PEOPLES HERITAGE FINANCIAL GROUP INC - 10-K Annual Report

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [$250 FEE]

For the fiscal year ended December 31, 1995

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ________ to ________.

Commission File Number: 0-16947

PEOPLES HERITAGE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

Maine 01-0437984
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

P.O. Box 9540
One Portland Square
Portland, Maine 04112-9540
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (207) 761-8500

Securities registered pursuant to Section 12(b) of the Act: Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
Title of Class

Preferred Stock Purchase Rights
Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 19, 1996, the aggregate market value of the 17,028,129 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
the 262,577 shares held by all directors and executive officers of the
Registrant as a group (excluding the effects of unexercised stock options), was
$356.3 million. This figure is based on the last sale price of $21.25 per share
of the Registrant's Common Stock on March 19, 1996, as reported in The Wall
Street Journal on March 20, 1996. Although directors of the Registrant and
executive officers of the Registrant and its subsidiaries were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.

Number of shares of Common Stock outstanding as of March 19, 1996: 17,028,129

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and
the part of the Form 10-K into which the document is incorporated:

(1) Portions of the Annual Report to Stockholders for the year ended
December 31, 1995 are incorporated by reference into Part II, Items 5-8
and Part IV, Item 14 of this Form 10-K.

(2) Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 23, 1996 are incorporated by reference
into Part III, Items 10-13 of this Form 10-K.

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Exhibit Index appears on page 44.
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PART I.

ITEM 1. BUSINESS

GENERAL

Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank
and financial services holding company which is incorporated under the laws of
the State of Maine and headquartered in Portland, Maine. The Company's direct
subsidiaries, both of which are wholly-owned, are Peoples Heritage Bank (the
"Bank") and First Coastal Banks, Inc. ("First Coastal"), a New Hampshire
corporation which wholly-owns The First National Bank of Portsmouth ("FNB"). At
December 31, 1995, the Company had total consolidated assets of $3.1 billion and
total shareholders' equity of $270.5 million.

The Company acquired all of the capital stock of the Bank upon
consummation of the Bank's reorganization into the holding company form of
organization in June 1988. The Bank conducts business from its headquarters and
main office in Portland, Maine and 60 full-service offices located throughout
the State of Maine. At December 31, 1995, the Bank had total assets of $2.5
billion and total shareholder's equity of $187.2 million.

The Company acquired all of the capital stock of First Coastal and FNB
in July 1989. FNB conducts business from its headquarters and main office in
Portsmouth, New Hampshire and 20 full-service offices (inclusive of five offices
purchased in February 1996) located in the east, southeast and central regions
of New Hampshire. At December 31, 1995, FNB had $570.6 million of total assets
and $41.9 million of shareholder's equity.

Unless the context otherwise requires, references herein to the Company
include the Bank and First Coastal and their respective subsidiaries.

The principal business of the Company consists of attracting deposits
from the general public through its offices and using such deposits to originate
loans secured by first mortgage liens on existing single-family (one-to-four
units) residential real estate ("residential real estate") and existing
multi-family (over four units) residential and commercial real estate (together
"commercial real estate"), construction loans, commercial business loans and
leases and consumer loans. The Company also provides various mortgage banking,
trust and investment advisory services and, through subsidiaries of the Bank,
engages in equipment leasing, financial planning and securities brokerage
activities. The Company also invests in investment securities and other
permitted investments.

The Company derives its income principally from interest charged on
loans and, to a lesser extent, from interest and dividends earned on
investments, fees received in connection with the sale and servicing of loans,
deposit services and for other services and gains on the sale of assets. The
Company's principal expenses are interest expense on deposits and borrowings,
operating expenses, provisions for loan losses and income tax

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expense. Funds for activities are provided principally by deposits, advances
from the Federal Home Loan Bank ("FHLB") of Boston, securities sold under
repurchase agreements, amortization and prepayments of outstanding loans,
maturities and sales of investments and other sources.

