-----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, PWH24wDk5kbwCWI4HRdDeBxks6YLJ5gd+x1oKkm0jH3o7UKbSlhneeZX92IReAZ6 OGvyjSw/kif2WbdZihsXOw== 0000950135-99-004109.txt : 19990817 0000950135-99-004109.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950135-99-004109 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692654 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, INC. 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 June 30, 1999 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 August 1, 1999 is: Common stock, par value $.01 per share 104,808,904 (Class) (Outstanding) 2 INDEX PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (unaudited) Consolidated Balance Sheets June 30, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three and Six Months ended June 30, 1999 and 1998 4 Consolidated Statements of Changes in Shareholders' Equity - Six months ended June 30, 1999 and 1998 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 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 share data) (Unaudited)
June 30, 1999 December 31,1998 ------------- ---------------- ASSETS Cash and due from banks $ 397,060 $ 415,435 Federal funds sold and other short term investments 45,194 283,878 Securities available for sale, at market value 5,044,822 2,986,131 Securities held to maturity (fair value of $612.5 million at June 30, 1999) 601,151 245,233 Loans held for sale 132,325 517,754 Loans and leases: Residential real estate mortgages 1,533,439 2,230,615 Commercial real estate mortgages 1,727,284 1,621,890 Commercial business loans and leases 1,267,105 1,146,242 Consumer loans and leases 2,088,700 2,089,284 ------------ ------------ 6,616,528 7,088,031 Less: Allowance for loan and lease losses 110,639 110,561 ------------ ------------ Net loans and leases 6,505,889 6,977,470 Premises and equipment 139,541 144,574 Goodwill and other intangibles 117,144 124,363 Mortgage servicing rights 47,314 40,088 Bank-owned life insurance 222,262 66,944 Other assets 226,996 248,369 ============ ============ $ 13,479,698 $ 12,050,239 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings $ 1,285,715 $ 1,284,074 Money market and NOW accounts 2,112,302 2,073,793 Certificates of deposit 3,335,663 3,455,541 Brokered deposits 185,155 257,570 Demand deposits 1,285,492 1,305,737 ------------ ------------ Total deposits 8,204,327 8,376,715 Federal funds purchased and securities sold under repurchase agreements 568,413 591,970 Borrowings from the Federal Home Loan Bank of Boston 3,644,173 1,936,585 Other borrowings 33,441 25,659 Other liabilities 65,839 118,182 ------------ ------------ Total liabilities 12,516,193 11,049,111 ------------ ------------ Company obligated, mandatory redeemable securities of subsidiary trust holding solely parent junior subordinated debentures 68,775 100,000 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, 106,647,497 and 106,647,585 shares issued) 1,066 1,066 Paid-in capital 507,914 509,473 Retained earnings 471,582 447,438 Unearned compensation (1,970) (2,027) Accumulated other comprehensive income (loss): Net unrealized loss on securities available for sale (46,905) (1,651) Treasury stock, at cost (2,547,693 shares and 2,845,731 shares) (36,957) (53,171) ------------ ------------ Total shareholders' equity 894,730 901,128 ------------ ------------ $ 13,479,698 $ 12,050,239 ============ ============
See accompanying Notes to Consolidated Financial Statements. 3 4 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Interest and dividend income: Interest on loans and leases $ 139,935 $ 169,225 $ 294,406 $ 338,439 Interest and dividends on securities 80,415 39,389 136,192 79,854 ------------ ------------ ------------ ------------ Total interest and dividend income 220,350 208,614 430,598 418,293 Interest expense: Interest on deposits 63,428 72,072 128,404 142,945 Interest on borrowed funds 47,796 30,323 85,130 62,577 ------------ ------------ ------------ ------------ Total interest expense 111,224 102,395 213,534 205,522 Net interest income 109,126 106,219 217,064 212,771 Provision for loan and lease losses 3,565 3,235 7,130 6,484 ------------ ------------ ------------ ------------ Net interest income after provision for loan and lease losses 105,561 102,984 209,934 206,287 Noninterest income: Customer services 12,738 10,070 23,550 19,555 Mortgage banking services 6,576 9,517 10,781 16,884 Insurance commissions 4,314 2,790 9,596 5,688 Trust and investment advisory services 5,200 4,189 9,645 7,796 Bank-owned life insurance income 3,009 878 5,318 1,926 Net securities gains 260 2 278 2,052 Other noninterest income 1,683 2,828 4,046 5,089 ------------ ------------ ------------ ------------ 33,780 30,274 63,214 58,990 Noninterest expenses: Salaries and employee benefits 39,170 40,183 79,340 82,995 Data processing 7,093 5,596 14,099 11,410 Occupancy 6,955 6,661 13,904 13,820 Equipment 5,407 4,811 10,214 10,736 Distributions on securities of subsidiary trust 1,585 2,286 3,571 4,530 Amortization of goodwill and other intangibles 2,933 2,914 5,901 5,776 Advertising and marketing 2,321 2,884 4,654 5,653 Special charges -- 34,474 33,235 35,374 Other noninterest expenses 13,848 14,538 25,398 29,041 ------------ ------------ ------------ ------------ 79,312 114,347 190,316 199,335 Income before income tax expense 60,029 18,911 82,832 65,942 Applicable income tax expense 19,263 6,375 28,572 22,290 ------------ ------------ ------------ ------------ Net income $ 40,766 $ 12,536 $ 54,260 $ 43,652 ============ ============ ============ ============ Weighted average shares outstanding: Basic 103,957,104 103,404,866 103,708,421 103,391,860 Diluted 105,121,969 105,761,510 105,003,725 105,750,425 Earnings per share: Basic $ 0.39 $ 0.12 $ 0.52 $ 0.42 Diluted 0.39 0.12 0.52 0.41
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) (Unaudited)
Accumulated Compen- Other Par Paid-in Retained sation Comprehensive Treasury Value Capital Earnings ESOP Income (Loss) Stock Total ----------------------------------------------------------------------------- Balance at December 31, 1998 $1,066 $509,473 $447,438 ($2,027) ($1,651) ($53,171) $901,128 Net income - - 54,260 - - - 54,260 Unrealized losses on securities, net of reclassification adjustment - - - - (45,254) - (45,254) -------- Comprehensive income 9,006 -------- Common stock issued for employee benefit plans - - (6,057) - - 16,214 10,157 Decrease in unearned compensation - 244 - 57 - - 301 Premium on repurchase of trust preferred securities - (1,801) - - - - (1,801) Payment of fractional shares - (2) - - - - (2) Cash dividends - - (24,059) - - - (24,059) --------------------------------------------------------------------------- Balances at June 30, 1999 $1,066 $507,914 $471,582 ($1,970) ($46,905) ($36,957) $894,730 =========================================================================== Balances at December 31, 1997 $1,053 $491,033 $379,017 ($3,123) $7,938 ($29,663) $846,255 Net income - - 43,652 - - - 43,652 Unrealized gains (losses) on securities net of reclassification adjustment - - - - (2,196) - (2,196) -------- Comprehensive income 41,456 -------- Cancellation of treasury shares at acquisition (1) (1,879) - - - 1,880 - Common stock issued for employee benefit plans 8 6,486 (763) (567) - 5,511 10,675 Treasury stock purchased - - - - - (24,460) (24,460) Decrease in unearned compensation - 666 - 747 - - 1,413 Cash dividends - - (20,345) - - - (20,345) --------------------------------------------------------------------------- Balances at June 30, 1998 $1,060 $496,306 $401,561 ($2,943) $5,742 ($46,732) $854,994 ===========================================================================
See accompanying Notes to Consolidated Financial Statements. 5 6 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, -------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net income $ 54,260 $ 43,652 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 7,130 6,484 Depreciation 9,709 10,008 Amortization of goodwill and other intangibles 5,901 5,776 Net increase (decrease) in net deferred tax liabilities (1,675) 30,323 ESOP and restricted stock expense 301 1,413 Net (gains) losses realized from sales of securities and consumer loans (278) (2,052) Net (gains) losses realized from sales of loans held for sale (a component of mortgage banking services) 1,561 13,857 Earnings from bank owned life insurance (5,318) (1,926) Net (increase) in mortgage servicing rights (7,226) (35,418) Proceeds from sales of loans held for sale 687,667 1,611,015 Residential loans originated and purchased for sale (303,799) (1,860,175) Net decrease (increase) in interest and dividends receivable and other assets (33,039) (4,082) Net increase (decrease) in other liabilities 31,982 (30,049) ----------- ----------- Net cash provided (used) by operating activities $ 447,176 ($ 211,174) ----------- ----------- Cash flows from investing activities: Proceeds from sales of securities available for sale $ 27,461 $ 304,920 Proceeds from maturities and principal repayments of securities available for sale 821,397 567,701 Purchases of securities available for sale (2,734,212) (648,388) Proceeds from maturities and principal repayments of securities held to maturity 31,584 41,086 Purchase of securities held to maturity -- (81,846) Net (increase) decrease in loans and leases (168,284) 83,257 Purchase of bank owned life insurance (150,000) -- Net additions to premises and equipment (4,676) (4,623) ----------- ----------- Net cash provided (used) by investing activities ($2,176,730) $ 262,107 ----------- ----------- Cash flows from financing activities: Net increase (decrease) in deposits ($ 172,388) $ 173,616 Net increase (decrease) in securities sold under repurchase agreements (23,557) (26,787) Proceeds from Federal Home Loan Bank of Boston borrowings 2,155,000 2,306,769 Payments on Federal Home Loan Bank of Boston borrowings (447,412) (2,149,067) Net increase (decrease) in other borrowings 7,782 8,408 Repurchase of trust preferred securities (33,026) -- Issuance of stock 10,155 11,546 Purchase of treasury stock -- (24,460) Dividends paid (24,059) (20,345) ----------- ----------- Net cash provided by financing activities $ 1,472,495 $ 279,680 ----------- ----------- Increase (decrease) in cash and cash equivalents ($ 257,059) $ 330,613 Cash and cash equivalents at beginning of period 699,313 390,426 ----------- ----------- Cash and cash equivalents at end of period $ 442,254 $ 721,039 =========== =========== For the six months ended June 30, 1999 and 1998, interest of $211,739 and $209,864 and income taxes of $17,403 and $22,052 were paid, respectively
6 7 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (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 1998 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations and other data for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 1999. Certain amounts in the prior periods have been reclassified to conform to the current presentation. On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"), 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, 1998, SIS had total assets of $2.0 billion and total shareholders' equity of $139 million. Effective January 1, 1999, the Company transferred all securities classified by SIS as "held to maturity" to "available for sale." This transfer was done to be consistent with the Company's interest rate risk management policies. NOTE 2 - OTHER COMPREHENSIVE INCOME The components of total comprehensive income for the Company are net income and unrealized gains (losses) on securities available for sale, net of tax. The following is a reconciliation of comprehensive income for the six months ended June 30, 1999 and 1998.
