash equivalents $ 266,484 $ 88,346 Cash and cash equivalents at beginning of period 322,812 491,388 ----------- ----------- Cash and cash equivalents at end of period $ 589,296 $ 579,734 =========== =========== - -------------------------------------------------------------------------------------------- For the nine months ended September 30, 1998 and 1997, interest of $267,548 and $210,924 and income taxes of $23,673 and $36,742 were paid, respectively.
See accompanying Notes to Consolidated Financial Statements. 6 7 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 or its 1997 Supplemental Consolidated Financial Statements included in the current report on Form 8-K, filed on July 23, 1998. 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 nine months ended September 30, 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. On April 10, 1998, the Company completed its merger with CFX Corporation, which was accounted for under the pooling-of-interests method. Accordingly, the consolidated financial statements of the Company have been restated to reflect the acquisition at the beginning of each period presented. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. Effective April 10, 1998, the Company transferred all securities considered by CFX to be held to maturity to available for sale. This was done to be consistent with the combined Company's interest rate risk profile. The Company also reclassified $122 million of automobile lease receivables to loans and leases held for sale, reflecting the Company's intention to exit this business and sell such receivables. A valuation allowance of $6.5 million was recorded to reflect these receivables at the lower of cost or market. 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 during the period other than transactions with owners. The 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 nine month periods ended September 30, 1998 and 1997.
Nine Months Ended September 30, ------- ------- 1998 1997 ------- ------- (Unaudited) Net income $67,996 $68,394 Other comprehensive income (loss), net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period 1,893 6,739 Less: reclassification adjustment for gains included in net income 1,456 594 ------- ------- Net 437 6,145 ------- ------- Comprehensive income $68,433 $74,539 ======= =======
7 8
Accumulated Other Comprehensive Income: Unrealized Gains on Securities ---------------- Balance at December 31, 1997 $5,805 Change, net of tax 437 ------ Balance at September 30, 1998 $6,242 ======
NOTE 3 - SHAREHOLDERS' EQUITY On April 28, 1998, shareholders 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 18, 1998. The shares herein have been restated as if the split had occurred during the earliest period shown. References to authorized common stock and outstanding shares in the Consolidated Financial Statements have been adjusted to reflect these actions. NOTE 4 - OTHER MATTERS In July 1998, the Company reached a definitive agreement to acquire SIS Bancorp, Inc., a $1.8 billion bank holding company based in Springfield, Massachusetts. Under terms of the agreement, shareholders of SIS will receive 2.25 shares of Peoples Heritage Common Stock for each whole share of SIS Common stock plus cash in lieu of any fractional share. Approximately 16.8 million shares of Peoples Heritage common stock will be issued in the transaction. The exchange is expected to be tax free and accounted for as a pooling of interests. The transaction, which received approval by SIS shareholders on November 12, 1998, is subject to approval by various regulatory agencies, and is anticipated to be completed by the end of 1998 . 8 9 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS On April 10, 1998, People Heritage Financial Group, Inc. (the "Company") completed its merger with CFX Corporation ("CFX"),which was accounted for under the pooling-of-interests method. Accordingly, the consolidated financial statements of the Company have been restated to reflect the acquisition at the beginning of each period presented. The Company recognized $24.0 million of after-tax merger-related charges in the second quarter. Results excluding these and other merger-related charges are referred to herein as operating. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The results of Atlantic Bancorp ("Atlantic"), the parent company of Atlantic Bank N.A., and Morse, Payson and Noyes, an insurance agency, which were acquired on October 1, 1997 and October 10, 1997, respectively in transactions accounted for as purchases, are included from the date of acquisition. SUMMARY The Company reported net income of $32.6 million, or $0.37 per diluted share, for the third quarter of 1998. This compares with $18.4 million, or $0.21 per diluted share, for the third quarter of 1997 and $8.3 million, or $0.09 per diluted share, for the second quarter of 1998. The Company reported operating income of $32.6 million, or $0.37 per diluted share, for the third quarter of 1998 compared with $25.6 million, or $0.29 per diluted share, for the third quarter of 1997 and $32.4 million, or $0.36 per diluted share for the second quarter of 1998. This represents a 28% increase in operating earnings per diluted share, compared to the same period last year and an 11% annualized increase compared to the second quarter of 1998. Third quarter operating return on equity was 17.78%, which compared to 14.67% in the third quarter of 1997 and 17.96% in the second quarter of 1998. The third quarter operating return on assets was 1.33%, which compared to 1.18% for the same period in 1997 and 1.33% in the second quarter of 1998. The improved operating results for the third quarter of 1998, compared to the third quarter of 1997, reflect strong revenue growth coupled with significant cost savings achieved as a result of the CFX merger. Compared to the third quarter of 1997, net interest income grew 5% and non-interest income grew 25%. However, operating non-interest expense grew just 1%, resulting in an efficiency ratio (exclusive of distributions on securities of subsidiary trust, special charges, and net securities gains) of 55.62% for the third quarter of 1998 compared to 59.49% for the third quarter of 1997 and 55.98% for the second quarter of 1998. Selected quarterly data, both as reported and on an operating basis, are provided in Table 1. The Company reported net income for the nine months ended September 30, 1998 of $68.0 million or $0.76 per diluted share compared to $68.4 million or $0.77 per diluted share for the same period last year. Return on average equity was 12.50% and 13.28% for the nine months ended September 30, 1998 and 1997, respectively. Return on average assets was 0.93% and 1.12% for the nine months ended September 30, 1998 and 1997, respectively. The Company's operating income was $92.6 million or $1.03 per diluted share, and $75.6 million or $0.85 per diluted share for the nine months ended September 30, 1998 and 1997, respectively Operating return on average equity and operating return on average assets were 17.02% and 1.27% for the nine months ended September 30, 1998, respectively, compared to 14.67% and 1.24% for the nine months ended September 30, 1997, respectively. 9 10
- ------------------------------------------------------------------------------------------------------------- TABLE 1 - SELECTED Third Second First Fourth Third Second First QUARTERLY DATA 1998 1998 1998 1997 1997 1997 1997 - ------------------------------------------------------------------------------------------------------------- (Dollars, Except Per Share Data, in Thousands) Net interest income $91,321 $90,836 $91,821 $91,611 $87,335 $84,429 $81,101 Provision for loan and lease losses 3,721 2,983 2,998 1,163 1,423 1,020 942 ------- ------- ------- ------- ------- ------- ------- Net interest income after loan and lease loss provision 87,600 87,853 88,823 90,448 85,912 83,409 80,159 ------- ------- ------- ------- ------- ------- ------- Noninterest income (excluding securities transactions) 24,221 26,934 22,855 24,983 19,899 17,456 17,763 Securities gains 1,456 - 2,050 1,196 594 475 302 Noninterest expenses (excluding special charges) 66,534 68,208 72,356 72,714 66,093 62,674 60,672 Special charges(1) - 34,474 900 7,560 11,031 - - ------- ------- ------- ------- ------- ------- ------- Income before income taxes 46,743 12,105 40,472 36,353 29,281 38,666 37,552 Income tax expense 14,097 3,795 13,432 12,412 10,848 13,214 13,043 ------- ------- ------- ------- ------- ------- ------- Net income $32,646 $ 8,310 $27,040 $23,941 $18,433 $25,452 $24,509 ======= ======= ======= ======= ======= ======= ======= Earnings per share: Basic $ 0.37 $ 0.09 $ 0.31 $ 0.27 $ 0.22 $ 0.29 $ 0.28 Diluted 0.37 0.09 0.30 0.27 0.21 0.29 0.27 Earnings per share (excluding special charges): Basic $ 0.37 $ 0.37 $ 0.31 $ 0.33 $ 0.29 $ 0.29 $ 0.28 Diluted 0.37 0.36 0.31 0.32 0.29 0.29 0.27 Return on avg. assets(2) 1.33% 0.34% 1.13% 1.03% 0.86% 1.27% 1.27% Return on avg. equity(2) 17.78 4.58 15.04 13.61 10.60 14.86 14.45 Return on average assets (excluding special charges)(2) 1.33 1.33 1.16 1.24 1.19 1.26 1.27 Return on average equity (excluding special charges)(2) 17.78 17.96 15.36 16.41 14.72 14.86 14.45 Efficiency ratio(3) 55.62 55.98 61.06 60.44 59.51 59.28 61.30 (1) Special charges consists of merger-related expenses and one-time charges related to CFX Funding. (2) Annualized. (3) Excludes distributions on securities of subsidiary trust, special charges and net securities gains.