The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA"), and as such is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). The Company also is registered as a Maine
financial institution holding company under Maine law and as such is subject to
regulation and examination by the Superintendent of Banking of the State of
Maine ("Superintendent").

As a Maine-chartered financial institution, the Bank is subject to
regulation and examination by the Superintendent, and as a national bank, FNB is
subject to regulation and examination by the Comptroller of the Currency
("Comptroller"). The deposit accounts of the Bank and FNB are insured by the
Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted
by law and, as a result, these entities are subject to examination by the FDIC.
Each of these entities also is subject to certain requirements established by
the Federal Reserve Board.

RECENT AND PROSPECTIVE ACQUISITIONS

For information about recent and prospective acquisitions of the
Company, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations Acquisitions" included in Item 7 hereof and Note 18 to the
Consolidated Financial Statements included in Item 14 hereof.

LENDING ACTIVITIES

General. At December 31, 1995, the Company's net loan portfolio
totalled $2.2 billion, representing approximately 70.4% of its $3.1 billion of
total assets at that date. The principal categories of loans in the Company's
portfolio are residential real estate loans, which are secured by single-family
residences; commercial real estate loans, which are secured by multi-family
residential and commercial real estate; commercial business loans and leases;
and consumer loans. Substantially all of the Bank's mortgage loans are
conventional loans, which are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Department of Veterans'
Affairs ("VA").

Substantially all of the mortgage loans in the Company's loan portfolio
are secured by properties located in Maine and New Hampshire. Moreover,
substantially all of the Company's non-mortgage loan portfolio consists of loans
made to residents of and businesses located in Maine and New Hampshire.

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During 1994, the Company adopted a policy generally to limit loans to
one borrower, including related entities, to $8.0 million. In addition, during
1994, the Company's largest banking subsidiary, the Bank, adopted a policy
generally to limit loans to one borrower, including related entities, to $5.0
million. These limitations are substantially below the limitations set forth in
applicable laws and regulations.

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Loan Portfolio Composition and Maturity. The following table sets forth
information concerning the Company's loan portfolio by type of loan at the dates
indicated.

December 31,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992
-------------------- -------------------- -------------------- --------------------
% of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)

Residential real estate
loans:
Conventional $ 567,538 25.6% 589,826 28.1% $ 509,999 26.7% $ 447,447 23.9%
FHA/VA 26,612 1.2 32,981 1.6 27,897 1.5 34,628 1.8
Construction 13,219 0.6 9,555 0.5 8,243 0.4 11,814 0.6
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total residential
real estate loans(1) 607,369 27.4 632,361 30.1 546,139 28.6 493,889 26.4
---------- ----- ---------- ----- ---------- ----- ---------- -----

Commercial real estate loans:
Permanent first mortgage
loans(2) 584,806 26.4 572,298 27.3 543,418 28.4 565,744 30.2
Construction 38,880 1.7 23,057 1.1 18,885 1.0 23,138 1.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total commercial real
estate loans 623,686 28.1 595,355 28.4 562,303 29.4 588,882 31.5
---------- ----- ---------- ----- ---------- ----- ---------- -----

Commercial business
loans and leases(3) 332,755 15.0 265,644 12.7 248,164 13.0 252,761 13.5
---------- ----- ---------- ----- ---------- ----- ---------- -----