Six Months Ended June 30, -------------------- 1999 1998 -------- -------- Net income $ 54,260 $ 43,652 Other comprehensive income (loss), net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period (45,073) (862) Less: reclassification adjustment for gains included in net income 181 1,334 -------- -------- Net (45,254) (2,196) -------- -------- Comprehensive income $ 9,006 $ 41,456 ======== ========
NOTE 3 - OTHER MATTERS In June 1999, the Company reached a definitive agreement to acquire Banknorth Group, Inc. ("Banknorth"), a $4.4 billion bank holding company based in Burlington, Vermont. Under the terms of the agreement, shareholders of Banknorth will receive 1.825 shares of Peoples Heritage Common Stock for each whole share of Banknorth Common stock, plus cash in lieu of any fractional share. The exchange is expected to be tax-free and accounted for as a pooling-of-interests. The transaction, which is subject to approval by shareholders of both Banknorth and the Company and various regulatory agencies, is anticipated to be completed by the end of 1999. 7 8 PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS SUMMARY The Company reported net income of $40.8 million, or $0.39 per diluted share, for the second quarter of 1999. This compares with $12.5 million, or $0.12 per diluted share, for the second quarter of 1998 and $13.5 million, or $0.13 per diluted share, for the first quarter of 1999. Special charges were recorded in the first quarter of 1999 and the second quarter of 1998. See Non-Interest Expense and Table 5 for more information related to special charges. The Company reported operating income (exclusive of special charges) of $40.8 million, or $0.39 per diluted share, for the second quarter of 1999 compared with $36.6 million, or $0.35 per diluted share, for the second quarter of 1998 and $37.6 million, or $0.36 per diluted share, for the first quarter of 1999. The second quarter results represent an 11% increase in operating earnings per diluted share, compared to the same period last year. Second quarter operating return on equity was 18.08%, which compared to 17.08% in the second quarter of 1998 and 17.23% in the first quarter of 1999. The operating return on assets was 1.25% for the second quarter of 1999, compared to 1.27% in the second quarter of 1998 and 1.25% in the first quarter of 1999. The improved operating results for the second quarter of 1999, compared to the second quarter of 1998, primarily reflect noninterest income growth coupled with cost savings achieved as a result of the SIS acquisition. Noninterest income increased 12% compared to the second quarter of 1998. The efficiency ratio (noninterest expense excluding distributions on securities of subsidiary trust and special charges, as a percentage of net interest income and noninterest income, excluding net securities gains) was 54.49% for the second quarter of 1999 compared to 56.84% for the second quarter of 1998 and 55.17% for the first quarter of 1999. Selected quarterly data and ratios and per share data, both as reported and on an operating basis, are provided in Table 1. 8 9 TABLE 1 - Selected Quarterly Data (Dollars in thousands, except per share data)
1999 1999 1998 1998 1998 1998 Second First Fourth Third Second First -------------------------------------------------------------------- Net interest income $109,126 $107,938 $106,233 $107,469 $106,219 $106,552 Provision for loan and lease losses 3,565 3,565 3,973 3,973 3,235 3,249 -------------------------------------------------------------------- Net interest income after loan and lease loss provision 105,561 104,373 102,260 103,496 102,984 103,303 Noninterest income (excluding securities transactions) 33,520 29,416 28,350 27,499 30,272 26,666 Net securities gains 260 18 2,395 1,457 2 2,050 Noninterest expenses (excluding special charges) 79,312 77,769 79,574 78,296 79,873 84,088 Special charges (1) -- 33,235 3,798 -- 34,474 900 -------------------------------------------------------------------- Income before income taxes 60,029 22,803 49,633 54,156 18,911 47,031 Income tax expense 19,263 9,309 17,703 16,914 6,375 15,915 -------------------------------------------------------------------- Net income $ 40,766 $ 13,494 $ 31,930 $ 37,242 $ 12,536 $ 31,116 ==================================================================== Earnings per share: Basic $ 0.39 $ 0.13 $ 0.31 $ 0.36 $ 0.12 $ 0.30 Diluted 0.39 0.13 0.30 0.35 0.12 0.29 Operating earnings per share (excluding special charges): Basic 0.39 0.36 0.35 0.36 0.35 0.31 Diluted 0.39 0.36 0.34 0.35 0.35 0.30 Return on average assets (2) 1.25% 0.45% 1.07% 1.27% 0.43% 1.10% Return on average equity (2) 18.08% 6.19% 14.21% 17.23% 5.86% 14.79% Operating ratios: Return on average assets (excluding special charges) (2) 1.25% 1.25% 1.22% 1.27% 1.27% 1.13% Return on average equity (excluding special charges) (2) 18.08% 17.23% 16.13% 17.23% 17.08% 15.06% Efficiency ratio (3) 54.49% 55.17% 57.44% 56.33% 56.84% 61.44%
(1) Special charges consists of merger-related expenses and one-time charges related to the discontinuance of the Company's correspondent mortgage business. (2) Annualized (3) Represents operating expenses, excluding distributions on securities of subsidiary trust and special charges, as a percentage of net interest income and noninterest income, excluding net securities gains. 9 10 RESULTS OF OPERATIONS NET INTEREST INCOME The Company's fully-taxable-equivalent net interest income in the second quarter of 1999 increased $1.2 million compared to the first quarter of 1999 and $2.6 million compared to the second quarter of 1998. The favorable effect of increased levels of average earning assets was substantially offset by lower margins as certain higher rate assets prepaid and new loan refinancings and investments were recorded at lower market rates. Table 2 shows the 1999 and 1998 quarterly average balances and 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 net interest margin for the second quarter of 1999 was 3.62% compared to 3.86% for the first quarter of 1999 and 4.03% in the second quarter of 1998. The decline in the net interest margin reflects the decrease in average loan yields due to the repricing and mix of interest earning assets and an increase in average borrowings as a percent of total average fundings. 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. 10 11 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
1999 Second Quarter 1999 First Quarter -------------------------------------- -------------------------------------- Yield/ Yield/ Average Balance Interest Rate(1) Average Balance Interest Rate(1) -------------------------------------- -------------------------------------- Loans and leases (2): Residential real estate mortgages $ 1,801,616 32,589 7.24% $ 2,556,325 $ 47,050 7.36% Commercial real estate mortgages 1,689,588 36,952 8.77 1,653,097 36,880 9.05 Commercial loans and leases 1,232,071 26,029 8.47 1,139,847 25,784 9.17 Consumer loans and leases 2,081,520 44,796 8.63 2,127,014 45,073 8.59 ------------------------ ------------------------ Total loans and leases 6,804,795 140,366 8.27 7,476,283 154,787 8.36 Securities (3) 5,103,801 78,130 6.12 3,583,507 54,105 6.05 Federal funds sold and other short term investments 189,798 2,331 4.93 186,465 1,820 3.96 ------------------------ ------------------------ Total earning assets 12,098,394 220,827 7.31 11,246,255 210,712 7.55 -------- -------- Nonearning assets 950,405 912,961 ------------ ----------- Total assets $ 13,048,799 $12,159,216 ============ =========== Interest-bearing deposits: Regular savings $ 1,268,159 6,428 2.03 $ 1,283,505 6,445 2.04 NOW and money market accounts 2,078,200 12,464 2.41 2,036,837 12,006 2.39 Certificates of deposit 3,391,976 41,725 4.93 3,449,865 43,893 5.16 Brokered deposits 201,244 2,811 5.60 211,412 2,632 5.05 ------------------------ ------------------------ Total interest-bearing deposits 6,939,579 63,428 3.67 6,981,619 64,976 3.77 Borrowed funds 3,769,847 47,796 5.09 2,923,476 37,334 5.18 ------------------------ ------------------------ Total interest-bearing liabilities 10,709,426 111,224 4.17 9,905,095 102,310 4.19 -------- -------- Non-interest bearing deposits 1,284,420 1,235,688 Other liabilities (3) 80,378 46,166 Securities of subsidiary trust 69,987 88,000 Shareholders' equity (3) 904,588 884,267 ============ =========== Total liabilities and shareholders' equity $ 13,048,799 $12,159,216 ============ =========== Net earning assets $ 1,388,968 $ 1,341,160 ============ =========== Net interest income (fully-taxable equivalent) 109,603 108,402 Less: fully-taxable equivalent adjustments (477) (464) -------- -------- Net interest income $109,126 $107,938 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.14% 3.36% Net interest margin (fully-taxable equivalent) 3.62% 3.86%
(1) Annualized. (2) Loans and leases include loans held for sale. (3) Excludes effect of unrealized gains or losses on securities available for sale. 11 12 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
1998 Fourth Quarter 1998 Third Quarter -------------------------------------- -------------------------------------- Yield/ Yield/ Average Balance Interest Rate(1) Average Balance Interest Rate(1) -------------------------------------- -------------------------------------- Loans and leases (2): Residential real estate mortgages $ 2,919,838 $ 53,662 7.35% $ 3,272,641 $ 61,006 7.46% Commercial real estate mortgages 1,611,739 38,667 9.52 1,594,023 38,186 9.50 Commercial loans and leases 1,126,061 24,598 8.67 1,122,187 25,828 9.13 Consumer loans and leases 2,092,081 45,308 8.59 2,006,297 45,011 8.90 ------------------------ ------------------------ Total loans and leases 7,749,719 162,235 8.33 7,995,148 170,031 8.46 Securities (3) 3,010,073 45,319 5.97 2,583,739 39,833 6.12 Federal funds sold and other short term investments 167,001 2,233 5.30 97,657 1,295 5.26 ------------------------ ------------------------ Total earning assets 10,926,793 209,787 7.63 10,676,544 211,159 7.87 -------- -------- Nonearning assets 898,969 924,025 ------------ ------------ Total assets $11,825,762 $11,600,569 ============ ============ Interest-bearing deposits: Regular savings $ 1,283,063 7,198 2.23 $ 1,306,657 7,960 2.42 NOW and money market accounts 2,017,616 13,018 2.56 1,938,800 11,989 2.45 Certificates of deposit 3,484,536 46,997 5.35 3,437,848 47,046 5.43 Brokered deposits 249,110 3,635 5.79 280,012 4,147 5.88 ------------------------ ------------------------ Total interest-bearing deposits 7,034,325 70,848 4.00 6,963,317 71,142 4.05 Borrowed funds 2,387,353 31,874 5.30 2,285,054 31,600 5.49 ------------------------ ------------------------ Total interest-bearing liabilities 9,421,678 102,722 4.33 9,248,371 102,742 4.41 -------- -------- Non-interest bearing deposits 1,308,902 1,260,212 Other liabilities (3) 103,862 134,455 Securities of subsidiary trust 100,000 100,000 Shareholders' equity (3) 891,320 857,531 ----------- ----------- Total liabilities and shareholders' equity $11,825,762 $11,600,569 =========== =========== Net earning assets $ 1,505,115 $ 1,428,173 =========== =========== Net interest income (fully-taxable equivalent) 107,065 108,417 Less: fully-taxable equivalent adjustments (832) (948) -------- -------- Net interest income $106,233 $107,469 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.30% 3.46% Net interest margin (fully-taxable equivalent) 3.90% 4.05%
(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 (Dollars in thousands)