10 11 RESULTS OF OPERATIONS NET INTEREST INCOME The Company's fully-taxable-equivalent net interest income in the third quarter of 1998 increased 5% from the third quarter of 1997 due to loan growth and the impact of the acquisition of Atlantic in the fourth quarter of 1997. Table 2 shows the 1998 and 1997 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 third quarter of 1998 net interest margin was 4.12% compared to 4.44% for the third quarter of 1997 and 4.09% in the second quarter of 1998. The decline in the margin from the third quarter of 1997 primarily reflects the 19 basis points decrease in yields on securities available for sale and a 36 basis point decrease in average loan yields due to the repricing and mix of loans. It is expected that competitive pressure on pricing of loans and deposits will continue. The fully-taxable equivalent net interest margin increased slightly from the second quarter of 1998 primarily due to lower deposit costs. See "Interest Rate Risk and Asset Liability Management" below. The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income 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 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. Average balances are based on average daily balances during the indicated periods. 11 12
- --------------------------------------------------------------------------------------------------------------------- TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES 1998 1998 Third Quarter Second Quarter --------------------------------- --------------------------------- Average Yield/(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate ---------- -------- --------- ---------- -------- --------- (Dollars in Thousands) Loans and leases(2): Residential real estate mortgages $3,035,085 $ 56,299 7.42% $3,108,026 $ 57,458 7.39% Commercial real estate mortgages 1,413,832 34.044 9.55 1,418,750 33,655 9.51 Commercial loans and leases 844,566 19,510 9.40 851,950 20,103 9.46 Consumer loans and leases 1,817,816 41,067 8.96 1,838,076 40,823 8.91 ---------- -------- ---------- -------- Total loans and leases 7,111,299 150,920 8.45 7,216,802 152,039 8.44 ---------- -------- ---------- -------- Securities available for sale(3) 1,732,951 26,571 6.24 1,662,019 26,110 6.29 Federal funds sold 58,689 790 5.34 54,549 104 5.54 ---------- -------- ---------- -------- Total earning assets 8,902,939 178,281 7.97 8,933,370 178,253 7.99 ---------- -------- ---------- -------- Nonearning assets 832,059 844,238 ---------- ---------- Total assets $9,734.998 $9,777,608 ========== ========== Interest-bearing deposits: Regular savings $1,037.397 6,601 2.52 $1,092,867 6,745 2.48 NOW and money market accounts 1,596,785 9,701 2.41 1,567,724 9,891 2.53 Certificates of deposit 2,851,704 39,458 5.49 2,905,439 39,968 5.54 Brokered deposits 280,012 4,147 5.88 315,289 4,507 5.73 ---------- -------- ---------- -------- Total interest-bearing deposits 5,765,898 59.907 4.12 5,881,319 61,111 4.17 Borrowed funds 1,927,458 26,429 5.44 1,901,454 25,776 5.44 ---------- -------- ---------- -------- Total interest-bearing liabilities 7,693,356 86,336 4.45 7,782,773 86,887 4.48 ---------- -------- ---------- -------- Demand deposits 1,103,814 1,067,278 Other liabilities(3) 114,736 96,919 Securities of subsidiary trust 100,000 100,000 Shareholders' equity(3) 723,092 730,638 ---------- ---------- Total liabilities and shareholders' equity $9,734,998 $9,777,608 ========== ========== Net earning assets $1,209,583 $1,150,597 ========== ========== Net interest income (fully-taxable equivalent) 91,945 91,366 Less: fully-taxable equivalent adjustments (624) (530) -------- -------- Net interest income $ 91,321 $ 90,836 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.52% 3.51% ==== ==== Net interest margin (fully-taxable equivalent) 4.12% 4.09% ==== ==== - --------------------------------------------------------------------------------------------------------------------- (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 First Fourth Quarter Quarter ---------------------------------- ------------------------------------ Average Yield(1) Average Yield/(1) Balance Interest Rate Balance Interest Rate ---------- -------- ------- ---------- -------- --------- (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $3,116,182 $ 60,224 7.73% $2,784,525 $ 54,524 7.83% Commercial real estate mortgages 1,408,203 33,421 9.63 1,391,087 34,059 9.71 Commercial loans and leases 798,535 18,529 9.41 771,305 18,724 9.63 Consumer loans and leases 1,800,883 40,052 9.02 1,724,577 39,598 9.11 ---------- -------- ---------- -------- Total loans and leases 7,123,803 152,226 8.62 6,671,494 146,905 8.76 ---------- -------- ---------- -------- Securities available for sale (3) 1,683,576 27,389 6.55 1,833,909 30,668 6.66 Federal funds sold 47,054 675 5.82 42,689 644 5.99 ---------- -------- ---------- -------- Total earning assets 8,854,433 180,290 8.21 8,548,092 178,217 8.30 ---------- -------- ---------- -------- Nonearning assets 821,175 769,989 ---------- ---------- Total assets $9,675,608 $9,318,081 ========== ========== Interest-bearing deposits: Regular savings $1,084,150 6,995 2.62 $1,080,708 7,219 2.65 NOW and money market accts 1,485,191 9,291 2.54 1,458,878 9,387 2.55 Certificates of deposit 2,913,756 39,792 5.54 2,885,314 40,359 5.58 Brokered deposits 290,177 4,246 5.93 220,086 3,324 5.99 ---------- -------- ---------- -------- Total interest-bearing deposits 5,773,274 60,324 4.24 5,644,986 60,289 4.24 Borrowed funds 2,024,437 27,781 5.57 1,812,396 26,106 5.71 ---------- -------- ---------- -------- Total interest-bearing liabilities 7,797,711 88,105 4.58 7,457,382 86,395 4.60 ---------- -------- ---------- -------- Demand deposits 963,234 923,978 Other liabilities (3) 85,381 128,147 Securities of subsidiary trust 100,000 103,093 Shareholders' equity (3) 729,282 705,481 ---------- ---------- Total liabilities and shareholders' equity $9,675,608 $9,318,081 ========== ========== Net earning assets $1,056,722 $1,090,710 ========== ========== Net interest income (fully-taxable equivalent) 92,185 91,822 Less: fully-taxable equivalent adjustments (364) (211) -------- -------- Net interest income $ 91,821 $ 91,611 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.63% 3.70% ==== ==== Net interest margin (fully-taxable equivalent) 4.18% 4.29% ==== ==== - --------------------------------------------------------------------------------------------------------------------- (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 1997 Third Quarter Second Quarter --------------------------------- -------------------------------- Average Yield(1) Average Yield(1) Balance Interest Rate Balance Interest Rate ---------- -------- -------- ---------- -------- -------- (Dollars in Thousands) Loans and leases(2): Residential real estate mortgages $2,425,850 $ 47,896 7.90% $2,207,376 $ 43,951 7.96% Commercial real estate mortgages 1,259,455 30,589 9.64 1,219,730 29,217 9.61 Commercial loans and leases 763,083 18,359 9.55 738,777 17,653 9.58 Consumer loans and leases 1,532,816 35,573 9.21 1,416,075 32,450 9.19 ---------- -------- ---- ---------- -------- Total loans and leases 5,981,204 132,417 8.81% 5,581,958 123,271 8.85 ---------- -------- ---- ---------- -------- Securities available for sale(3) 1,868,673 30,288 6.43% 1,856,902 30,731 6.63 Federal funds sold 22,905 163 4.83 18,185 210 4.63 ---------- -------- ---------- -------- Total earning assets 7,872,782 162,868 8.23 7,457,045 154,212 8.29 ---------- -------- ---------- -------- Nonearning assets 628,148 605,015 ---------- ---------- Total assets $8,500,930 $8,062,060 ========== ========== Interest-bearing deposits: Regular savings $1,047,442 6,982 2.64 $1,053,675 6,929 2.64 NOW and money market accounts 1,379,506 7,817 2.25 1,377,839 8,338 2.43 Certificates of deposit 2,660,703 36,770 5.48 2,627,009 35,837 5.47 Brokered deposits 191,084 2,921 6.06 135,312 2,015 5.97 ---------- -------- ---------- -------- Total interest-bearing deposits 5,278,735 54,490 4.10 5,193,835 53,119 4.10 Borrowed funds 1,512,913 20,827 5.46 1,193,979 16,481 5.54 ---------- -------- ---------- -------- Total interest-bearing liabilities 6,791,648 75,317 4.40 6,387,814 69,600 4.37 ---------- -------- ---------- -------- Demand deposits 841,667 797,533 Other liabilities(3) 77,740 89,887 Securities of subsidiary trust 100,000 100,000 Shareholders' equity(3) 689,875 686,826 ---------- ---------- Total liabilities and shareholders' equity $8,500,930 $8,062,060 ========== ========== Net earning assets $1,081,134 $1,069,231 ========== ========== Net interest income (fully-taxable equivalent) 87,551 84,612 Less: fully-taxable equivalent adjustments (216) (183) -------- -------- Net interest income $ 87,335 $ 84,429 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.83% 3.92% ==== ==== Net interest margin (fully-taxable equivalent) 4.44% 4.54% ==== ==== - --------------------------------------------------------------------------------------------------------------------------- (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 2 - AVERAGE BALANCES, YIELDS AND RATES 1997 First Quarter ---------------------------------- Average Yield/(1) Balance Interest Rate ---------- -------- --------- (Dollars in Thousands) Loans and leases (2): Residential real estate mortgages $2,185,645 $ 43,355 7.93% Commercial real estate mortgages 1,208,268 28,616 9.60 Commercial loans and leases 706,154 16,750 9.62 Consumer loans and leases 1,352,888 30,396 9.11 ---------- -------- Total loans and leases 5,452,955 119,117 8.81 ---------- -------- Securities available for sale (3) 1,693,222 Federal funds sold 30,517 27,640 6.57 ---------- Total earning assets 7,176,694 494 6.57 ---------- -------- Nonearning assets 656,784 147,251 8.28 ---------- -------- Total assets $7,833,478 ========== Interest-bearing deposits: Regular savings $1,059,471 6,866 2.63 NOW and money market accounts 1,354,440 8,275 2.48 Certificates of deposit 2,639,136 35,475 5.45 Brokered deposits 72,431 1,065 5.96 ---------- -------- Total interest-bearing deposits 5,125,478 51,681 4.09 Borrowed funds 1,097,988 14,330 5.29 ---------- -------- Total interest-bearing liabilities 6,223,466 66,011 4.30 ---------- -------- Demand deposits 740,847 Other liabilities (3) 130,339 Securities of subsidiary trust 50,806 Shareholders' equity (3) 688,020 ---------- Total liabilities and shareholders' equity $7,833,478 ========== Net earning assets $ 953,228 ========== Net interest income (fully-taxable equivalent) 81,240 Less: fully-taxable equivalent adjustments (139) -------- Net interest income $ 81,101 ======== Net interest rate spread (fully-taxable equivalent) 3.98% ==== Net interest margin (fully-taxable equivalent) 4.55% ==== - ------------------------------------------------------------------------------------------ (1) Annualized. (2) Loans and leases include loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale.