Consumer loans and leases:
Home equity 256,813 11.6 217,889 10.4 188,823 9.9 183,565 9.8
Mobile home 196,408 8.8 201,297 9.6 185,454 9.7 160,000 8.5
Automobile 109,738 4.9 106,666 5.1 91,434 4.8 71,913 3.8
Home improvement, second
mortgage and land 36,900 1.7 32,921 1.6 36,337 1.9 40,899 2.2
Boat and recreational
vehicle 17,013 0.8 18,836 0.9 22,780 1.2 26,380 1.4
Other 36,955 1.7 27,309 1.3 29,456 1.5 53,573 2.9
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer loans 653,827 29.5 604,918 28.8 554,284 29.0 536,330 28.7
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans receivable 2,217,637 100.0% 2,098,278 100.0% 1,910,890 100.0% 1,871,862 100.0%
---------- ===== ---------- ===== ---------- ===== ---------- =====
Allowance for loan losses (49,138) (50,484) (52,804) (54,604)
---------- ---------- ---------- ----------
Net loans receivable $2,168,499 $2,047,794 $1,858,086 $1,817,258
========== ========== ========== ==========

December 31,
---------------------
1991
----------------------
% of
Amount Loans
------ -----
(Dollars in Thousands)

Residential real estate
loans:
Conventional $ 475,613 23.3%
FHA/VA 49,808 2.4
Construction 6,472 0.3
---------- -----
Total residential
real estate loans(1) 531,893 26.0
---------- -----

Commercial real estate loans:
Permanent first mortgage
loans(2) 604,335 29.6
Construction 56,015 2.7
---------- -----
Total commercial real
estate loans 660,350 32.3
---------- -----

Commercial business
loans and leases(3) 339,007 16.6
---------- -----

Consumer loans and leases:
Home equity 176,904 8.7
Mobile home 134,709 6.6
Automobile 60,702 3.0
Home improvement, second
mortgage and land 48,253 2.4
Boat and recreational
vehicle 30,731 1.5
Other 61,664 3.0
---------- -----
Total consumer loans 512,963 25.1
---------- -----
Total loans receivable 2,044,213 100.0%
---------- =====
Allowance for loan losses (67,955)
----------
Net loans receivable $1,976,258
==========

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(1) At December 31, 1995, $402.7 million and $204.7 million of residential real
estate loans had adjustable and fixed rates, respectively.

(2) At December 31, 1995, permanent commercial real estate loans consisted of
$524.2 million of permanent commercial real estate loans and $60.6 million of
multi-family residential loans.

(3) At December 31, 1995, commercial business loans and leases included $62.0
million of lines and letters of credit and $10.9 million of leases.

The following table sets forth scheduled contractual amortization of
loans in the Company's portfolio at December 31, 1995, as well as the dollar
amount of loans which are scheduled to mature after one year which have fixed or
adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdraft loans are reported as due in
one year or less.

Commercial
Residential Commercial Business
Real Estate Real Estate Loans and Consumer
Loans Loans Leases Loans Total
----------- ----------- ---------- --------- ----------
(In Thousands)

Amounts due:
Within one year $ 31,139 $ 79,233 $ 132,035 $ 68,129 $ 310,537
After one year through five
years 76,738 316,142 149,185 170,031 712,096
Beyond five years 499,492 228,311 51,535 415,666 1,195,004
---------- ---------- ---------- ---------- ----------
Total $ 607,369 $ 623,686 $ 332,755 $ 653,827 $2,217,637
========== ========== ========== ========== ==========
Interest rate terms on amounts
due after one year:
Fixed $ 255,102 $ 159,942 $ 45,989 $ 263,248 $ 724,281
========== ========== ========== ========== ==========
Adjustable $ 321,128 $ 384,511 $ 154,731 $ 322,449 $1,182,819
========== ========== ========== ========== ==========

Scheduled contractual amortization does not reflect actual maturities
of loans due to prepayments and in the case of single-family residential loans
due-on-sale clauses, which give the Company the right to declare a loan due and
payable in the event of a sale of the security property.

Origination, Purchase and Sale of Loans. Historically, the Company has
originated loans and engaged in other lending activities primarily through its
banking subsidiaries. In addition, the Bank has a mortgage banking subsidiary
which engages in mortgage banking activities outside of the primary market areas
of the Company's banking subsidiaries in Maine and New Hampshire; the activities
of this subsidiary have not been material to date. See "Subsidiaries - Mortgage
Banking Activities" below.