1998 Second Quarter 1998 First Quarter --------------------------------------- -------------------------------------- Yield/ Yield/ Average Balance Interest Rate(1) Average Balance Interest Rate(1) -------------------------------------- -------------------------------------- Loans and leases (2): Residential real estate mortgages $ 3,363,259 $ 62,583 7.44% $ 3,388,356 $ 64,971 7.75% Commercial real estate mortgages 1,600,841 37,693 9.44 1,596,801 37,644 9.56 Commercial loans and leases 1,090,450 25,418 9.35 1,015,809 23,143 9.25 Consumer loans and leases 2,017,090 44,618 8.87 1,972,781 43,671 8.98 ------------------------ ------------------------ Total loans and leases 8,071,640 170,312 8.45 7,973,747 169,429 8.61 Securities (3) 2,462,955 38,478 6.27 2,439,674 39,521 6.57 Federal funds sold and other short term investments 96,298 634 2.64 90,671 1,290 5.77 ------------------------ ------------------------ Total earning assets 10,630,893 209,424 7.90 10,504,092 210,240 8.11 -------- -------- Nonearning assets 948,706 918,811 ----------- ----------- Total assets $11,579,599 $11,422,903 =========== =========== Interest-bearing deposits: Regular savings $ 1,361,919 8,094 2.38 $ 1,372,469 8,470 2.50 NOW and money market accounts 1,915,109 12,239 2.56 1,809,653 11,524 2.58 Certificates of deposit 3,472,084 47,232 5.46 3,452,992 46,633 5.48 Brokered deposits 315,289 4,507 5.73 290,177 4,246 5.93 ------------------------ ------------------------ Total interest-bearing deposits 7,064,401 72,072 4.09 6,925,291 70,873 4.15 Borrowed funds 2,215,643 30,323 5.49 2,334,920 32,254 5.60 ------------------------ ------------------------ Total interest-bearing liabilities 9,280,044 102,395 4.43 9,260,211 103,127 4.52 -------- -------- Non-interest bearing deposits 1,220,460 1,123,814 Other liabilities (3) 120,338 85,381 Securities of subsidiary trust 100,000 100,000 Shareholders' equity (3) 858,757 853,497 ----------- ----------- Total liabilities and shareholders' equity $11,579,599 $11,422,903 =========== =========== Net earning assets $ 1,350,849 $ 1,243,881 =========== =========== Net interest income (fully-taxable equivalent) 107,029 107,113 Less: fully-taxable equivalent adjustments (810) (561) -------- -------- Net interest income $106,219 $106,552 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.47% 3.59% Net interest margin (fully-taxable equivalent) 4.03% 4.13%
(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 The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate) and (3) changes in rate/volume (change in rate multiplied by change in volume). TABLE 3 - RATE VOLUME ANALYSIS (Dollars in thousands)
Three Months Ended June 30, 1999 vs. 1998 Increase (decrease) due to -------------------------------------------- Rate & Total Volume Rate Volume (1) Change -------------------------------------------- Interest income: Loans and leases ($26,689) ($3,622) $ 365 ($29,946) Securities 41,282 (921) (709) 39,652 Federal funds sold and other short term investments 615 550 532 1,697 -------------------------------------------- Total interest income 15,208 (3,993) 188 11,403 -------------------------------------------- Interest expense: Interest-bearing deposits Regular savings (450) (1,188) (28) (1,666) NOW and money market accts 1,041 (716) (100) 225 Certificates of deposit (1,090) (4,588) 171 (5,507) Brokered deposits (1,629) (102) 35 (1,696) -------------------------------------------- Total interest-bearing deposits (2,128) (6,594) 78 (8,644) Borrowed funds 21,273 (2,210) (1,590) 17,473 -------------------------------------------- Total interest expense 19,145 (8,804) (1,512) 8,829 Net interest income (fully taxable equivalent) ($ 3,937) $ 4,811 $ 1,700 $ 2,574 ============================================
(1) Includes changes in interest income and expense not due solely to volume or rate changes. 14 15 NON-INTEREST INCOME Second quarter non-interest income of $33.8 million increased 12% from the second quarter of 1998, and increased 15% from the first quarter of 1999. The increase over the second quarter of 1998 related to insurance agency commissions ($1.5 million or 55%), customer service income ($2.7 million or 26%), trust/investment advisory service fees ($1.0 million or 24%) and bank owned life insurance income ($2.1 million or 243%.) These increases were partially offset by a $2.9 million decline in mortgage banking income due primarily to discontinuance of the correspondent lending business in the first quarter of 1999. Second quarter non-interest income increased by $4.3 million (or 15%) over the first quarter of 1999 due to a $2.4 million increase in mortgage banking income and a $1.9 million increase in customer service income. Customer services income in the second quarter of 1999 increased 26% from the second quarter of 1998 and 18% from the first quarter of 1999. The increases were primarily attributable to growth in the number of transaction accounts and increased ATM fees. Insurance commission revenue was $4.3 million for the second quarter of 1999, compared to $2.8 million for the same period in 1998. The increase primarily relates to the acquisition of insurance agencies in Massachusetts and New Hampshire in the fourth quarter of 1998, which were accounted for using the purchase method. Trust and investment advisory services 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 $3.1 billion, $3.0 billion and $2.9 billion at June 30, 1999, December 31, 1998 and June 30, 1998, respectively. Bank-owned life insurance ("BOLI") income was $3.0 million for the second quarter of 1999, compared to $878 thousand for the same period in 1998. The increase relates to higher levels of BOLI. At June 30, 1999, the cash surrender value of BOLI was $222 million compared to $65 million at June 30, 1998. BOLI covers certain officers of the Company's bank subsidiaries. Most of the Company's BOLI is invested in the "general account" of quality insurance companies. All such companies were rated AA or better by Standard and Poors at June 30, 1999. Mortgage banking services income of $6.6 million, $4.2 million and $9.5 million provided 19%, 14% and 31% of noninterest income for the quarters ended June 30, 1999, March 31, 1999 and June 30, 1998, respectively. Mortgage banking services income increased from the first quarter due to increased gains on sales of mortgage servicing of $2.9 million and a $900 thousand valuation net gain on the mortgage servicing rights asset and hedging instruments, offset by a $1.9 million lower of cost or market adjustment on loans held for sale. The decline in the first quarter was largely due to discontinuing the correspondent mortgage lending business in January 1999. Also, the second quarter of 1998 included a $1.7 million gain on sales of mortgage servicing compared to a $17 thousand loss in the first quarter of 1999. See "Special Charges" below for a discussion of the costs to discontinue the correspondent mortgage lending business. The amount of loans serviced for others was $3.9 billion, $4.3 billion and $7.4 billion at June 30, 1999, March 31, 1999 and June 30, 1998, respectively. The Company recorded $1.9 million in mortgage servicing income in the second quarter of 1999 compared to $1.6 million in the first quarter of 1999 and $3.6 million in the second quarter of 1998. See Table 4 for a summary of mortgage banking services income by quarter for 1999 and 1998. Capitalized mortgage servicing rights amounted to $47.3 million at June 30, 1999, compared to $45.3 million at March 31, 1999 and $96.1 million at June 30, 1998. The decrease from the second quarter last year was due to the sale of mortgage servicing rights totaling $59.2 million in the third and fourth quarters of 1998. 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 a portion of its capitalized mortgage servicing rights to help protect its value and mortgage banking income. Notwithstanding the foregoing, there can be no assurance that significant declines in interest rates will not have a material impact on the Company's mortgage servicing rights and mortgage banking income or that the hedge program will be successful in mitigating the effects of such a decline. 15 16 TABLE 4 - MORTGAGE BANKING SERVICES (Dollars in thousands)
At or for the Three Months Ended 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 --------------------------------------------------------------------------------- RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $3,913,525 $4,328,668 $4,243,181 $5,289,015 $7,374,982 $6,974,292 ================================================================================= MORTGAGE BANKING SERVICES INCOME: Residential mortgage sales income $2,799 $3,313 $7,123 $8,124 $4,596 $3,280 Lower of cost or market adjustment - loans held for sale (1,934) -- -- -- -- -- Residential mortgage servicing income, net 1,880 1,559 1,137 2,320 3,599 4,087 Change in impairment reserve 2,382 950 (4,545) (6,182) (359) -- Valuation adjustments - interest rate floor (1,475) (1,600) 200 2,180 -- -- Gain (loss) on sale of capitalized mortgage servicing rights 2,924 (17) 958 (997) 1,681 -- --------------------------------------------------------------------------------- Total $6,576 $4,205 $4,873 $5,445 $9,517 $7,367 ================================================================================= MORTGAGE SERVICING RIGHTS: Balance at beginning of period $45,266 $40,088 $57,640 $96,056 $80,278 $60,638 Mortgage servicing rights capitalized and purchased 2,747 7,535 6,803 13,940 24,364 35,709 Amortization charged against mortgage servicing fee income (2,736) (2,828) (3,644) (3,161) (3,647) (3,918) Change in impairment reserve 2,382 950 (4,545) (6,182) (359) -- Mortgage servicing rights sold (345) (479) (16,166) (43,013) (4,580) (12,151) --------------------------------------------------------------------------------- Balance at end of period $47,314 $45,266 $40,088 $57,640 $96,056 $80,278 =================================================================================
16 17 NON-INTEREST EXPENSE Excluding special charges, amortization of intangibles and distribution on securities of subsidiary trust, non-interest expense was $74.8 million, $72.8 million and $74.7 million for the quarters ended June 30, 1999, March 31, 1999, and June 30, 1998, respectively. The efficiency ratio was 54.49%, 56.84% and 55.17% for the quarters ended June 30, 1999, June 30, 1998 and March 31, 1999, respectively, excluding special charges, distributions on securities of subsidiary trust and net securities gains. Salaries and benefits expense of $39.2 million decreased $1.0 million from both the second quarter of last year and from the first quarter of 1999. Staff reductions related to the SIS acquisition was the primary reason for this decline. Data processing expense increased $1.5 million from the second quarter of last year and increased $87 thousand from the first quarter of 1999. The increase from last year was due to new systems initiatives, the costs of year 2000 testing (see "Impact of the Year 2000" section) and increased transaction volumes. Occupancy expense increased $294 thousand from the second quarter of 1998 and $6 thousand from the first quarter of 1999. The increase from the second quarter of 1998 was primarily due to a $206 thousand loss on the disposition of a branch in the second quarter of 1999. The Company had 220 branch offices at June 30, 1999 as compared to 227 branch offices at June 30, 1998. Equipment expense increased $596 thousand from the second quarter of last year and $600 thousand from the first quarter of 1999, while advertising and marketing expense decreased $563 thousand and $12 thousand from the second quarter of 1998 and the first quarter of 1999, respectively. The increase in equipment expense was due to increased amounts of depreciation on new equipment. The decreases in advertising and marketing expenses were primarily due to cost savings and efficiencies related to the SIS acquisition. Amortization of goodwill and other intangibles during the first quarter of 1999 increased $19 thousand from the second quarter of 1998 due to the goodwill associated with the fourth quarter 1998 purchase acquisitions of two insurance agencies. There were no special charges in the second quarter of 1999. Special charges of $34.5 million pre-tax were incurred during the second quarter of 1998 related to the acquisition of CFX on April 10, 1998. Special charges of $33.2 million pre-tax were incurred during the first quarter of 1999, which included merger-related expenses of $25.9 million incurred in connection with the acquisition of SIS and $7.4 million related to the discontinuance of the Company's correspondent mortgage lending business. On an after-tax basis, special charges amounted to $24.0 million and $24.1 million for the quarters ended June 30, 1998 and March 31, 1999, respectively. The following table summarizes activity related to special charges recorded since December 31, 1998 and shows the balance as of June 30, 1999. 17 18 TABLE 5 - SPECIAL CHARGES (Dollars in thousands)