15 16 TABLE 3 - RATE VOLUME ANALYSIS
Three months ended september 30, 1998 vs. Three months ended september 30, 1997 - ------------------------------------------------------------------------------------------------ Quarterly Change from Previous Year due to Changes in: ------------------------------------------------------ Volume Rate Rate & Volume(1) Total Change --------- -------- ---------------- ------------ (Dollars in Thousands) Interest income: Loans and leases $ 25,095 $(5,427) $(1,165) $ 18,503 Securities available for sale (2,200) (895) (622) (3,717) Federal funds sold 436 29 162 627 -------- ------- ------- -------- Total interest income 23,331 (6,293) (1,625) 15,413 -------- ------- ------- -------- Interest expense: Interest-bearing deposits Regular savings (67) (317) 3 (381) NOW and money market accts 1,232 556 96 1,884 Certificates of deposit 2,638 67 (17) 2,688 Brokered deposits 1,358 (87) (45) 1,226 -------- ------- ------- -------- Total interest-bearing deposits 5,161 219 37 5,417 Borrowed funds 5,705 (76) (27) 5,602 -------- ------- ------- -------- Total interest expense 10,866 143 10 11,019 -------- ------- ------- -------- Net interest income (fully taxable equivalent) $ 12,465 $(6,436) $(1,635) $ 4,394 ======== ======= ======= ========
(1) Includes changes in interest income and expense not due solely to volume or rate changes. NON-INTEREST INCOME Third quarter non-interest income of $25.7 million increased $5.2 million, or 25%, from the third quarter of 1997 and decreased 5% from the second quarter of 1998. The third quarter of 1998 included $3.4 million of insurance commissions earned by Morse, Payson and Noyes, an insurance agency purchased in October 1997. Other significant increases from the third quarter of 1997 were a $1.2 million increase in trust and investment advisory services income and a $1.0 million increase in customer service income and an increase of $862 thousand in net securities gains. Trust and investment advisory services income increased $1.2 million, or 40%, from the third quarter of 1997 and 3% from the second quarter of 1998. The increase in income reflects the continued growth in trust assets under management and increased commissions earned on sales of third party mutual funds and annuities. Assets under management were $2.9 billion , $2.7 billion and $2.3 billion at September 30, 1998, December 31, 1997 and September 30, 1997, respectively. Customer services income of $8.4 million increased $1.0 million, or 14%, from the third quarter of 1997 and 3% from the second quarter of 1998. The increases were primarily attributable to growth in the number of transaction accounts and increased ATM fees. 16 17 Mortgage banking services income of $4.6 million, $8.7 million and $6.5 million provided 18%, 32% and 32% of noninterest income for the quarters ended September 30, 1998, June 30, 1998 and September 30, 1997, respectively. Mortgage banking income declined in the third quarter largely because of a $1 million loss realized on the sale of rights to service approximately $2.2 billion of residential mortgage loans which reduced capitalized mortgage servicing rights by $43 million and $6.2 million of gross impairment of the remaining capitalized mortgage servicing rights. The Company undertook the servicing rights sale to reduce its level of risk against declining interest rates. The loss incurred by the sale and the negative impact of impairment on the remaining capitalized servicing rights was partially offset by a $2.2 million gain on interest rate floor contracts, a $1.5 million gain on the sale of securities and increased gains on loans sold to the secondary market. The Company recorded a gain of $1.7 million on the sale of servicing rights during the quarter ended June 30, 1998 and a $802 thousand gain was recorded during the quarter ended September 30, 1997. The Company expects to continue to sell servicing rights periodically in the future. The Company had $1.8 million in mortgage servicing income in the third quarter of 1998 compared to $3.1 million in the second quarter of 1998 and $2.7 million in the third quarter of 1997. The decrease from the second quarter was primarily due to a smaller servicing portfolio. The amount of loans serviced for others was $4.6 billion, $6.6 billion and $4.6 billion at September 30, 1998, June 30, 1998 and September 30, 1997, respectively. Capitalized mortgage servicing rights amounted to $56.8 million at September 30, 1998, compared to $95 million at June 30, 1998, $60 million at December 31, 1997 and $45 million at September 30, 1997. The decrease was due to the sale of mortgage servicing rights totaling $43 million in the third quarter coupled with the $6.2 million impairment reserve as discussed above. See Table 4 for details. Because mortgage servicing rights are an interest-rate sensitive asset, the value of the Company's mortgage servicing rights and the related mortgage banking income may be adversely impacted if mortgage interest rates decline and actual or expected loan prepayments increase. To mitigate the prepayment risk associated with adverse changes in interest rates and the resultant impairment to capitalized mortgage servicing rights and effects on mortgage banking income, the Company has established a hedge program against its capitalized mortgage servicing rights to help protect its value and mortgage banking income. Notwithstanding the foregoing, there can be no assurance that significant declines in interest rates will not have a material impact on the Company's mortgage servicing rights and mortgage banking income or that the hedge program will be successful in mitigating the effects of such a decline. 17 18
- ---------------------------------------------------------------------------------------------------------------------------------- TABLE 4 - MORTGAGE BANKING SERVICES At or for the Three Months Ended 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Residential mortgages serviced for investors at end of period $4,592,901 $6,648,233 $6,242,085 $5,381,003 $4,637,704 $4,107,607 $4,627,562 ========== ========== ========== ========== ========== ========== ========== Residential mortgage sales income $ 7,762 $ 4,231 $ 2,164 $ 4,970 $ 2,978 $ 2,625 $ 1,920 Impairment reserve for mortgage servicing rights (6,151) (359) - - - - - Residential mortgage servicing income, net 1,812 3,123 3,538 2,650 2,712 2,337 2,334 Valuation adjustments - hedge 2,180 - - - - - - Gain (loss) on sale of mortgage servicing (997) 1,681 - 325 802 - 1,253 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 4,606 $ 8,676 $ 5,702 $ 7,945 $ 6,492 $ 4,962 $ 5,507 ========== ========== ========== ========== ========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------------------- MORTGAGE SERVICING RIGHTS Balance at beginning of period $ 95,157 $ 79,365 $ 59,702 $ 44,814 $ 42,038 $ 35,288 $ 40,958 Mortgage servicing rights capitalized and purchased 13,914 24,327 35,679 25,111 15,278 9,840 8,226 Amortization charged against mortgage servicing fee income (3,110) (3,596) (3,865) (2,517) (2,011) (1,702) (1,695) Impairment reserve (6,151) (359) - - - - - Mortgage servicing rights sold (43,013) (4,580) (12,151) (7,706) (10,491) (1,388) (12,201) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 56,797 $ 95,157 $ 79,365 $ 59,702 $ 44,814 $ 42,038 $ 35,288 ========== ========== ========== ========== ========== ========== ==========