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Applications for all types of loans may be taken at most of the
Company's branch offices. Residential loan applications are primarily
attributable to correspondent lending institutions, referrals from real estate
brokers, whom the Company actively solicits, and builders, existing customers
and walk-in customers. Commercial real estate applications are obtained
primarily from previous borrowers, direct contacts with the Company and
referrals. Commercial business loan and lease applications are primarily
obtained through existing customers, walk-in customers, solicitation by the
Company and referrals. Consumer loans are primarily obtained through existing
and walk-in customers who have been made aware of the Company's programs by
advertising, phonebank and other means, as well as indirectly through a network
of dealers in the various products financed by the Company. During 1995, the
Company also utilized a marketing campaign to attract all types of loans.

Applications also are obtained through several field loan originators
who solicit and refer residential mortgage loan applications to the Company.
These representatives are compensated in part on a commission basis and provide
convenient origination services during banking and nonbanking hours. The Bank
also operates a residential loan production office in Londonderry, New
Hampshire, and the Bank's mortgage banking subsidiary maintains a residential
loan office in Burlington, Massachusetts. See "Business Subsidiaries."

During 1995, the Company significantly expanded its correspondent
lending operations in order to leverage existing secondary market capabilities
and add mortgage servicing income at a low marginal cost. Substantially all
loans originated through the Company's correspondent lending network are sold in
the secondary mortgage market. The vast majority of correspondent originations
come from correspondent lenders located outside of New England. Residential real
estate mortgage originations from correspondent lenders increased by $285.0
million, or 304.7%, from $93.5 million in 1994 to $378.5 million in 1995.

Loans may be approved by branch managers, including assistants, and
various lending officers of the Company within designated limits, which are
established and modified from time to time to reflect expertise and experience.
All loans in excess of an individual's designated limits are referred to the
nearest officer with the requisite authority. Commercial business and commercial
real estate loan relationships at the Bank in excess of $1.25 million and less
than $3.0 million are reviewed and approved by a senior management loan
committee, and relationships in excess of $3.0 million are reviewed and approved
by the Board of Directors or a committee of the Board of Directors.

The Company believes that its decentralized approach to approving loan
applications allows it to process and approve applications faster than many of
its competitors. The Company also believes that its decentralized approach to
lending is conducive to providing direct and personal service to borrowers
located in its market areas. The Company also has established a telephone
application center for consumer loans, which the Company believes has further
improved efficiencies and service to consumer borrowers.

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The Company emphasizes residential mortgage loans that are made on
terms, conditions and documentation which permit sale to the Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"),
Government National Mortgage Association ("GNMA") and other institutional
investors in the secondary market. Currently, substantially all of such
long-term, fixed-rate mortgage loans originated by the Company are sold in the
secondary market to the FHLMC and the FNMA and the Company both sells and
retains adjustable-rate mortgage loans originated by it in its loan portfolio.
In recent years, the Company also has held a portion of its originations of ten
and 15 year fixed-rate residential loans for its loan portfolio.

The Company has retained credit risk on certain residential mortgage
loans sold with full or partial recourse, which amounted to $48.2 million at
December 31, 1995. Loan sales in the secondary market provide additional funds
for lending and other business activities.

The long-term, fixed-rate loans originated by the Bank include loans
which are originated for sale to the Maine State Housing Authority ("MSHA").
MSHA is an independent agency of the State of Maine which issues tax-exempt
bonds in order to purchase low-rate mortgages made to eligible borrowers. The
Company sold $11.7 million, $9.5 million and $10.7 million of loans to the MSHA
in 1995, 1994 and 1993, respectively.

For additional information relating to the Company's activities in the
secondary market for loans, see "Loan Servicing Activities" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Loans and Leases" included in Item 7 hereof.