Special Charges in First Six Months of 1999 ------------------------------------------- Discontinuing Plus: Correspondent Accrual Less: Less: Accrual Mortgage Balance at Cash Write- Balance at Merger Business Total 12/31/98 Transactions downs 6/30/99 ------ -------- ----- -------- ------------ ----- ------- Severance costs $11,345 $1,986 $13,331 $32 ($9,995) $0 $3,368 Data processing/systems integration 5,176 -- 5,176 -- (4,386) -- 790 Professional fees 3,314 1,793 5,107 -- (4,511) -- 596 Asset write-downs and lease terminations 4,067 1,293 5,360 -- (478) (2,905) 1,977 Customer communications 1,148 -- 1,148 -- (1,703) -- (555) Fund charitable foundation 3,000 -- 3,000 -- (3,000) -- -- Correspondent losses -- 957 957 -- (1,945) -- (988) Pension curtailment gain (4,000) -- (4,000) -- -- -- (4,000) Other costs 1,821 1,335 3,156 1,131 (2,342) -- 1,945 ------------------------------------- ------ -------- ------- ------ $25,871 (1) $7,364 (2) $33,235 $1,163 ($28,360) ($2,905) $3,133 ===================================== ====== ======== ======= ======
(1) On an after-tax basis merger charges amounted to $18,779. (2) On an after-tax basis charges for discontinuing the correspondent mortgage business amounted to $5,300. Other noninterest expenses for the second quarter of 1999 decreased $690 thousand from the second quarter of 1998 and increased $2.3 million from the first quarter of 1999. The following table summarizes the principal components of other non-interest expenses by quarter. TABLE 6 - OTHER NON-INTEREST EXPENSES (Dollars in thousands)
1999 1999 1998 1998 1998 1998 Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter ---------------------------------------------------------- Miscellaneous loan costs $1,952 $1,934 $1,457 $2,035 $2,612 $1,264 Telephone 2,566 2,561 2,306 2,315 1,951 1,973 Postage and freight 1,771 2,103 1,893 1,542 1,884 1,887 Office supplies 1,805 1,471 1,706 1,664 2,017 1,773 Deposits and other assessments 727 668 651 657 675 705 Collection and carrying costs of non-performing assets 313 701 666 (583) 268 737 Other 4,714 2,112 2,615 4,666 5,131 6,164 --------------------------------------------------------- Total $13,848 $11,550 $11,294 $12,296 $14,538 $14,503 =========================================================
TAXES The effective tax rate for the second quarter of 1999, excluding the effect of special charges, was 32% compared to 31% for the second quarter of 1998 and 33% for the first quarter of 1999. 18 19 OTHER COMPREHENSIVE INCOME FASB Statement No. 130 requires disclosure of "Other comprehensive income." Unlike net income, "other comprehensive income" includes the after-tax change in unrealized gains and losses on securities. As a result of an increase in interest rates in the first six months of 1999, the unrealized loss on the Company's securities portfolio increased $45.3 million, net of taxes and gains and losses realized on sales of securities. At June 30, 1999, unrealized losses, net of tax, represented less than 1% of securities available for sale. The Company attempts to balance the Interest Rate Risk of its assets with its liabilities (see "Interest Rate Risk and Asset Liability Management"). However, the change in value of its liabilities, which tends to improve in rising interest rate environments, is not included in "other comprehensive income." The Company has no current intention to sell any of its available for sale assets. FINANCIAL CONDITION LOANS AND LEASES Average loans of $6.8 billion during the second quarter of 1999 decreased $671 thousand or 9% from the first quarter of 1999 and $1.3 million or 16% from the second quarter of 1998. The decreases were primarily in residential real estate mortgages resulting from declines in loans held for sale, prepayments on residential real estate loans, and the April 1999 securitization of $633 million of 1-4 family residential loans into a real estate mortgage investment conduit ("REMIC") which is classified as securities held to maturity. Loans as a percent of average earning assets were 56% at June 30, 1999 compared to 66% at March 31, 1999 and 76% at June 30, 1998. Average residential real estate loans (which includes mortgage loans held for sale) of $1.8 billion during the second quarter of 1999 declined $1.6 billion from the second quarter of last year. As a result of declining interest rates during the period, prepayments on residential real estate loans accelerated, particularly in adjustable rate mortgages which had previously been retained in portfolio. Mortgage loans held for sale amounted to $132 million at June 30, 1999 and $653 million at June 30, 1998. The decline in loans held for sale was due primarily to discontinuance of the correspondent mortgage business in the first quarter of 1999. Average commercial real estate loans of $1.7 billion increased 6% from the second quarter of last year. The average yield on commercial real estate loans during the second quarter of 1999 was 8.77% as compared to 9.44% in the second quarter of 1998, which is indicative of increased competition and lower prevailing interest rates. Market forces have also influenced the term of new commercial real estate loans as customers are frequently requesting fixed rates and longer terms. Commercial loans averaged $1.2 billion during the second quarter of 1999, an increase of 13% over the second quarter of 1998. The yield on commercial loans decreased to 8.47% in the second quarter of 1999 from 9.35% in the second quarter of 1998. Average consumer loans of $2.1 billion during the second quarter of 1999 increased 3% from the second quarter of 1998. The increase was primarily in indirect automobile, student and home equity loans. The average yield on consumer loans declined from 8.87% in the second quarter of 1998 to 8.63% in the second quarter of 1999. SECURITIES AND OTHER EARNING ASSETS The Company's securities portfolio averaged $5.1 billion during the second quarter of 1999, as compared to $3.6 billion in the first quarter of 1999 and $2.5 billion in the second quarter of 1998, and consisted primarily of mortgage-backed securities, most of which are seasoned 15 year agency securities, and U.S. Treasury securities. Other securities consisted of collateralized mortgage obligations, asset-backed securities and securitized portfolio loans held in a REMIC and classified as held to maturity. Substantially all securities are rated AAA or equivalently rated. A significant portion of the increase in securities was to replace the decline in residential real estate loans. The average yield on securities was 6.12%, 6.05% and 6.27% for the quarters ended June 30, 1999, March 31, 1999 and June 30, 1998, respectively. The fluctuations in yields was due to reinvestment of maturing securities at lower yields during a declining interest rate environment and increased amortization of premiums as prepayments on mortgage backed securities have accelerated. The REMIC securities have a weighted average yield of 7.53% and increased the portfolio yield by 16 basis points in the second quarter of 1999 compared to the first quarter of 1999. Securities available for sale are carried at fair value and had an after-tax unrealized loss of $45.3 million and $50 thousand at June 30, 1999 and March 31, 1999, respectively. The unrealized loss was 0.9% of total securities available for sale at June 30, 1999. 19 20 ASSET QUALITY As shown in Table 7, nonperforming assets were $62.3 million at June 30, 1999, or 0.46% of total assets, compared to $60.1 million at March 31, 1999 and $71.7 million at June 30, 1998. 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 23% of the total loan portfolio at June 30, 1999, as compared with 30% at March 31, 1999. 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 June 30, 1999, 0.76% of the Company's residential loans were nonperforming, as compared with 0.48% at March 31, 1999. The increase from the first quarter was due mainly to the securitization of $633 million of 1-4 family loans now classified as securities held to maturity. The Company's commercial real estate loan portfolio accounted for 26% of the total loan portfolio at June 30, 1999 compared to 23% at March 31, 1999. At June 30, 1999, 0.92% of the Company's commercial real estate loans were nonperforming, as compared with 1.08% at March 31, 1999. The Company's commercial business loan portfolio accounted for 19% of the total loan portfolio at June 30, 1999 and 17% at March 31, 1999. Commercial business loans are not concentrated in any particular industry, but reflect the broad-based economies of Maine, New Hampshire, Massachusetts, and to a lesser extent, Connecticut. The Company's commercial business loans are generally to small and medium size businesses located within its geographic market area. At June 30, 1999, 1.47% of the Company's commercial business loans were non-performing, as compared with 1.06% at March 31, 1999. The increase was primarily related to one relationship which is believed to be adequately secured. The Company's consumer loan portfolio accounted for 32% of the total loan portfolio at June 30, 1999 and 30% at March 31, 1999. The Company has a diversified consumer loan portfolio consisting of home equity, automobile, mobile home, boat and recreational vehicles and education loans. At June 30, 1999, 0.26% of the Company's consumer loans were nonperforming, as compared with 0.36% at March 31, 1999. At June 30, 1999, the Company had $18.0 million of accruing loans which were 90 days or more delinquent, as compared to $25.0 million of such loans at March 31, 1999 and $10.1 million at June 30, 1998. The increase in the first quarter was primarily attributable to an increase in residential real estate loans over 90 days delinquent, which the Company believes are well secured and in the process of collection. As noted, accruing loans 90 days or more delinquent declined during the second quarter of 1999. 20 21 TABLE 7 - NONPERFORMING ASSETS (Dollars in thousands)
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 ------------------------------------------------------------- Residential real estate loans: Nonaccrual loans $11,643 $10,124 $9,917 $13,976 $10,802 $14,134 ------------------------------------------------------------- Commercial real estate loans: Nonaccrual loans 14,494 16,657 19,944 20,521 20,398 22,239 Troubled debt restructurings 1,391 1,110 6 475 1,477 3,298 ------------------------------------------------------------- Total 15,885 17,767 19,950 20,996 21,875 25,537 ------------------------------------------------------------- Commercial business loans and leases: Nonaccrual loans 18,600 12,694 14,920 15,174 18,409 19,833 Troubled debt restructurings 80 40 874 70 71 207 ------------------------------------------------------------- Total 18,680 12,734 15,794 15,244 18,480 20,040 ------------------------------------------------------------- Consumer loans and leases: Nonaccrual loans 5,531 7,566 10,865 8,887 8,323 10,000 ------------------------------------------------------------- Total nonperforming loans: Nonaccrual loans 50,268 47,041 55,646 58,558 57,932 66,206 Troubled debt restructurings 1,471 1,150 880 545 1,548 3,505 ------------------------------------------------------------- Total 51,739 48,191 56,526 59,103 59,480 69,711 ------------------------------------------------------------- Other nonperforming assets: Other real estate owned, net of related reserves 7,170 7,468 7,030 7,435 7,790 6,270 Repossessions, net of related reserves 3,411 4,446 3,624 3,786 4,380 4,158 ------------------------------------------------------------- Total other nonperforming assets 10,581 11,914 10,654 11,221 12,170 10,428 ------------------------------------------------------------- Total nonperforming assets $62,320 $60,105 $67,180 $70,324 $71,650 $80,139 ============================================================= Accruing loans which are 90 days overdue $17,990 $24,967 $21,962 $7,933 $10,078 $9,136 ============================================================= Total nonperforming loans as a percentage of total loans (1) 0.78% 0.68% 0.80% 0.81% 0.82% 0.96% Total nonperforming assets as a percentage of total assets 0.46% 0.48% 0.56% 0.60% 0.62% 0.68% Total nonperforming assets as a percentage of total loans and leases (1) and total other nonperforming assets 0.94% 0.85% 0.95% 0.96% 0.98% 1.10% (1) Total loans and leases are exclusive of loans held for sale.