18 19 NON-INTEREST EXPENSE Excluding special charges, amortization of intangibles and distribution on securities of subsidiary trust, non-interest expense decreased $371 thousand from the third quarter of 1997 and decreased $1.6 million from the second quarter of 1998. The decreases were the results of cost savings from the integration of CFX as well as efforts by management to control noninterest expense. As compared with the third quarter of 1997, the cost savings related to the CFX merger were partially offset by additional costs related to the purchase of Atlantic Bank and Morse, Payson and Noyes in the fourth quarter of 1997. The efficiency ratio was 55.62%, 59.49% and 55.98% for the quarters ended September 30, 1998, September 30, 1997 and June 30, 1998, respectively, excluding special charges, distributions on securities of subsidiary trust and net securities gains. Salaries and benefits expense of $33.3 million was essentially unchanged from the third quarter of last year and the second quarter of 1998. Third quarter full-time equivalent employees continued to decrease as the recent acquisitions of CFX and Atlantic were further assimilated. Occupancy expense increased $421 thousand from the third quarter of 1997 and decreased $214 thousand from the second quarter of 1998. The increased expense from the third quarter of 1997 was to accommodate the expansion of operations as the recent acquisitions were assimilated. The decrease in expense from the second quarter of 1998 was primarily reflective of the divestiture of five branches and the consolidation of eight branch offices, all related to the CFX acquisition. The Company had 188 branch offices at September 30, 1998, as compared to 191 branch offices at September 30, 1997 and 194 branch offices at June 30, 1998. Data processing expense increased $1.0 million from the third quarter of last year and increased $1.2 million from the second quarter of 1998. The increases were due to increased volumes as the Company continues to grow, the cost of upgrades to a larger mainframe, new systems initiatives, and the costs of year 2000 testing. Equipment expense decreased $719 thousand from the third quarter of last year and decreased $125 thousand from the second quarter of 1998. The decrease in equipment expenses was primarily due to cost savings related to the CFX acquisition. Advertising and marketing expense decreased $946 thousand and $291 thousand from the third quarter of 1997 and second quarter of 1998, respectively. The decreases in advertising and marketing expenses were primarily due to savings resulting from the CFX acquisition. Amortization of goodwill and other intangibles during the third quarter of 1998 increased $844 thousand from the third quarter of 1997 due to the goodwill associated with the October 1997 purchase of Morse, Payson and Noyes and Atlantic Bank. There were no merger expenses in the third quarter of 1998. Merger expenses of $34.5 million pre-tax were incurred during the second quarter of 1998 related to the acquisition of CFX on April 10, 1998. Merger expenses were $24.0 million on an after-tax basis and represent reorganization and restructuring costs net of an $8.1 million after-tax gain from the sale of five CFX branches in connection with the transaction. The after-tax reorganization and restructuring costs consisted of costs relating to termination of employment contracts and severance obligations ($7.8 million), professional fees ($6.8 million), writedown of assets ($10.4 million), data processing/integration costs ($4.8 million) and charges related to CFX Funding ($2.3 million). These expenses reduced the Company's income during the quarter ended June 30, 1998 by approximately $24.0 million or $0.27 per diluted share. Merger expenses in 1997 relate to CFX's acquisition of Portsmouth Bankshares, Inc and Community Bankshares, Inc. in August 1997. 19 20 The following table summarizes the activity in the merger and restructuring accrual established for the CFX merger as of September 30, 1998. Activity Through September 30, 1998 ------------------ (in thousands) Establishment of Accrual $34,474 Cash payments 15,405 Non-cash items 15,394 ------- Balance at September 30, 1998 $ 3,675 ======= Other noninterest expenses for the third quarter of 1998 decreased by $52 thousand from the third quarter of 1997 and were $1.9 million lower than the second quarter of 1998. The decline from the second quarter of 1998 was due mainly to lower miscellaneous loan costs related to origination volume as well as the reversal of litigation reserves in light of a legal settlement. See Table 5 for details.
- ----------------------------------------------------------------------------------------------------- TABLE 5 - OTHER NON-INTEREST EXPENSES 1998 1998 1998 1997 1997 1997 1997 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- (Dollars in Thousands) Miscellaneous loan cost $ 1,735 $ 2,288 $ 1,116 $ 1,385 $ 1,266 $ 1,440 $ 1,113 Telephone 2,070 1,628 1,758 1,838 1,527 1,443 1,395 Postage and freight 1,274 1,583 1,574 1,367 1,198 1,336 1,373 Office supplies 1,309 1,594 1,518 1,690 1,305 1,360 1,323 Deposits and other assessments 611 629 663 510 579 584 493 Collection and carrying costs of non-performing assets 628 846 668 893 508 228 391 Other 4,107 5,054 5,670 6,945 5,403 5,422 4,547 ------- ------- ------- ------- ------- ------- ------- Total $11,734 $13,622 $12,967 $14,628 $11,786 $11,813 $10,635 ======= ======= ======= ======= ======= ======= ======= - -----------------------------------------------------------------------------------------------------
20 21 TAXES The third quarter effective tax rate was 30% compared to 37% for the third quarter of 1997 and 31% in the second quarter of 1998. The lower rate for 1998 was due primarily to the reorganization of certain corporate entities, increased levels of bank-owned life insurance (BOLI) and lower state taxes. IMPACT OF THE YEAR 2000 ISSUE The Company's Year 2000 project is monitored by a Year 2000 senior management committee. They provide direct oversight of the Year 2000 initiative and are updated biweekly on the project's progress. The Company's Board of Directors receives project updates on a quarterly basis. The Company started its Year 2000 initiative in early 1997. It has completed its assessment of Year 2000 issues, developed a plan, and arranged for the required resources to complete the necessary remediation efforts. The Company will utilize both internal and external resources to reprogram, or replace, and test the software and hardware for Year 2000 modification. The Company is in the process of remediating, testing, and returning to production of all its critical applications. This activity continues to track in accordance with the original plan and the Company expects to have substantially completed the remediation of all critical applications by the end of 1998. The Company established a separate test environment to accommodate its Year 2000 specific testing activity and the anticipated need to test with its customers and other third parties during 1999. The Company relies on several third party service providers for key business processes. It continues to work closely with these companies to monitor the progress of their Year 2000 efforts. The Company's Year 2000 project management has contacted all critical service providers to discuss and assess their Year 2000 readiness. In addition, the Company is receiving written and verbal verification from its significant third party service providers and vendors as to their Year 2000 readiness. The Company will begin Year 2000 testing with several of these key vendors in the fourth quarter of 1998 and plans to complete testing with service providers by the end of the first quarter of 1999. This activity continues to track in line with the Year 2000 project plan. Validation of Year 2000 readiness of all the Company's vendors continues with a particular focus on the readiness, where possible, for vendors that have been identified as critical. While the Company continues to discuss these matters with, obtain written certification from and test the systems of such other companies as to the Year 2000 compliance, there can be no assurance that any potential impact associated with incompatible systems after December 31, 1999 would not have a material adverse effect on the Company's business, financial condition or results of operations. The Company had already established business continuity plans for its lines of business. The Company is in the process of assessing these plans for the possible impact of Year 2000 failures. It will encompass the primary risk areas of software and hardware, security, communications, operations, transportation, power and cash access. The Company will adjust its existing business continuity plans where appropriate and possible for those scenarios that may have the most severe impact on its operations. Areas of uncertainty include data communications, network systems (external service provider systems), and third party data file exchanges. This activity is expected to be substantially complete in the first quarter of 1999. The Company anticipates that the incremental cost of the Year 2000 project will not exceed $2.6 million. The company has incurred $1.1 million of expenses in 1998. 