Residential Real Estate Loans. At December 31, 1995, $607.4 million or
27.4% of the Company's total loan portfolio consisted of single-family
residential loans, substantially all of which were conventional loans.

The Company originates single-family residential loans which provide
for periodic adjustments to the interest rate. The Company's ability to
originate adjustable rate loans is dependent on market and economic conditions,
including the level of interest rates. Approximately 16%, 38% and 24% of the
permanent single-family residential loans originated by the Company in 1995,
1994 and 1993, respectively, had adjustable interest rates. At December 31,
1995, approximately $402.7 million or 66.3% of the single-family residential
loans in the Bank's loan portfolio consisted of loans which provided for
adjustable rates of interest.

The Company's adjustable-rate loans have 15 to 30-year terms and an
interest rate which adjusts annually in accordance with an index which is based
on one-year securities issued by the United States government. There generally
is a 2% cap on any increase or decrease in the interest rate per year, and
various caps depending on when the loan was originated (currently 6%) on the
interest rate over the life of the loan. The Company has not engaged in the
practice of using a cap on the payments that could allow the loan

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balance to increase rather than decrease, resulting in negative amortization.
The Company often offers discounts on the initial interest rate on its
adjustable-rate residential mortgage loans, as compared to the index plus its
normal margin, for up to one year for competitive reasons, but evaluates the
borrower's ability to pay at the rate which would be in effect without the
discount.

The Company originates long-term, fixed-rate loans, but generally only
under terms, conditions and documentation which permit sale in the secondary
market. At December 31, 1995, approximately $204.7 million or 33.7% of the
permanent single-family residential loans in the Company's loan portfolio
consisted of loans which provide for fixed rates of interest. Although these
loans provide for repayments of principal over a fixed period of up to 30 years,
it is the Company's experience that such loans have remained outstanding for a
substantially shorter period of time.

The Company will lend up to 95% of the appraised value of the property
securing the loan (referred to as the loan-to-value ratio), and generally
requires borrowers to obtain private mortgage insurance on the portion of the
principal amount of the loan that exceeds 80% of the value of the security
property. The Company's general policy is to emphasize loans with loan-to-value
ratios of 80% or less (which may be higher in the case of sales of other real
estate owned).

The Company generally requires title insurance insuring the priority of
its mortgage lien, as well as fire and extended coverage casualty insurance in
order to protect the properties securing its residential and other mortgage
loans. The properties securing all of the Company's mortgage loans are appraised
by independent appraisers approved by senior lending officers of the Company.

Commercial Real Estate Loans. The Company originates mortgage loans for
acquisition, development and construction of commercial real estate properties.
At December 31, 1995, $623.7 million or 28.1% of the Company's total loan
portfolio consisted of such loans, including construction and development loans
totalling $38.9 million or 1.7% of total loans.

Commercial real estate loans originated by the Company are primarily
secured by office buildings, industrial buildings, warehouses and various
special purpose properties, including hotels, restaurants and nursing homes.
Commercial real estate loans also include multi-family residential loans, which
are primarily secured by townhouse condominiums and apartment buildings.

Although terms vary, commercial real estate loans secured by existing
properties generally have maturities of ten years or less and are amortized over
a period of up to 30 years, thus requiring a balloon payment at maturity.
Commercial real estate loans generally have interest rates which float in
accordance with a designated prime lending rate or, to a lesser extent, adjust
every one, three or five years in accordance with a designated index,

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subject in some instances to ceilings and floors which may be negotiated at the
time of origination. Permanent commercial real estate loans are also made with
fixed rates of interest for terms of up to five years or longer if they can be
funded with a comparably maturing liability at an acceptable positive interest
rate spread.

Construction loans, including loans for the acquisition and development
of land for construction, generally have maturities of 12 to 18 months. Interest
rates on construction loans generally float at a spread above a designated prime
lending rate or adjust in accordance with a designated index, and occasionally
may be made on a fixed-rate basis. Advances are generally made to cover actual
construction costs. Loan proceeds are disbursed as inspections of construction
progress warrant and as pre-construction sale and leasing requirements generally
imposed by the Company are met.