PROVISION/ALLOWANCE FOR LOAN LOSSES The Company provided $3.6 million for loan and lease losses in the second quarter of 1999, compared to $3.2 million in the second quarter of 1998. As shown in Table 8, net charge-offs for the second quarter of 1999 were $3.5 million, or 21 basis points of average loans outstanding, compared to $4.4 million, or 22 basis points of average loans outstanding, for the second quarter of 1998. At June 30, 1999, the allowance for loan and lease losses amounted to $110.6 million or 1.67% of total portfolio loans and leases, as compared to $110.4 million or 1.52% at June 30, 1998. The ratio of the allowance for loan and lease losses to nonperforming loans was 214% at June 30, 1999 and 186% at June 30, 1998. Management considers the allowance appropriate and adequate to cover potential losses inherent in the loan portfolio based on the current economic environment. Provisions for loan losses are attributable to management's ongoing evaluation of the adequacy of the allowance for loan and lease losses, which includes, among other procedures, consideration of the character and size of the loan portfolio such as internal risk ratings and credit concentrations, trends in nonperforming loans, delinquent loans and net charge-offs, the volume of new loan originations and other asset quality factors. Although management utilizes its best judgment in providing for possible losses, there can be no 21 22 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 movements in market-based interest rates or other reasons could affect the Company's future provisions for loans losses. TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
1999 Second 1999 First 1998 Fourth 1998 Third 1998 Second 1998 First Quarter Quarter Quarter Quarter Quarter Quarter --------------------------------------------------------------------------- Average loans and leases outstanding during the period (1) $6,804,795 $7,476,283 $7,744,371 $7,990,408 $8,068,140 $7,973,747 =========================================================================== Allowance at beginning of period $110,573 $110,561 $111,413 $110,371 $111,507 $112,064 Charge-offs: Real estate mortgages 1,982 530 1,169 2,929 2,426 1,518 Commercial business loans and leases 346 1,137 2,634 717 1,304 601 Consumer loans and leases 3,904 3,550 3,822 2,868 2,966 3,727 --------------------------------------------------------------------------- Total loans charged off 6,232 5,217 7,625 6,514 6,696 5,846 --------------------------------------------------------------------------- Recoveries: Real estate mortgages 1,402 550 1,142 1,991 1,431 1,186 Commercial business loans and leases 688 627 932 889 501 166 Consumer loans and leases 643 487 726 703 393 688 --------------------------------------------------------------------------- Total loans recovered 2,733 1,664 2,800 3,583 2,325 2,040 --------------------------------------------------------------------------- Net charge-offs 3,499 3,553 4,825 2,931 4,371 3,806 Additions charged to operating expenses 3,565 3,565 3,973 3,973 3,235 3,249 --------------------------------------------------------------------------- Allowance at end of period $110,639 $110,573 $110,561 $111,413 $110,371 $111,507 =========================================================================== Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1) 0.21% 0.19% 0.25% 0.15% 0.22% 0.19% Ratio of allowance to total loans and leases at end of period (2) 1.67% 1.56% 1.56% 1.52% 1.52% 1.54% Ratio of allowance to nonperforming loans at end of period 214% 229% 196% 189% 186% 161% Ratio of net charge-offs as a percent of average outstanding loans, annualized (1): Real estate mortgages 0.067% -0.002% 0.002% 0.076% 0.080% 0.027% Commercial business loans and leases -0.111% 0.181% 0.603% -0.061% 0.296% 0.174% Consumer loans and leases 0.628% 0.584% 0.587% 0.428% 0.512% 0.625%
(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. 22 23 DEPOSITS Average deposits of $8.2 billion during the second quarter of 1999 remained relatively unchanged from the second quarter of 1998. Excluding brokered deposits, average total deposits increased $53 million compared to the second quarter of 1998. The ratio of portfolio loans to retail deposits was 83% and 92% at June 30, 1999 and June 30, 1998, respectively. Average non-interest bearing deposit accounts of $1.3 billion during the second quarter of 1999 increased $64.0 million or 5% from the second quarter of 1998. The increase reflects growth in both commercial and retail deposit balances. Average interest-bearing deposit accounts, excluding brokered deposits, of $6.7 billion during the second quarter of 1999 decreased $10.8 million or less than 1% from the second quarter of 1998. The average rates paid on all deposit types decreased from 4.09% in the second quarter of 1998 to 3.67% in the second quarter of 1999. 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 second quarter of 1999 were $3.2 billion, which increased by $1.5 billion or 88% from the second quarter of 1998 in order to fund the growth in earning assets. FHLB collateral consists primarily of first mortgage loans secured by 1 - 4 family properties, certain unencumbered securities and other qualified assets. At June 30, 1999, the Company's FHLB borrowings amounted to $3.6 billion and its additional borrowing capacity was $2.3 billion. Average balances for securities sold under repurchase agreements were $515 million, $537 million and $479 million for the quarters ended June 30, 1999, March 31, 1999, and June 30, 1998, respectively. These borrowings are secured by mortgage-backed securities and U.S. Government obligations. INTEREST RATE RISK AND ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-Liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (the "Board") and monitored periodically by a committee of the Board. The Board delegates responsibility for asset-liability management to the corporate Liquidity and Funds Management Committee ("LFMC"), which is comprised of members of senior management who sets strategic directives that guide the day-to-day asset-liability management activities of the Company. The LFMC also reviews and approves all major risk, liquidity and capital management programs. Market Risk Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. The Company has no trading operations and thus is only exposed to non-trading market risk. Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-credit risk to which the Company in exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets, affect net interest income, the Company's primary source of revenue. This risk arises directly from the Company's core banking activities - lending, deposit gathering and loan servicing. In addition to directly impacting net interest income, changes in the level of interest rates can also affect (i) the amount of loans originated and sold by the institution, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the rate of amortization of capitalized mortgage servicing rights and premiums paid on securities, (v) the amount of unrealized gains and losses on securities available for sale and (vi) the value of an institution's investment securities and mortgage loans and the resultant ability to realize gains on the sale of such assets. The primary objective of interest-rate risk management is to control the Company's exposure to interest-rate risk both within limits approved by the Board of Directors and guidelines established by the LFMC. These limits and guidelines reflect the Company's tolerance for interest-rate risk over both short-term and long-term horizons. The Company controls interest-rate risk by identifying, quantifying and, where appropriate, hedging its exposure. The Company quantifies and measures interest-rate exposures using a model to dynamically simulate net-interest income under various interest rate scenarios over 12 months. Simulated scenarios include deliberately extreme interest 23 24 rate "shocks" and more gradual interest rate "ramps." Key assumptions in these simulation analyses relate to behavior of interest rates and spreads, the growth or shrinkage of product balances and the behavior of the Company's deposit and loan customers. The most material assumption relates to the prepayment of mortgage assets (including mortgage loans, securities and mortgage servicing rights). The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly. Complicating management's efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of the Company's assets and liabilities. To cope with these uncertainties, management gives careful attention to its assumptions. For example, many of the Company's interest-bearing deposit products (e.g. interest checking, savings and money market deposits) have no contractual maturity and based on historical experience have only a limited sensitivity to movements in market rates. Because management believes it has some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built in to the model. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The Company manages the interest-rate risk inherent in its core banking operations primarily using on-balance sheet instruments, mainly fixed-rate portfolio securities and borrowed fund maturities. When appropriate, the Company will utilize off-balance sheet interest rate instruments such as interest-rate swaps, forward-rate agreements, options, options on swaps and exchange traded futures and options. The Company owns two interest-rate floors with a combined notional amount of $20 million, expiring from 1999-2000, which were purchased to protect certain rate sensitive assets against falling interest rates. The Company has no direct or contingent liability as a result of these floors. The Company's policy on interest-rate risk simulation specify that if interest rates were to immediately shift up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 10%. The Company was in compliance with this limit at June 30, 1999. The Company also monitors gradual changes in market interest rates which it believes better represents its exposure to net interest income. The following table reflects the estimated exposure of the Company's net interest income for the 12 months following the date indicated assuming a gradual shift in market interest rates of 100 and 200 basis points, respectively.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase ------------- ------------- ------------- ------------- (Dollars in thousands) June 30, 1999 $ (3,876) $ 7,012 $(10,497) $(14,458) ======== ======== ======== ======== March 31, 1999 $(11,349) $ 1,781 $ (4,674) $(11,596) ======== ======== ======== ========
The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, savings, money market and NOW accounts have implied interest rate floors and it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming a upward shift in rates of 200 basis points, the simulated increase in interest income would be less than the simulated increase in interest expense as the Company's fixed-rate earning assets exceed its fixed-cost paying liabilities. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. The Company uses interest rate floors, U.S. Treasury debt instruments and principal only strips to mitigate the prepayment risk associated with mortgage servicing rights (see "Non-Interest Income" for further details). At June 30, 1999, the Company had $200 million notional amount in interest rate floors, $20 million in U.S. Treasury bonds and $20 million in principal only strips. For mortgage servicing rights, the adverse impact of current movements in interest rates on expected future cash flows must be recognized immediately through an adjustment to their carrying value. If interest rates decline, estimated future fee income from mortgage servicing rights is reduced because of an expected increase in mortgage prepayments. The following table sets forth the net exposure at June 30, 1999 of the carrying value of mortgage servicing rights and identified hedging instruments, assuming an immediate shift by the indicated amount in market interest rates. 24 25
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase --------------------------------------------------------------------------- (Dollars in thousands) Mortgage servicing rights ($20,800) ($9,900) $7,400 $10,400 Interest Rate floors 7,700 3,600 (1,000) (1,700) U.S. Treasury bonds 6,800 3,000 (2,400) (4,400) Principal only strips 7,300 3,400 (2,000) (3,000) ======================================================================== Net exposure $ 1,000 $100 $2,000 $1,300 ========================================================================