21 22 FINANCIAL CONDITION LOANS AND LEASES Average loans of $7.1 billion during the third quarter of 1998 decreased 1.5% from the second quarter of 1998 and increased 19% from the third quarter of 1997. The increase from the third quarter of 1997 was primarily a result of the acquisition of Atlantic and internal growth in residential and consumer loans. Loans as a percent of average earning assets were 80% at September 30, 1998 compared to 76% at September 30, 1997. Average residential real estate loans (which includes mortgage loans held for sale) of $3.0 billion grew 25% from the third quarter of last year. Excluding $156 million of loans from the acquisition of Atlantic, residential real estate loans increased 19% from the third quarter of 1997. Mortgage loans held for sale amounted to $371 million at September 30, 1998 and $183 million at September 30, 1997. Average commercial real estate loans of $1.4 billion increased 12% from the third quarter of last year. Excluding $102.0 million of loans from the acquisition of Atlantic, commercial real estate loans grew 4%. The average yield on commercial real estate loans during the third quarter of 1998 was 9.55% as compared to 9.64% in the third quarter of 1997, which is indicative of increased competition and falling interest rates. Average commercial loans of $845 million during the third quarter of 1998 increased 11% from the third quarter of 1997. Excluding the Atlantic acquisition, commercial loans increased 7% from the third quarter of 1997. The yield on commercial loans decreased to 9.40% in the third quarter of 1998 from 9.55% in the third quarter of 1997. Average consumer loans of $1.8 billion during the third quarter of 1998 increased 19% from the third quarter of 1997. Excluding the Atlantic acquisition, consumer loans increased 14%. The increase was primarily in indirect automobile, student and home equity loans. Mobile home loans continue to decline as the Company has emphasized other types of consumer loan products. The average yield on consumer loans declined from 9.21% in the third quarter of 1997 to 8.96% in the third quarter of 1998. SECURITIES AND OTHER EARNING ASSETS The Company's securities portfolio averaged $1.7 billion during the third quarter of 1998 and $1.9 billion in the third 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 rated AAA or equivalently rated. The average yield on securities was 6.24%, 6.29%, and 6.43% for the quarters ended September 30, 1998, June 30, 1998 and September 30, 1997, respectively. The decline in yields was 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 pre-tax unrealized gain of $10.3 million and $7.1 million at September 30 and June 30, 1998, respectively. 22 23 ASSET QUALITY As shown in Table 6, nonperforming assets were $65.7 million at September 30, 1998, or 0.66% of total assets, compared to $66.8 million at June 30, 1998 and $62.4 million at September 30, 1997. The increase from the third quarter of 1997 was primarily due to the Atlantic acquisition. The Company continues to monitor asset quality with regular reviews of its portfolio in accordance with its lending and credit policies. The Company's residential loan portfolio accounted for 37% of the total loan portfolio at September 30, 1998 as compared with 38% at September 30, 1997. 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 September 30, 1998, 0.53% of the Company's residential loans were nonperforming, as compared with 0.60% at September 30, 1997. The Company's commercial real estate loan portfolio accounted for 22% of the total loan portfolio at September 30, 1998 and 1997. At September 30, 1998, 1.41% of the Company's commercial real estate loans were nonperforming, as compared with 1.69% at September 30, 1997. The Company's commercial business loan portfolio accounted for 13% of the total loan portfolio at September 30, 1998 and 1997. Commercial business loans are not concentrated in any particular industry, but reflect the broad-based economies of Maine, New Hampshire and northern Massachusetts. The Company's commercial business loans are generally to small and medium size businesses located within its geographic market area. At September 30, 1998, 1.62% of the Company's commercial business loans were non-performing, as compared with 1.36% at September 30, 1997. The Company's consumer loan portfolio accounted for 27% of the total loan portfolio at September 30, 1998 and 26% at September 30, 1997. The Company has a diversified consumer loan portfolio consisting of home equity, automobile, mobile home, boat and recreational vehicles and education loans. At September 30, 1998, 0.49% of the Company's consumer loans were nonperforming, as compared with 0.44% at September 30, 1997. 23 24
- ----------------------------------------------------------------------------------------------------------------- TABLE 6 - NONPERFORMING ASSETS 9/30/98 6/30/98 3/31/98 12/3197 9/30/97 6/30/97 3/31/97 ------- ------- ------- ------- ------- ------- ------- (Dollars in Thousands) Residential real estate loans: Nonaccrual loans $12,844 $ 9,735 $12,688 $15,323 $13,259 $ 9,735 $10,540 Commercial real estate loans: Nonaccrual loans 19,846 19,714 20,700 19,582 19,314 20,127 19,717 Troubled debt restructurings 200 1,044 2,178 2,304 2,285 2,520 2,637 ------- ------- ------- ------- ------- ------- ------- Total 20,046 20,758 22,878 21,886 21,599 22,647 22,354 ------- ------- ------- ------- ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 13,613 16,810 17,442 13,255 9,880 9,326 8,573 Troubled debt restructurings 70 71 207 114 118 193 199 ------- ------- ------- ------- ------- ------- ------- Total 13,683 16,881 17,649 13,369 9,998 9,519 8,772 ------- ------- ------- ------- ------- ------- ------- Consumer loans and leases: Nonaccrual loans 8,578 8,075 9,771 8,473 7,020 6,966 6,737 ------- ------- ------- ------- ------- ------- ------- Total nonperforming loans: Nonaccrual loans 54,881 54,334 60,601 56,633 49,473 46,154 45,567 Troubled debt restructurings 270 1,115 2,385 2,418 2,403 2,713 2,836 ------- ------- ------- ------- ------- ------- ------- Total 55,151 55,449 62,986 59,051 51,876 48,867 48,403 ------- ------- ------- ------- ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 6,756 6,949 5,453 7,158 8,671 12,380 10,408 In substance foreclosures, - - - - - - 1,964 net of allowance Repossessions, net of related reserves 3,786 4,380 4,158 3,218 1,837 2,843 199 ------- ------- ------- ------- ------- ------- ------- Total other nonperforming assets 10,542 11,329 9,611 10,376 10,508 15,223 12,571 ------- ------- ------- ------- ------- ------- ------- Total nonperforming assets $65,693 $66,778 $72,597 $69,427 $62,384 $64,090 $60,974 ======= ======= ======= ======= ======= ======= ======= Accruing loans which are 90 days overdue $ 7,526 $ 9,969 $ 8,953 $ 8,355 $ 6,324 $ 5,866 $ 6,398 ======= ======= ======= ======= ======= ======= ======= Total nonperforming loans as a percentage of total loans (1) 0.86% 0.87% 0.98% 0.91% 0.89% 0.88% 0.91% Total nonperforming assets as a percentage of total assets 0.66% 0.68% 0.72% 0.72% 0.70% 0.77% 0.76% Total nonperforming assets as a percentage of total loans and leases (1) and total other nonperforming assets 1.02% 1.04% 1.13% 1.06% 1.07% 1.15% 1.15% - ----------------------------------------------------------------------------------------------------------------- (1) Total loans and leases are exclusive of loans held for sale.
PROVISION/ALLOWANCE FOR LOAN LOSSES The Company provided $3.7 million for loan and lease losses in the third quarter of 1998, compared to $1.4 million in the third quarter of 1997. As shown in Table 7, net charge-offs for the third quarter of 1998 were $3.1 million, or 17 basis points of average loans outstanding, compared to $2.8 million, or 19 basis points of average loans outstanding, for the third quarter of 1997. At September 30, 1998, the allowance for loan and lease losses amounted to $88.7 million or 1.38% of total portfolio loans and leases, as compared to 1.45% at September 30, 1997. The ratio of the allowance for loan and lease losses to nonperforming loans was 161% at September 30, 1998 and 163% at September 30, 1997. Management considers the allowance appropriate and adequate to cover potential losses inherent in the loan portfolio based on the current economic environment. 24 25 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 and lease 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.