Loan-to-value ratios on the Company's commercial real estate loans
generally range from 60% to 80% (which may be higher in the case of sales of
other real estate owned), although in prior years the Company would finance a
greater amount of the value of the property which secures the loan. In addition,
as part of the criteria for underwriting permanent commercial real estate loans,
the Company generally imposes a debt coverage ratio (the ratio of net cash from
operations before payment of debt service to debt service) of 115% to 125%. It
is also the Company's general policy to obtain personal guarantees of its
commercial real estate loans from the principals of the borrower.

Commercial Business Loans and Leases. The Company is authorized to make
secured or unsecured loans for commercial, corporate, business and agricultural
purposes, including issuing letters of credit. At December 31, 1995, $332.8
million or 15.0% of the Company's total loan portfolio consisted of commercial
business loans and leases.

The Company's current strategy is to focus on lending to sound, small
to medium business customers within its market areas. The Company's commercial
business loans consist primarily of loans secured by various equipment,
machinery and other corporate assets. Commercial business loans also are made to
provide working capital to businesses in the form of lines of credit which may
be secured by inventory, accounts receivable or other assets or unsecured and
which are generally required to be paid out for 30 consecutive days annually, as
well as for various other miscellaneous purposes.

Commercial business loans are generally provided to closely-held
businesses which are primarily located in Maine and New Hampshire, and the
Company's commercial business loans are well distributed by type of business.
Commercial business loans generally have terms of five years or less and are
amortized over a period of up to 30 years, thus requiring a balloon payment at
maturity. Commercial business loans generally have interest rates which float in
accordance with a designated base lending rate, although the Company also
originates commercial business loans with adjustable and fixed rates of
interest. Loan-to-value ratios generally are 80% or less. The Company generally
obtains personal guarantees of its commercial business loans from the principals
of the borrower.

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The Company originates commercial business leases through Peoples
Heritage Leasing Company, Inc. (the "Leasing Company"), which was formerly known
as Northeast Leasing Company, Inc. The Leasing Company is a wholly-owned
subsidiary of the Bank. For a further description of the activities of this
subsidiary, which had $10.9 million of leases outstanding at December 31, 1995,
see "Subsidiaries" below.

At December 31, 1995, commitments under unused commercial lines and
standby letters of credit amounted to $120.8 million.

Consumer Loans. The Company also is authorized to make loans for a wide
variety of personal or consumer purposes. At December 31, 1995, $653.8 million
or 29.5% of the Company's total loan portfolio consisted of consumer loans.

The Company has been emphasizing a wide variety of consumer loans in
recent years in order to provide a full range of financial services to its
customers and because such loans generally have shorter terms and higher
interest rates than mortgage loans. The consumer loans offered by the Company
include home improvement loans, home equity credit lines and loans that are
secured by personal property, including automobiles, boats, mobile homes and
recreational vehicles.

Originations of consumer loans increased substantially in recent years
primarily as a result of increased originations of loans indirectly obtained by
the Company through various dealers in products financed by the Company. In
general, each such loan is underwritten by the Company prior to its acquisition
of the loan. Indirect consumer loans accounted for approximately 23.2%, 35% and
40% of the Company's total originations of consumer loans in 1995, 1994 and
1993, respectively, and amounted to $300.1 million or 45.9% of the Company's
consumer loan portfolio at December 31, 1995.

The following table sets forth information regarding the Company's
indirect consumer loan portfolio at the dates indicated.