The foregoing estimates of the effects of specified changes in interest rates on the Company's net interest income and the carrying value of its mortgage servicing rights are based on various assumptions, as discussed above, which approximate actual experience and which management of the Company considers to be reasonable. The effects of changes in interest rates on the Company could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. The most significant factors affecting market risk exposure of net interest income during the first half of 1999 were (i) the increase in interest rates, (ii) changes in the composition of mortgage assets, (iii) increases in consumer savings accounts and increase in net free funds and (iv) the increase and diversification of assets and off-balance sheet interest-rate instruments used to hedge mortgage servicing rights. The Company's earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the US dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity of the amount of fees from investment-related businesses. LIQUIDITY On a parent-only basis, the Company does not have substantial commitments or debt service requirements. At June 30, 1999, such commitments consisted primarily of junior subordinated debentures issued to a subsidiary, Peoples Heritage Capital Trust I, in connection with that subsidiary's issuance of 9.06% Capital Securities due 2027. The principal sources of funds for the Company to meet parent-only obligations are dividends from its banking subsidiaries, which are subject to regulatory limitations. Other sources of funds available to the Company on a parent-only basis include borrowings from public and private sources. For banking subsidiaries of the Company, liquidity represents the ability to meet both loan commitments and deposit withdrawals. Funds to meet these needs generally can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional in-market deposit sources, banks have many other sources of liquidity, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and other non-relationship funding sources, such as FHLB borrowings, senior or subordinated debt, commercial paper and wholesale purchased funds. Management believes that the high proportion of residential and installment consumer loans in its banks' loan portfolios also provides a significant amount of contingent liquidity through the conventional securitization programs that exist today. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. 25 26 CAPITAL At June 30, 1999, shareholders' equity amounted to $894.7 million. In addition, through a subsidiary trust, the Company had outstanding $68.8 million of Capital Securities which mature in 2027 and qualify as Tier 1 Capital. The Company paid a $0.115 per share dividend on its common stock during the second quarter of 1999. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios, set forth in Table 9. As indicated in such table, the Company's regulatory capital currently substantially exceeds all applicable requirements. The Company's banking subsidiaries are also subject to federal, and in certain cases state, regulatory capital requirements. At June 30, 1999, each of the Company's banking subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency and in compliance with applicable state capital requirements. TABLE 9 - REGULATORY CAPITAL REQUIREMENTS (Dollars in thousands)
For Capital Adequacy Actual Purposes Excess --------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of June 30, 1999: Total capital (to risk weighted assets) $988,680 12.30% $643,875 8.00% $ 344,805 4.30% Tier 1 capital (to risk weighted assets) 888,074 11.05% 321,537 4.00% 566,537 7.05% Tier 1 leverage capital ratio (to average assets) 889,965 6.88% 517,760 4.00% 372,205 2.88% As of December 31, 1998: Total capital (to risk weighted assets) 968,974 13.02% 595,426 8.00% 373,548 5.02% Tier 1 capital (to risk weighted assets) 875,723 11.76% 297,713 4.00% 578,010 7.76% Tier 1 leverage capital (to average assets) 875,723 7.50% 467,096 4.00% 408,627 3.50%
IMPACT OF THE YEAR 2000 The Company recognizes the significant potential impact from what is generally called the "year-2000" computer problem. This problem results from a computer programming convention where the specification of year data is truncated to two digits instead of the literal four digits (i.e., the year "1998" is represented as "98" and the century indicator of "19" is only assumed or automatically added after processing is completed). As computer software programs using this programming convention encounter data with year-2000 dates, they may misinterpret the resulting "00" year representation as the year "1900" instead of "2000." Date-based calculations under these conditions could result in inaccurate results or system failures. The use of embedded chips into non-information processing applications has also increased the risk of year-2000 problems in automated control and production systems where date and calendar programming is involved (e.g., in automated building environment controls or automated production equipment). Year-2000 computer software or embedded chip system failures external to the Company have the potential for negative impacts if they occur "upstream" (at suppliers, service providers, fiduciary counter-parties or funding sources) or "downstream" (at customers or other third-parties). As with most large financial service providers, the Company relies on a substantial number of information processing systems to deliver and manage its financial services products and the year-2000 problem presents a significant challenge. The Company relies heavily on external sources for computer software, basic infrastructure services, product-line support services and other goods and materials. The Company also exchanges a significant volume of data with external parties, including other financial institutions, government entities, customers, and business partners. The extent of the Company's reliance on external support for its business operations adds to the challenge of getting "year-2000 ready." 26 27 SOLUTION STRATEGY The Company initiated a formal Year-2000 Readiness Project in 1997. A senior management committee monitors the project and receives status reports on a bi-weekly basis. The Board of Directors receives quarterly status updates. A project team chaired by the Vice President of Technology and made up of a full-time project coordinator and team leaders from core support and data processing business units directs the detail readiness effort. Business unit representatives are involved in assessment, testing and implementation tasks as required. The Company is using both internal and external resources for various project tasks. The project plan has been segregated into five phases and closely follows the guidelines provided by the Federal Financial Institutions Examination Council (FFIEC), an inter-agency collaborative sponsored by the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. The project phases and description are as follows: Awareness phase - the problem and project effort was initially defined and senior project sponsorship and support was obtained. The project team was formed and the overall nature of the project effort was communicated to employees and other important external parties. This phase was initiated in January 1997 and, except for the on-going customer and community awareness efforts, was completed in July 1998. Assessment phase - a system component inventory was conducted across the Company. This included identifying all internally managed and controlled hardware, software, networks, unique processing platforms, and external customer and vendor data processing interdependencies. Various non-information processing systems such as physical security, elevator, HVAC/building environment and vault control systems were included in the inventory. Each system component was rated on its importance to the enterprise and its year-2000 compliance status. This assessment was used as a guide for repair or replacement priority and resource assignments. The Company identified nearly 100 internally controlled or managed systems or system categories as "critical." Twelve external services or data interfaces are currently considered as "critical." Assessments of building environment and security control systems indicated they were a low risk to the Company. During this phase, a plan to identify material customers (as funds takers, funds providers, or capital market/asset management counterparties), assess their Year-2000 readiness, evaluate the risks to the Company, and develop appropriate risk management strategies was formulated. The Assessment phase for company systems and external suppliers and servicers was concluded in August 1998. Renovation phase - a solution strategy was determined and planned for each system at risk and the strategies were executed. This included re-coding, hardware and software replacement or upgrade, and other associated changes. For systems and services supplied by external parties, the Company obtained from vendors their year-2000 readiness certifications and statements or monitored the vendor's progress in renovation, internal testing and availability of certified systems or upgrades. The review of current service contracts for year-2000 implications was also included in this phase. The Company relies on vendors for over 90% of its software systems and components, including the core mainframe-based software. The remaining approximately 10% of software is mainframe-based customized product or in-house developed micro-computer database applications. The renovation phase commenced in October 1997 and software upgrades, replacements and other remediation were completed in June 1999. Validation Phase - this phase includes developing and executing test scripts in specific testing environments where system dates can be set ahead and documenting the results. The validation plans closely follow regulatory guidances dictating the independent testing of critical systems in the Company's test centers even when vendor certifications are available. Testing designs include unit, integrated (with internal and external systems), point-to-point and end-to-end testing as appropriate. Business unit management, project management and internal audit provide final validation of the testing process and year-2000 readiness. The testing of critical rated and non-critical rated internal systems and external servicers and data interfaces, user acceptance and audit review was completed in June 1999. The Company is communicating with, or otherwise monitoring, the year-2000 readiness progress of significant external providers of infrastructure services on an on-going basis; the Company does not expect to directly test with these providers. At this time, the Company is not aware of any material disruption of infrastructure services which may be likely to occur. 27 28 Implementation phase - once systems are validated as year-2000 ready, repairs, upgrades or replacements are installed into production during this phase. All critical systems have been validated as Year 2000 ready, or repaired or replaced as necessary and put into production by June 1999. All non-critical systems have been validated as Year 2000 ready, or repaired or replaced as necessary and put into production by June 1999. Also as part of the implementation phase, the Company conducted systematic analyses regarding core critical business processes in order to create a Y2K specific Business Resumption Contingency Plan, an addendum to the already existing Company wide Business Recovery Plan focusing on the uniqueness of potential Y2K failure scenarios. Business processes critical to the Company have been analyzed and broken down into manual processes or other workaround tasks and fully documented. A method to evaluate the validity of the Y2K plan has been developed and was approved by the Board in May 1999. The final Y2K plan is anticipated to receive Board approval in the third quarter. The Company has also developed an Event Management Plan and strategy to serve as a master management tool for all tasks necessary to meet the millennium rollover period, including those necessary for a swift and expedient return from any alternate operating contingency procedures back to normal operations. The plan includes preparation tasks, validation procedures, and internal and external communications protocols, and forms a Y2K "Command Center" consisting of senior management and Y2K support units to function as communications/coordination centers for possible event disruptions. The Event Management Plan and strategy are expected to be complete and validated in September 1999. The Company is also proactively working with employees, customers, and industry peers, media and the White House Council on Y2K in efforts to increase awareness and educate customers and the public with regard to Y2K preparedness and safety. Ongoing activities include the monitoring and evaluation of internal system changes for year-2000 risk impacts, the monitoring of material customer, vendor, and counterparty risk, and the continuing development and implementation of customer and community awareness efforts. COST The Company does not separately track the internal costs incurred for the year- 2000 project, except for the dedicated salary of the project coordinator. The vast majority of internal costs relates to the payroll cost for staff assigned to the year-2000 project team and Company personnel assigned to testing the changes resulting from the Year 2000 effort. The Company has incurred $1.6 million of expenses in 1999 and anticipates that the incremental cost of the Year 2000 project will be approximately $2.0 million in 1999. All year 2000 costs are expensed as incurred, and are being funded out of the Company's operating cash flow. SUMMARY Based on the risk assessment, remediation, testing and monitoring efforts to date, the Company expects substantially all of its critical and important systems will operate successfully in all material respects through the century change. Therefore, the Company believes internal system failures are unlikely to materially adversely affect the Company's operations or financial condition, although there can be no assurances in this regard. The Company has already successfully tested with several critical external service providers and will continue in 1999 to validate and monitor changes in the readiness of its critical service providers, including the Company's electric power, telecommunications and transportation service providers. At this time, the Company believes the most likely "worst case" scenario consists of temporary and localized disruptions in infrastructure services, which may disrupt the Company's ability to service customers and/or the ability of external service providers to service the Company. The magnitude and scope of the Company's efforts to address the year-2000 problem may be revised periodically as the quality and quantity of knowledge about the project increases. It should also be noted that this description of the Company's efforts involves estimates and projections that are subject to change as work continues and such changes could be substantial. Pursuant to FFIEC guidelines, the Company is required to develop commercial credit risk controls to monitor and assess Year 2000 risk. As of July 1999, the Company had exceeded its target for reviewing commercial loan balances for year- 2000 readiness. 