- ----------------------------------------------------------------------------------------------------------------------------------- TABLE 7 - ALLOWANCE FOR LOAN AND LEASE LOSSES 1998 1998 1998 1997 1997 1997 1997 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Average loans and leases outstanding during the period(1) $7,111,299 $7,216,802 $7,123,803 $6,671,494 $5,981,204 $5,581,958 $5,452,955 ========== ========== ========== ========== ========== ========== ========== Allowance at beginning of period $ 88,075 $ 89,454 $ 89,983 $ 84,370 $ 85,736 $ 87,038 $ 87,820 Additions due to acquisitions and purchases - - 7,361 - - - Charge-offs: Real estate mortgages 2,622 2,070 1,487 1,534 791 799 1,622 Commercial business loans and leases 509 1,270 519 2,827 1,787 1,295 482 Consumer loans and leases 2,806 2,879 3,651 2,784 3,794 1,620 1,866 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total loans charged off 5,937 6,219 5,657 7,145 6,372 3,714 3,970 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Recoveries: Real estate mortgages 1,584 1,004 743 2,420 1,598 557 1,248 Commercial business loans and leases 545 476 709 958 1,454 574 721 Consumer loans and leases 683 377 678 856 541 251 277 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total loans recovered 2,812 1,857 2,130 4,234 3,593 1,382 2,246 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net charge-offs 3,125 4,362 3,527 2,911 2,779 2,332 1,724 Additions charged to operating expenses 3,721 2,983 2,998 1,163 1,413 1,030 942 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance at end of period $ 88,671 $ 88,075 $ 89,454 $ 89,983 $ 84,370 $ 85,736 $ 87,038 ========== ========== ========== ========== ========== ========== ========== Ratio of net charge-offs to average loans and leases outstanding during the period-annualized(1) 0.17% 0.24% 0.20% 0.17% 0.19% 0.17% 0.13% Ratio of allowance to total loans and leases at end of period(2) 1.38% 1.38% 1.40% 1.38% 1.45% 1.54% 1.64% Ratio of allowance to nonperforming loans at end of period 161% 159% 142% 152% 163% 176% 182% Ratio of net charge-offs as a percent of average outstanding loans-annualized(1): Real estate mortgages 0.09% 0.09% 0.07% 0.09% 0.09% 0.03% 0.04% Commercial business loans and leases (0.02%) 0.37% (0.10%) 0.97% 0.17% 0.39% (0.14%) Consumer loans and leases 0.47% 0.55% 0.66% 0.45% 0.85% 0.39% 0.47% (1) Average loans and leases include portfolio loans and loans held for sale. (2) Total loans and leases are exclusive of loans held for sale.
25 26 DEPOSITS Average deposits of $6.9 billion during the third quarter of 1998 increased 12% from the third quarter of 1997 primarily as a result of the assumption of $354.4 million of Atlantic deposits in the fourth quarter of 1997 and increased brokered deposits, which averaged $280 million and $191 million during the three months ended September 30, 1998 and 1997, respectively. The portfolio loan to retail deposit ratio was 97% and 100% at September 30, 1998, and December 31, 1997, respectively. Average transaction accounts (demand deposit, NOW and money market accounts) of $2.7 billion during the third quarter of 1998 increased 22% from the third quarter of 1997. The increase included the assumption of Atlantic's $98 million of transaction deposits as well as significant internal growth in both commercial and retail deposit balances. The average rates paid on NOW and money market accounts during the third quarter of 1998 was 2.41%, as compared to 2.25% in the third quarter of 1997 reflective of increased competition. Average savings and time deposit balances, excluding brokered deposits, of $3.9 billion during the third quarter of 1998 increased 4.9% from the third quarter of 1997. The average rates paid on savings deposits decreased slightly while time deposit rates remained relatively stable. 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 of Boston ("FHLB"). Average FHLB borrowings for the third quarter of 1998 were $1.5 billion, which was relatively unchanged from the second quarter of 1998 as the growth in earning assets was funded during the third quarter by increased deposits. FHLB collateral consists primarily of first mortgage loans secured by 1 - 4 family properties, certain unencumbered securities and other qualified assets. At September 30, 1998, the Company's FHLB borrowings amounted to $1.6 billion and its additional borrowing capacity was $1.2 billion. Average balances for securities sold under repurchase agreements were $403 million and $356 million for the quarters ended September 30 and June 30, 1998, respectively. These borrowings are secured by mortgage-backed securities and U.S. Government obligations. LIQUIDITY The Company does not have material unconsolidated liabilities or commitments and, as a result, does not have material liquidity requirements on an unconsolidated basis. For the Company's subsidiary 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. 26 27 CAPITAL At September 30, 1998, shareholders' equity amounted to $750.7 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 $0.11 per share dividend during the third quarter of 1998. In April 1998, the Company's Board of Directors declared a two-for-one split of the issued and outstanding shares of the Company's common stock. In addition, in June 1998, the Company completed the repurchase of one million shares of the Company's common stock on the open market pursuant to the Board of Director's approval. The Company no longer has in effect a share repurchase program. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios, set forth in Table 8. 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 September 30, 1998, each of the Company's banking subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency and in compliance with applicable state capital requirements.
- -------------------------------------------------------------------------------------------------------------- TABLE 8 - REGULATORY CAPITAL REQUIREMENTS For Capital Adequacy Actual Purposes Excess Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in Thousands) As of September 30, 1998: Total capital (to risk weighted assets) $797,694 12.96% $492,554 8.00% $305,140 4.96% Tier 1 capital (to risk weighted assets) 720,588 11.70 246,277 4.00 474,311 7.70 Tier 1 leverage capital ratio (to average assets) 720,588 7.51 388,812 4.00 336,776 3.51 As of December 31, 1997: Total capital (to risk weighted assets) 762,391 12.65% 482,056 8.00% 280,335 4.65% Tier 1 capital (to risk weighted assets) 687,421 11.41 241,028 4.00 446,393 7.41 Tier 1 leverage capital (to average assets) 687,421 7.51 366,124 4.00 321,297 3.51 - --------------------------------------------------------------------------------------------------------------
27 28 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 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 institution's 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. 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 its simulation model, that an instantaneous 300 basis point increase in interest rates at September 30, 1998 would result in less than a 2% decrease in net interest income over the next 12 months while a 300 basis point decrease in rates would result in approximately a 5% decrease in net interest income over the next 12 months. The Company estimates 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. It should be emphasized that the foregoing results are highly dependent on material assumptions such as those discussed above. The Company, as a result of acquisitions, has acquired two interest rate floors with a combined notional amount of $20 million, expiring from 1999-2000. The Company has no direct or contingent liability as a result of these floors, which were purchased to protect certain rate-sensitive assets against falling interest rates. 28 29 The Company has purchased interest rate floors tied to the CMT index to mitigate the prepayment risk associated with mortgage servicing rights. The value of the CMT floors is inversely related to movements in interest rates, while the value of the servicing rights is positively related to movements in interest rates. When rates decline, people are more likely to refinance their mortgages, which reduces the value of the servicing rights to the Company. When rates increase, the opposite is true. In the event that interest rates fall, any resulting increase in the value of the CMT floors are intended to offset, in part, the prospective impairment of the servicing rights. During the third quarter of 1998, the value of the CMT floor increased by $2.2 million and this gain was recognized by the Company as part of Mortgage Banking Services income. At September 30, 1998, the Company had $100 million in notional amount of CMT floors which expire in 2003. 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 32.8 million shares of common stock. The merger was accounted for as a pooling-of-interests. PENDING ACQUISITION On July 20, 1998, the Company announced that it had reached a definitive agreement to acquire SIS Bancorp, Inc. ("SIS"). Under the terms of the agreement, the shareholders of SIS will receive 2.25 shares of the Company's common stock plus cash in lieu of any fractional shares. Consummation of the acquisition is subject to, among other things, all necessary regulatory approvals and other customary conditions. The SIS acquisition is expected to be completed by the end of 1998 and will be 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. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This Statement is effective for years beginning January 1, 2000. 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. 29 30 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" is incorporated herein by reference. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition and results of operations of the Company. Item 2. Changes in securities - not applicable. Item 3. Defaults upon senior securities - not applicable. Item 4. Submission of matters to a vote of security holders - not applicable. Item 5. Other Information - not applicable. Item 6. Exhibits and reports on Form 8-K. (a) (i). Exhibit 10 - 1996 Equity Incentive Plan, as amended (ii). Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K - None 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEOPLES HERITAGE FINANCIAL GROUP, INC. Date November 16, 1998 By: /s/ William J. Ryan ------------------------------ William J. Ryan Chairman, President and Chief Executive Officer Date November 16, 1998 By: /s/ Peter J. Verrill ------------------------------ Peter J. Verrill Executive Vice President and Chief Financial Officer (principal financial and accounting officer) 31 EX-10 2 1996 EQUITY INCENTIVE PLAN 1 Exhibit 10 PEOPLES HERITAGE FINANCIAL GROUP, INC. 1996 EQUITY INCENTIVE PLAN (AS AMENDED AS OF MAY 26, 1998 AND/AS ADJUSTED TO REFLECT A 2 FOR 1 SPLIT OF THE SHARES EFFECTIVE MAY 18, 1998) SECTION 1. PURPOSE. The purposes of the Peoples Heritage Financial Group, Inc. 1996 Equity Incentive Plan are to promote the interests of Peoples Heritage Financial Group, Inc. and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Affiliates; (ii) motivating such employees by means of performance-related incentives to achieve long-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of the Company. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or indirectly, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Award or Other Stock-Based Award. "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Change in Control" shall be deemed to have occurred if: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company and any trustee or other fiduciary holding securities under any employee benefit plan of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the adoption of the Plan), individuals who at the beginning of such period constitute the Board of Directors, and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately 2 prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. If any of the events enumerated in clauses (i) through (iv) occur, the Board shall determine the effective date of the Change in Control resulting therefrom for purposes of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required by Rule 16b-3, each of whom, to the extent necessary to comply with Rule 16b-3 only, is a "non-employee director" within the meaning of Rule 16b-3, as from time to time amended. Until otherwise determined by the Board, the Human Resources Committee designated by the Board shall be the Committee under the Plan. "Company" shall mean Peoples Heritage Financial Group, Inc. "Employee" shall mean an employee of the Company or of any Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the fair market value of the property or other item being valued, as determined by the Committee in its sole discretion, provided that, unless otherwise determined by the Committee in order to satisfy the requirements relating to Incentive Stock Options under applicable laws and regulations, the "Fair Market Value" of a Share shall be (i) if the Shares are listed or admitted to trading on any securities exchange or national market system in the United States, the closing price, regular way, on such day on the principal securities exchange or national market system in the United States on which Shares are traded, (ii) if the Shares are not then listed or admitted to trading on any such day, or if no sale takes place on such day, the average of the closing bid and asked prices in the United States on such day, as reported by a reputable quotation source designated by the Committee, and (iii) if the Shares are not then listed or admitted to trading on any such securities exchange or national market system and no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices in the United States on such day, as reported in The Wall Street Journal (Eastern edition) or other newspaper designated by the Committee. "Incentive Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provisions thereto. 2 3 "Net After-Tax Amount" shall mean the net amount of compensation, assuming for this purpose only that all vested Awards and other forms of compensation subject to vesting upon a Change of Control are exercised upon such Change in Control, to be received (or deemed to have been received) by such Participant in connection with such Change of Control under any option agreement and under any other plan, arrangement or contract of the Company to which such Participant is a party, after giving effect to all income and excise taxes applicable to such payments. "Nonqualified Stock Option" shall mean a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Nonqualified Stock Option. "Other Stock-Based Award" shall mean any right granted under Section 10 of the Plan. "Participant" shall mean any Employee selected by the Committee to receive an Award under the Plan. "Performance Award" shall mean any right granted under Section 9 of the Plan. "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Plan" shall mean this Peoples Heritage Financial Group, Inc. 1996 Equity Incentive Plan. "QDRO" shall mean a domestic relations order meeting such requirements as the Committee shall determine, in its sole discretion. "Restricted Stock Award" shall mean any Award granted under Section 8 of the Plan. "Restricted Stock" shall mean any Share granted under Section 8 of the Plan. "Restricted Stock Unit" shall mean any unit granted under Section 8 of the Plan. "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission or any successor thereto and shall include the staff thereof. "Shares" shall mean shares of the common stock, $.01 par value, of the Company, or such other securities of the Company as may be designated by the Committee from time to time. 3 4 "Stock Appreciation Right" shall mean any right granted under Section 7 of the Plan. SECTION 3. ADMINISTRATION. (a) AUTHORITY OF COMMITTEE. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Employee; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) COMMITTEE DISCRETION BINDING. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Employee. (c) DELEGATION. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers of the Company or any Affiliate, or to a committee of such officers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend or terminate Awards held by, Employees who are not officers or directors of the Company for purposes of Section 16 of the Exchange Act, or any successor section thereto, or who are otherwise not subject to such Section. (d) AUTHORITY OF BOARD. Notwithstanding anything to the contrary contained in the Plan, the Plan also may be administered by the Board to the extent permitted by Rule 16b-3, as amended from time to time. In the event of such administration by the Board, all references to the Committee in the Plan shall be deemed to refer to the Board and any officer or employee-director of the Company or any Affiliate shall be eligible to be designated a Participant. 4 5 SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(b), the number of Shares with respect to which Awards may be granted under the Plan shall be equal to 6,000,000. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or if such an Award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such settlement, forfeiture, termination or cancellation, shall again become Shares with respect to which Awards may be granted. In the event that any Option or other Award granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Award are satisfied by the withholding of Shares by the Company, the number of Shares available for Awards under the Plan shall be increased by the number of Shares so surrendered or withheld. Notwithstanding the foregoing and subject to adjustment as provided in Section 4(b), no Participant may receive Awards under the Plan in any calendar year that relate to more than 300,000 Shares. (b) ADJUSTMENTS. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that (A) with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code, as from time to time amended, and (B) with respect to any Award no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended, or Rule 16b-3, as from time to time amended. (c) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. SECTION 5. ELIGIBILITY. Any Employee, including any officer or employee-director of the Company or any Affiliate, who is not a member of the Committee, shall be eligible to be designated a Participant. 5 6 SECTION 6. STOCK OPTIONS. (a) GRANT. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Nonqualified Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute. (b) EXERCISE PRICE. The Committee in its sole discretion shall establish the exercise price at the time each Option is granted, provided that the per share price at which Shares may be purchased upon exercise of an Option shall be no less than one hundred percent (100%) of the Fair Market Value of a Share at the time such Option is granted. (c) EXERCISE. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including without limitation any conditions relating to the application of federal or state securities laws, as it may deem necessary or advisable. (d) PAYMENT. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging Shares owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Shares so tendered to the Company as of the date of such tender is at least equal to such option price. SECTION 7. STOCK APPRECIATION RIGHTS. (a) GRANT. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right, the grant price thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time. Stock Appreciation Rights shall have a grant price as determined by the Committee on the date of grant. (b) EXERCISE AND PAYMENT. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value of a Share on the date of exercise of 6 7 the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, with respect to any Stock Appreciation Right that is not related to an Incentive Stock Option and that can only be exercised for cash during limited periods of time in order to satisfy the conditions of Rule 16b-3, the exercise of such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Shares is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights granted thereafter. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares. (c) OTHER TERMS AND CONDITIONS. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights granted thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS. (a) GRANT. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Shares of Restricted Stock and Restricted Stock Units shall be granted, the number of Shares of Restricted Stock and/or the number of Restricted Stock Units to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Company and the other terms and conditions of such Awards. Notwithstanding any other provision of the Plan to the contrary, Restricted Stock and Restricted Stock Units shall have a minimum vesting period of three years from the date of grant, except (i) as provided in Section 12 hereof and (ii) in the Committee's sole discretion, in the event of the Participant's retirement, permanent and total disability or death. The meaning of the terms "retirement" and "permanent and total disability" for purposes of this Section 8(a) and the other provisions of the Plan shall be determined by the Committee. (b) TRANSFER RESTRICTIONS. Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered, except, in the case of Restricted Stock, as provided in the Plan or the applicable Award Agreements. Certificates issued in respect of Shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such certificates to the Participant or the Participant's legal representative. 7 8 (c) PAYMENT. Each Restricted Stock Unit shall have a value equal to the Fair Market Value of a Share. Restricted Stock Units shall be paid in cash, Shares, other securities or other property, as determined in the sole discretion of the Committee, upon the lapse of the restrictions applicable thereto, or otherwise in accordance with the applicable Award Agreement. (d) DIVIDENDS AND DISTRIBUTIONS. Dividends and other distributions paid on or in respect of any Shares of Restricted Stock may be paid directly to the Participant, or may be reinvested in additional Shares of Restricted Stock or in additional Restricted Stock Units, as determined by the Committee in its sole discretion. (e) VOTING OF RESTRICTED STOCK. Unless otherwise determined by the Committee at the time of grant, an Employee to whom Shares of Restricted Stock shall be granted shall be entitled to vote such Shares. SECTION 9. PERFORMANCE AWARDS. (a) GRANT. The Committee shall have sole and complete authority to determine the Employees who shall receive a Performance Award, which shall consist of a right that is (i) denominated in cash or Shares, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish and (iii) payable at such time and in such form as the Committee shall determine. Notwithstanding any other provision of the Plan to the contrary, a Performance Award shall have a minimum vesting period of one year from the date of grant, except (i) as provided in Section 12 hereof and (ii) in the Committee's sole discretion, in the event of the Participant's retirement, permanent and total disability or death. (b) TERMS AND CONDITIONS. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance Award. (c) PAYMENT OF PERFORMANCE AWARDS. Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 10. OTHER STOCK-BASED AWARDS. The Committee shall have authority to grant to eligible Employees an Other Stock-Based Award, which shall consist of any right that is (i) not an Award described in Sections 6 through 9 above and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan; provided that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and 8 9 conditions of any such Other Stock-Based Award. Notwithstanding any other provision of the Plan to the contrary, an Other Stock-Based Award which is not granted in lieu of base salary or bonuses shall have a minimum vesting period of three years from the date of grant, except (i) as provided in Section 12 hereof and (ii) in the Committee's sole discretion, in the event of the Participant's retirement, permanent and total disability or death. SECTION 11. TERMINATION OR SUSPENSION OF EMPLOYMENT. The following provisions shall apply in the event of the Participant's termination of employment unless the Committee shall have provided otherwise, either at the time of the grant of the Award or thereafter. (a) NONQUALIFIED STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. (i) TERMINATION OF EMPLOYMENT. If the Participant's employment with the Company or its Affiliates is terminated for any reason other than death, permanent and total disability or retirement, the Participant's right to exercise any Nonqualified Stock Option or Stock Appreciation Right shall terminate, and such Option or Stock Appreciation Right shall expire, on the earlier of (A) the first anniversary of such termination of employment or (B) the date such Option or Stock Appreciation Right would have expired had it not been for the termination of employment. The Participant shall have the right to exercise such Option or Stock Appreciation Right prior to such expiration to the extent it was exercisable at the date of such termination of employment and shall not have been exercised. (ii) DEATH, DISABILITY OR RETIREMENT. If the Participant's employment with the Company or its Affiliates is terminated by death, permanent and total disability or retirement, the Participant or his successor (if employment is terminated by death) shall have the right to exercise any Nonqualified Stock Option or Stock Appreciation Right to the extent it was exercisable at the date of such termination of employment and shall not have been exercised, but in no event shall such Option or Stock Appreciation Right be exercisable later than the date the Option or Stock Appreciation Right would have expired had it not been for the termination of such employment. (iii) ACCELERATION AND EXTENSION OF EXERCISABILITY. Notwithstanding the foregoing, the Committee may, in its discretion, provide (A) that an Option granted to a Participant may terminate at a date earlier than that set forth above, including without limitation the date of termination of employment, (B) that an Option granted to a Participant may terminate at a date later than that set forth above, provided such date shall not be beyond the date the Option would have expired had it not been for the termination of the Participant's employment, and (C) that an Option or Stock Appreciation Right may become immediately exercisable when it finds that such acceleration would be in the best interests of the Company. (b) INCENTIVE STOCK OPTIONS. Except as otherwise determined by the Committee at the time of grant, if the Participant's employment with the Company is terminated for any reason, the 9 10 Participant shall have the right to exercise any Incentive Stock Option and any related Stock Appreciation Right during the 90 days after such termination of employment to the extent it was exercisable at the date of such termination, but in no event later than the date the option would have expired had it not been for the termination of such employment. If the Participant does not exercise such Option or related Stock Appreciation right to the full extent permitted by the preceding sentence, the remaining exercisable portion of such Option automatically will be deemed a Nonqualified Stock Option, and such Option and any related Stock Appreciation Right will be exercisable during the period set forth in Section 11(a) of the Plan, provided that in the event that employment is terminated because of death or the Participant dies during such 90-day period, the option will continue to be an Incentive Stock Option to the extent provided by Section 421 or Section 422 of the Code, or any successor provisions, and any regulations promulgated thereunder. (c) RESTRICTED STOCK. Except as otherwise determined by the Committee at the time of grant, upon termination of employment for any reason during the restriction period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and reacquired by the Company at the price (if any) paid by the Participant for such Restricted Stock, provided that in the event of a Participant's retirement, permanent and total disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. SECTION 12. CHANGE IN CONTROL. Notwithstanding any other provision of the Plan to the contrary, upon a Change in Control all outstanding Awards shall vest, become immediately exercisable or payable or have all restrictions lifted as may apply to the type of Award; provided, however, that unless otherwise determined by the Committee at the time of grant or thereafter, if it is determined that the Net After-Tax Amount to be realized by any Participant, taking into account the accelerated vesting provided for by this Section as well as all other payments to be received by such Participant in connection with such Change in Control, would be higher if Awards did not vest in accordance with this Section, then and to such extent the Awards of such Participant shall not vest. The determination of whether any such Award should not vest shall be made by a nationally-recognized accounting firm selected by the Company, which shall be instructed to consider that (i) Awards and other forms of compensation subject to vesting upon a Change of Control shall be vested in the order in which they were granted and within each grant in the order in which they would otherwise have vested and (ii) unless and to the extent any other plan, arrangement or contract of the Company pursuant to which any such payment is to be received provides to the contrary, such other payment shall be deemed to have occurred after any acceleration of Awards or other forms of compensation subject to vesting upon a Change in Control. SECTION 13. AMENDMENT AND TERMINATION. (a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such 10 11 approval is (i) necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement that is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, for which or with which the Board deems it necessary or desirable to qualify or comply or (ii) otherwise required by applicable law. (b) AMENDMENTS TO AWARDS. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary. Notwithstanding any other provision of the Plan to the contrary, the Committee may not amend more than 10% of outstanding Options at any particular time to reduce the per share exercise price thereof and, to the extent permitted by the foregoing, may not amend outstanding Options to reduce the per share exercise price thereof to lower than 85% of the Fair Market Value of a Share on the date of repricing. (c) ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR NONRECURRING EVENTS. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(b) hereof) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan's meeting the requirements of Section 162(m) of the Code, as from time to time amended, or Rule 16b-3, as from time to time amended. SECTION 14. GENERAL PROVISIONS. (a) DIVIDEND EQUIVALENTS. In the sole and complete discretion of the Committee, an Award, whether made as an Other Stock-Based Award under Section 10 or as an Award granted pursuant to Sections 6 through 9 hereof, may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis. (b) NONTRANSFERABILITY. No Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution or pursuant to a QDRO, provided, however, that an Award may be transferable, to the extent determined by the Committee and set forth in the applicable Award Agreement, (i) if such Award Agreement provisions do not disqualify such Award for exemption under Rule 16b-3, as from time to time amended, (ii) if such Award is not intended to qualify for exemption under such rule or (iii) with respect to Awards which are Incentive Stock Options, if such Award Agreement provisions do not prevent the Incentive Stock Options from qualifying as such under Section 422 of the Code, as from time to time amended. 11 12 (c) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (d) SHARE CERTIFICATES. All certificates for Shares or other securities of the Company of any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the SEC, any stock exchange or national market quotation system upon which such Shares or other securities are then listed or quoted, respectively, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) WITHHOLDING. A participant may be required to pay to the Company or any Affiliate and the Company or any Affiliate shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of any Award, its exercise or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise or payments of any Award. (f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an Award Agreement that shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto. (g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of options, restricted stock, Shares and other types of Awards provided for hereunder (subject to stockholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (h) NO RIGHT TO EMPLOYMENT. Neither the Plan nor the grant of any Awards hereunder nor any action taken by the Committee or the Board in connection with the Plan shall create any right on the part of any Employee to continue in the employ of the Company or any Affiliate. (i) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award and the Plan, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until he or she has become the holder of such Shares. 12 13 (j) GOVERNING LAW. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Maine. (k) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (l) OTHER LAWS. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (n) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. (o) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (p) SUCCESSORS AND ASSIGNS. The Plan and any Award Agreement shall be binding upon the successors and assigns of the Company and upon each Participant and such Participant's heirs, executors, administrators, personal representatives, permitted assignees and successors in interest. 13 14 SECTION 15. EFFECTIVE DATE; TERM OF THE PLAN. (a) EFFECTIVE DATE. The Plan shall be effective as of February 13, 1996, subject to approval by the stockholders of the Company within one year thereafter. The amendment to Section 4(a) of the Plan adopted by the Board of Directors of the Company on March 3, 1998 shall be effective as of such date, subject to approval by the stockholders of the Company within one year thereafter. The amendments to Plan adopted by the Committee on May 26, 1998 shall be effective as of such date. (b) TERM OF THE PLAN. Unless sooner terminated, the Plan shall remain in effect for a period of ten years ending on the tenth anniversary of the Effective Date. Termination of the Plan shall not affect any Awards previously granted and such Awards shall remain valid and in effect until they have been fully exercised or earned, are surrendered or by their terms expire or are forfeited. 14 EX-27 3 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1998 SEP-30-1998 399,387 0 189,909 0 1,881,830 0 0 6,426,231 88,671 9,882,729 6,832,172 2,046,135 103,768 0 100,000 0 900 749,754 9,887,729 453,583 81,723 0 535,306 181,343 79,985 273,978 9,702 3,506 242,472 99,320 99,320 0 0 67,996 .77 .76 4.13 55,151 7,526 270 0 88,075 5,937 2,812 88,671 88,671 0 0
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