December 31,
--------------------------------

1995 1994 1993
---- ---- ----

Mobile home loans $188,201 $197,634 $180,669
Auto loans 88,532 100,884 70,422
Boat, home improvement and other
loans 23,391 18,391 46,504
-------- -------- --------
Total indirect loans $300,124 $316,909 $297,595
======== ======== ========

The largest category of loans in the Company's consumer loan portfolio
consists of home equity lines, which are a form of revolving credit and are
secured by the underlying equity in the borrower's home. Home equity lines
amounted to $256.8 million or 39.3% of the Company's total consumer loan
portfolio at December 31, 1995. Credit generally is

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extended for up to 90% of the appraised value of the home, less any loans
outstanding secured by such collateral.

The second largest category of loans in the Company's consumer loan
portfolio is loans secured by mobile homes. Mobile home loans amounted to $196.4
million or 30.0% of the Company's total consumer loan portfolio at December 31,
1995. In recent years, the Company's originations of mobile home loans have been
obtained primarily through two mobile home loan brokers who have been selected
by the Company based on their experience in the industry, market area and
experience with the Company. The mobile homes which secure these loans are
primarily located in Maine, New Hampshire, Massachusetts and upstate New York. A
loss reserve deposit account funded by the broker is maintained at the Company
to cover any future losses and prepayments on mobile home loans. (The loss and
prepayment reserve for each loan is calculated based on a percentage of the
difference between the total finance charge to be paid by the borrower compared
to the total finance charge retained by the Company (assuming no prepayments);
this percentage generally ranges from 50% to 55%). During 1995 and 1994, the
Company charged net credit losses of $883,668 or .46% of average indirect mobile
home loans and $743,000 or .39% of average indirect mobile home loans,
respectively, against the dealer reserve deposit accounts. In addition, during
1995 and 1994, the Company charged $2.4 million and $2.2 million, respectively,
of prepayment losses against the dealer reserve deposit accounts. At December
31, 1995, dealer reserve deposit accounts amounted to $3.0 million.
Additionally, the Company has established a credit loss reserve for its mobile
home loans as part of its allowance for loan losses, which amounted to $5
million at December 31, 1995.

The third largest category of loans in the Company's consumer loan
portfolio is loans secured by new and used automobiles. Automobile loans
amounted to $109.7 million or 16.8% of the Company's total consumer loan
portfolio at December 31, 1995. These loans have fixed rates of interest and
terms up to five years, depending on the age of the automobile. Such loans are
obtained primarily indirectly through a network of new car dealers located
within the States of Maine and New Hampshire, who are selected based on their
stability and location, among other factors. The dealer generally retains a
reserve on each loan originated. Indirect loans are generally made under terms
which do not allow the Company to seek recourse from the dealer in the event of
default. During 1995 and 1994, the Company charged net credit losses against its
allowance for loan losses of $266,000 or .30% of its average indirect auto loans
and $180,000 or .19% of its average indirect auto loans, respectively.

Together, home improvement, second mortgage and land loans and boat and
recreational vehicle loans amounted to $53.9 million or 8.3% of the Company's
total consumer loan portfolio at December 31, 1995. Home improvement loans, etc.
and boat and recreational vehicle loans generally have a fixed rate of interest
and a term of five to 15 years, or terms of up to 20 years and provisions which
provide for adjustment of the interest rate every one or three years in
accordance with a designated prime lending rate.

11
13
Such loans generally have loan-to-value ratios of 80% or less. Some of these
loans are obtained by the Company through various dealers in products financed
by the Company. Collectively, during 1995 and 1994, the Company charged-off
$296,000 and $307,000, respectively, of these types of loans against the
allowance for loan and lease losses.

Loan Fee Income. In addition to interest earned on loans, the Company
receives income through servicing of loans, unamortized loan fees in connection
with loan sales and fees in connection with loan modifications, late payments,
prepayments and for miscellaneous services related to its loans. Income from
these activities varies from period to period with the volume and type of loans
made and competitive conditions.

In its lending, the Company often charges loan origination fees which
are calculated as a percentage of the amount borrowed. Loan origination fees
generally are not obtained in connection with consumer loans and may or may not
be obtained in connection with commercial business and commercial real estate
loans.