28 29 IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This Statement currently is scheduled to be effective for the Company for years beginning January 1, 2001. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms or the negative of 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. (a) An annual meeting of shareholders of the Company was held on April 27, 1999 ("Annual Meeting"). (b) Not applicable. (c) There were 104,070,044 shares of Common Stock of the Company eligible to be voted at the Annual Meeting and 86,813,803 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows: 1. Election of directors for a three-year term DIRECTOR NOMINEES ELECTED FOR THREE YEAR TERMS: FOR WITHHELD ------------------------- --- -------- P. Kevin Condron 86,035,821 777,794 Douglas S. Hatfield, Jr. 85,968,992 852,803 Philip A. Mason 85,927,234 886,561 William J. Ryan 86,031,364 782,431 Curtis M. Scribner 86,035,488 778,307 DIRECTOR NOMINEES ELECTED FOR TWO YEAR TERMS ------------------------- John M. Naughton 86,000,266 773,529 Seth A. Resnicoff 85,911,821 901,974 DIRECTOR NOMINEE ELECTED FOR ONE YEAR TERM ------------------------ David D. Hindle 86,018,329 795,465 2. Proposal to ratify the appointment of KPMG LLP as the Company's independent auditors for the year ending December 31, 1999. FOR AGAINST ABSTAIN 86,369,695 218,828 225,271 (d) Not applicable. Item 5. Other Information - not applicable. Item 6. Exhibits and reports on Form 8-K. (a) Exhibit 10 - Agreement, dated as of August 5, 1999, between the Company and F.William Marshall, Jr. Exhibit 27 - Financial Data Schedule. (b) The Company filed a Current Report on Form 8K on April 23, 1999, June 2, 1999 (as amended on June 9, 1999), June 10, 1999, July 27, 1999 and July 28, 1999. 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 August 16, 1999 By: /s/ William J. Ryan ----------------------------- William J. Ryan Chairman, President and Chief Executive Officer Date August 16, 1999 By: /s/ Peter J. Verrill ----------------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer) 31 EX-10 2 AGREEMENT WITH F.W. MARSHALL DATED 5-AUG-1999 1 Exhibit 10 AGREEMENT Agreement, dated as of the 5th day of August 1999, by and between Peoples Heritage Financial Group, Inc. (the "Company") and F. William Marshall, Jr. (the "Executive"). WITNESSETH: WHEREAS, the Company's employment of the Executive was terminated effective as of the close of business on June 30, 1999 in accordance with the terms of the Employment Agreement, dated as of January 1, 1999, between the Company and the Executive (the "Company Employment Agreement"); and WHEREAS, the Company desires to have the Executive provide, and the Executive is willing to provide the Company with, consulting services on the terms and conditions set forth herein; and WHEREAS, the Company desires to have the Executive enter into an agreement pursuant to which the Executive refrains from competing against the Company and taking certain other actions, and the Executive is willing to agree to such obligations; and WHEREAS, the consulting services and other obligations of the Executive set forth herein will be of substantial value to the Company; NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows: 1. CONSULTANCY. (a) In consideration of the payments specified in Section 5(a)(i) hereof, during the period commencing on the first day following the date of expiration of the period referred to in Section 4(b)(iv) hereof and ending six months thereafter (the "Consulting Period"), the Executive undertakes to provide his personal advice and counsel to the Company and Family Bank, FSB, a wholly-owned subsidiary of the Company, in connection with the business of the Company and Family Bank, FSB, including consulting with the Company and Family Bank, FSB regarding their operations and customer relationships, growth and expansion opportunities and other business matters (collectively, the "Consulting Services"), subject to the terms and conditions which are set forth herein. (i) In no event shall the Executive be required to provide Consulting Services hereunder for more than 35 hours per week or 140 hours in any calendar month during the Consulting Period. 2 (ii) The Executive shall provide such Consulting Services commensurate with the Executive's prior experience as may be reasonably requested by the Chief Executive Officer of the Company or his designee from time to time and at mutually agreeable times. Such Consulting Services may be provided in person, telephonically, electronically or by correspondence. (iii) The Executive shall not be required to provide Consulting Services outside a 50-mile radius of Springfield, Massachusetts, provided that the Executive may be requested to provide consulting services at the executive offices of the Company located in Portland, Maine up to not more than four times per month during the Consulting Period. (b) The Company shall reimburse the Executive or otherwise provide for or pay for all reasonable expenses incurred by the Executive at the request of the Company, subject to such reasonable documentation as may be requested by the Company. If such expenses are paid in the first instance by the Executive, the Company shall reimburse the Executive therefor upon receipt of such reasonable documentation as may be requested by the Company. (c) During the Consulting Period, the Executive shall be treated as an independent contractor and shall not be deemed to be an employee of the Company or any subsidiary or other affiliate of the Company. 2. NON-COMPETE. The Executive agrees that during the four-year period commencing on the date of this Agreement the Executive will not, directly or indirectly, as director, officer, employee, principal or agent, or in any other capacity, manage, operate, consult with or be employed by any insured depository institution, trust company or parent holding company of any such institution or company which has its main office in Maine, Massachusetts, New Hampshire or Connecticut and transacts business in any area in such states in which the Company or any of its banking subsidiaries maintains offices, provided, however, that this provision shall not prohibit the Executive from owning bonds, preferred stock or up to five percent (5%) of the outstanding common stock of any such entity if such common stock is publicly traded. 3. CONFIDENTIALITY; NONDISPARAGEMENT. (a) Except in the course of providing Consulting Services to the Company hereunder, the Executive shall not, except as required by law or regulation (including without limitation in connection with any judicial or administrative process or proceeding), at any time disclose to any third party or use any confidential information or proprietary data of the Company or any of its subsidiaries or affiliates (including predecessors thereof) other than in connection with services rendered by the Executive under Section 1 hereof. The Executive agrees that all information concerning the identity of the customers of the Company and its subsidiaries and the relations of the Company and its subsidiaries to their customers is confidential information. The obligations of the 2 3 Executive with respect to any particular information shall terminate at such time as such information becomes part of the public domain, provided that such disclosure was not the result of a disclosure by the Executive which was not permitted by the terms of this Agreement. (b) The Executive represents and agrees that he will keep the terms, amount and existence of this Agreement completely confidential and that he will not hereafter disclose any information concerning this Agreement to any entity or person, except (i) as may be required pursuant to law or regulation (including without limitation in connection with any judicial or administrative process or proceeding) after written notice of any such requirement is provided by the Executive to the Company or (ii) as may be necessary to enforce the provisions of this Agreement at law or in equity. (c) The Executive agrees not to make, either directly or indirectly, or cause to be made, either directly or indirectly, by any other person or entity, any statement or comment, whether oral, written, electronic or otherwise, or to take any other action which disparages or criticizes the Company or any subsidiaries or affiliates thereof, their present or former directors, officers, employees, management, practices or services, or which disrupts or impairs or could disrupt or impair the operations of the Company or any of its subsidiaries or affiliates. The Company agrees not to make, either directly or indirectly, or cause to be made, either directly or indirectly, by any other person or entity, or permit to be made by any director, officer, employee or representative of the Company, any statement or comment, whether oral, written, electronic or otherwise, or to take any other action which disparages or criticizes the Executive. (d) Each of the Company and the Executive covenants and agrees that upon any final, nonappealable adjudication that such party has violated the terms of this Section 3, the party asserting such a violation shall be entitled to seek and be awarded damages together with such party's costs, reasonable attorneys' fees and expenses in connection with enforcing the terms hereof. 4. RELEASES. (a) For, and in consideration of the commitments made herein by the Company, including without limitation the releases in paragraph (c) below, the Executive, for himself and for his heirs, successors and assigns, does hereby release completely and forever discharge the Company and its subsidiaries, affiliates, stockholders, attorneys, officers, directors, agents, employees, successors and assigns, and any other party associated with the Company (the "Released Parties"), to the fullest extent permitted by applicable law, from any and all claims, rights, demands, actions, liabilities, obligations, causes of action of any and all kind, nature and character whatsoever, known or unknown, in any way connected with his employment by the Company or any of its subsidiaries (including predecessors thereof), either as a director, officer or employee, or termination of such employment. (b) The Executive hereby specifically and unconditionally releases the Released Parties from any and all claims which the Executive may have against any of them and which arose on or 3 4 before the date of this Agreement under the Age Discrimination in Employment Act (the "ADEA"), including, but not limited to, any claim attributable to the Company' solicitation of the Executive's consent to the terms of this Agreement, and further acknowledges and represents that (i) the Executive waives the Executive's claims under the ADEA knowingly and voluntarily in exchange for the commitments made herein by the Company, and that the benefits provided thereby constitute consideration of value to which the Executive would not otherwise have been entitled; (ii) the Executive has been advised in writing by the Company to consult an attorney in connection with this Agreement; (iii) the Executive has been given a period of 21 days within which to consider the terms hereof; (iv) the Executive may revoke the waiver of ADEA claims set forth in this Section 4 for a period of seven (7) days following the execution of this Agreement and the Executive's waiver of ADEA claims hereunder shall not become effective until this revocation period has expired; (v) if the Executive revokes the waiver of ADEA claims in accordance with subparagraph (iv) above, this Agreement shall be null and void and the Executive shall cease to be entitled to receive the payments and benefits specified in Section 5 hereof; and (vi) this Agreement complies in all respects with Section 7(f) of the ADEA, the waiver provision of the Older Workers Benefit Protection Act. Notwithstanding the foregoing, the Executive does not release the Company from claims arising out of any breach by the Company of (i) any remaining obligations of the Company pursuant to Section 6.4(e), (f) and (g), Section 6.9 and Section 11 of the Amended and Restated Employment Agreement, dated as of June 30, 1997, between the Executive and Springfield Institution for Savings (the "SIS Employment Agreement"), (ii) this Agreement or (iii) Section 5.8 of the Agreement and Plan of Merger, dated as of July 20, 1998, as amended, among the Company, Peoples Heritage Merger Corp. and SIS Bancorp, Inc. (the "Merger Agreement"). (c) For, and in consideration of the commitments made herein by the Executive, including without limitation the releases in paragraphs (a) and (b) above, the Company, for itself, and for its successors and assigns does hereby release completely and forever discharge the Executive and his heirs, successors and assigns, to the fullest extent permitted by applicable law, 4 5 from any and all claims, rights, demands, actions, liabilities, obligations, causes of action of any and all kind, nature and character whatsoever, known or unknown, in any way connected with the Executive's employment by the Company or any of its subsidiaries (including predecessors thereof), either as a director, officer or employee. Notwithstanding anything in the foregoing to the contrary, the Company does not release the Executive from claims arising out of any breach by the Executive of (i) any law or regulation by the Executive during the term of and related to his employment by the Company or any of its subsidiaries (including predecessors thereof), either as a director, officer or employee, or (ii) this Agreement. 5. PAYMENTS AND BENEFITS. (a) In consideration of the obligations of the Executive hereunder, the Company agrees to provide the following benefits to the Executive: (i) with respect to the Executive's obligations under Section 1 above, the Company shall pay to the Executive $209,000 of compensation for the Consulting Period, such compensation to be paid in six equal monthly installments commencing on the first day following the date of expiration of the period referred to Section 4(b)(iv) hereof and continuing on the same day of each of the five succeeding months thereafter; (ii) with respect to the Executive's other covenants and obligations under this Agreement, the Company shall pay to the Executive an aggregate of $900,000, payable in four installments, as follows: $250,000 on the first day following the date of expiration of the period referred to in Section 4(b)(iv) hereof; $250,000 on January 15, 2000; and $200,000 on each of January 15, 2001 and January 15, 2002; (iii) with respect to the Executive's period of employment by the Company from January 1, 1999 through June 30, 1999, the Company shall pay to the Executive a bonus for services rendered to the Company equal to the higher of (i) $100,000 or (ii) 50% of the amount, if any, that would have been paid to him pursuant to the Company's Executive Management Short-Term Incentive Plan but for the termination of his employment, such bonus to be payable in early 2000 at the same time as any bonuses under such plan are paid to the executive officers of the Company, but in any event shall be paid no later than January 31, 2000; and (iv) provided that it is able to do so by the terms of the applicable plans and insurance carriers, the Company agrees to arrange for the Executive's continued participation (which by its terms shall include 5 6 coverage for the Executive's spouse) under the Company's health and dental insurance plans, at the Executive's sole expense, for the period commencing on the first day following the third anniversary of the date of termination of the employment of the Executive by the Company and ending on the earlier of (i) with respect to the Executive, the date the Executive attains age 65, and with respect to the Executive's spouse, the date she attains age 65, and (ii) the date, if any, the Executive obtains full-time employment with another employer, regardless of the level of health and dental insurance benefits provided by such new employer, if any. The Company shall bill the Executive for the cost of such health and dental insurance plans in accordance with its practices in place at the time. (b) Payments to the Executive under this Section 5 may be paid by the Company by check mailed to the address of the Executive set forth in Section 10 hereof or at such other address as the Executive may notify the Company in accordance with the terms of such section. (c) If any payment pursuant to this Section 5 is required to be made on a day which is not a business day, payment shall be made on the first business day thereafter, and no interest shall accrue on any such payment for the intervening period. For purposes of this Agreement, the term "business day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Maine are authorized by law, regulation or executive order to remain closed. (d) In the event of a Change in Control of the Company, (i) any remaining payments due to the Executive pursuant to paragraphs (a)(i), (a)(ii) and (a)(iii) of this Section 5 shall become immediately due and payable in one lump sum payment, and (ii) the Executive shall not have any obligations under Section 2 or Section 3(a) of this Agreement beyond the date of the Change in Control. A "Change in Control of the Company" shall be deemed to have occurred: (i) if any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")(other than the Company and any trustee or other fiduciary holding securities under any employee benefit plan of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) if during any period of two consecutive years (not including any period prior to the adoption of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (iii) upon the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities 6 7 of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company outstanding immediately after such merger or consolidation; or (iv) upon the complete liquidation of the Company or the consummation of the sale or disposition by the Company of all or substantially all of the Company's assets. 6. NATURE OF PAYMENT OBLIGATIONS. (a) Provided that the Executive complies in all material respects with his obligations pursuant to Sections 1, 2, 3 and 4 hereof in accordance with their terms, and except as otherwise provided in Section 6(b) and Section 7 hereof, the Company's obligation to pay the Executive the benefits and payments provided in Section 5 hereof shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any purported termination of this Agreement, other than pursuant to Section 6(b) hereof, set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or anyone else, and each and every such payment made or benefit provided shall be final and the Company shall not seek to recover all or any part of any such payment or benefit from the Executive or from whomsoever may be entitled thereto for any reason whatsoever. (b) If the Executive materially breaches any of his obligations hereunder, the Company may terminate this Agreement by written notice of termination provided to the Executive, and thereafter the Executive shall be entitled to no further benefits and payments under the terms of this Agreement. In the event of the death of the Executive, (i) any payment that remains to be made by the Company under Section 5(a)(iii) shall become due and payable to the Executive's estate within five business days after the Company is notified in writing of such death and (ii) the Executive's spouse shall continue to be entitled to the medical and dental benefits provided under Section 5(a)(iv) hereof for the period specified therein at the sole expense of such spouse, provided that the Company is able to continue to provide such benefits by the terms of the applicable plans and insurance carriers and the Company was providing such benefits to the Executive in accordance with such section at the time of his death. Except as provided in the preceding sentence, the estate and family of the Executive shall be entitled to no further benefits and payments under the terms of this Agreement in the event of the death of the Executive. 7. LIMITATION ON PAYMENTS. (a) Notwithstanding anything in this Agreement to the contrary, in the event that the Company, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Executive which the Company, after consultation with the Company's outside legal counsel and/or independent public accountants, believes has a high probability of success, determines that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable (or distributed or distributable) pursuant to the terms of this Agreement, either of the Employment Agreements referred to in Section 12 hereof or otherwise (a "Payment"), would be nondeductible by the Company for federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value 7 8 of the amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (the "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 7, the term "Reduced Amount" shall mean an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. (b) If the Company determines pursuant to Section 7(a) that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount) and shall advise the Company in writing of his election within 10 days of his receipt of notice. If no such election is made by the Executive within such 10-day period, then the Company may elect which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount) and shall notify the Executive promptly of such election. (c) If the Company determines pursuant to Section 7(a) that any Payment which has been made to the Executive is or would be nondeductible by the Company because of Section 280G of the Code (an "Overpayment"), such Overpayment shall be treated for all purposes as a loan to the Executive, which he shall repay to the Company, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, upon demand by the Company. (d) Determinations of present value for purposes of this Section 7 shall be determined in the manner set forth in Section 280G(d)(4) of the Code. (e) All determinations made by the Company under this Section 7 shall be final and binding upon the Executive. (f) The Executive acknowledges and agrees that Section 6.9 of the SIS Employment Agreement has no applicability to the payments and benefits to be provided to him under this Agreement and in no way conflicts with, limits or otherwise modifies the requirements of this Section 7. 8. REPRESENTATION. The Company and the Executive represent and warrant to each other that they have carefully read this Agreement and consulted with respect thereto with their respective counsel and that each of them fully understands the content of this Agreement and its legal effect. Each party hereto also represents and warrants that this Agreement is a legal, valid and binding obligation of such party which is enforceable against it in accordance with its terms. 8 9 9. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive and the Company, including any successor to the Company by merger or consolidation or any other change in form or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. This Agreement may not be assigned by any party hereto without the consent of the other party. 10. NOTICES. Any communication to a party required or permitted under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party or parties, as applicable: If to the Executive: F. William Marshall, Jr. 87 Ely Road Longmeadow, Massachusetts 01106 If to the Company: Peoples Heritage Financial Group, Inc. P.O. Box 9540 One Portland Square Portland, Maine 04112-9540 Attention: President 11. WITHHOLDING. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. ENTIRE AGREEMENT; SEVERABILITY. This Agreement incorporates the entire understanding among the parties relating to the subject matter hereof, recites the sole consideration for the promises exchanged and supersedes any prior agreements between the Company and the Executive with respect to the subject matter hereof, including without limitation, the Company Employment Agreement and the SIS Employment Agreement, provided that nothing contained herein shall affect any remaining obligations of the Company to the Executive under Section 6.4(e), (f) and (g), Section 6.9 and Section 11 of the SIS Employment Agreement or Section 5.8 of the Merger Agreement. In reaching this Agreement, no party has relied upon any representation or promise except those set forth herein. 13. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition. A waiver of 9 10 any provision of this Agreement must be made in writing, designated as a waiver and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. 15. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Maine applicable to agreements made and entirely to be performed within such jurisdiction. 16. HEADINGS. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. IN WITNESS WHEREOF, the Company and the Executive have entered into this Agreement as of the day and year first above written. PEOPLES HERITAGE FINANCIAL GROUP, INC. By: /s/ William J. Ryan --------------------------------------------- William J. Ryan, Chairman, President and Chief Executive Officer /s/ F. William Marshall, Jr. --------------------------------------------- F. William Marshall, Jr. 10 EX-27 3 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1999 JUN-30-1999 397,060 15,870 29,324 0 5,044,822 601,151 0 6,616,528 110,639 13,479,698 8,204,327 4,246,027 65,839 0 68,775 0 1,066 893,664 13,479,698 294,406 136,192 0 430,598 128,404 85,130 217,064 7,130 278 190,316 82,832 82,832 0 0 54,260 .52 .52 3.62 50,268 17,990 1,471 0 110,573 6,232 2,733 110,639 110,639 0 0
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