The Company's policy is to defer all loan fees net of direct
origination costs and amortize those fees over the estimated remaining lives of
the related loans. Amortization of loan fees is included in interest income.

Loan Servicing Activities. Residential real estate mortgages are
originated by the Company primarily for sale into the secondary market. Such
loans generally are sold to institutional investors such as the FNMA and the
FHLMC. Under loan sale and servicing agreements with these investors, the
Company generally continues to service the residential real estate mortgages.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers, supervising
foreclosures in the event of unremedied defaults and generally administering the
loans. The Company pays the investor an agreed-upon rate on the loan, which,
including a guarantee fee paid to FNMA and FHLMC, is less than the interest rate
the Company receives from the borrower. The difference is retained by the
Company as a fee for servicing the residential real estate mortgages.

In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights -- An Amendment of FASB Statement No. 65," which
changed the method of accounting for certain mortgage banking activities. The
Company elected early adoption of SFAS No. 122 and as a result capitalized $2.5
million of originated mortgage servicing rights in 1995. For additional
information regarding SFAS No. 122 and the mortgage banking activities of the
Company, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Noninterest Income" and "- Risk Management Interest Rate
Risk and Asset Liability Management" included in Item 7 hereof and Note 9 to the
Consolidated Financial Statements included in Item 14 hereof.

12
14
The Company periodically purchases residential mortgage servicing
rights through a closed bid process from brokers representing financial
institutions with mortgage servicing portfolios available for sale. The payment
made to purchase such mortgage servicing rights is capitalized by the Company
upon consummation of the purchase. During 1995, 1994 and 1993, the Company paid
$707,000, $11.4 million and $5.9 million, respectively, to acquire the servicing
rights related to approximately $76 million, $780 million and $700 million of
mortgages secured by real estate located primarily in New England. Although the
Company currently intends to continue to expand its loan servicing portfolio
primarily through the origination and sale of loans on a servicing-retained
basis, the Company from time to time may evaluate additional purchases of loan
servicing portfolios. In addition, depending on current mortgage origination
volumes and other factors, from time to time, the Company may sell a portion of
newly-originated loans on a servicing-released basis or sell a portion of its
servicing portfolio. During 1995, the Company sold the servicing rights related
to approximately $158 million of loans for a gain of $642,000.

Mortgage servicing rights are amortized on an accelerated method over
the estimated weighted average life of the loans. Amortization is recorded as a
charge against mortgage service fee income ( a component of mortgage banking
services income). The Company's assumptions with respect to prepayments, which
affect the estimated average life of the loans, are adjusted periodically to
reflect current circumstances and to ensure that the carrying value of the
remaining mortgage servicing rights does not exceed the present value of
estimated future net servicing income. Mortgage servicing rights generally are
adversely affected by accelerated prepayments resulting primarily from
decreasing interest rates. In evaluating the realizability of the carrying value
of mortgage servicing rights, the Company assesses the estimated life of its
servicing portfolio based on data which is disaggregated to reflect the coupon
rates on the underlying loans whose servicing rights have been acquired in
connection with the Company's lending activities or as a result of purchases of
servicing rights from third parties. Included in the amortization of mortgage
servicing rights charged to service fee income were writedowns of $0, $0 and
$400,000 during 1995, 1994 and 1993, respectively, to adjust for changes in
prepayment experience.

The following table sets forth an analysis of the Company's mortgage
servicing rights during the periods indicated.

Year Ended December 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)

Balance at beginning of period $ 17,275 $ 6,483 $ 1,985
Mortgage servicing rights capitalized 9,101 12,535 6,764
Amortization charged against mortgage
servicing fee income (3,483) (1,743) (2,266)
Mortgage servicing rights sold (2,584) -- --
-------- -------- --------
Balance at end of period $ 20,309 $ 17,275 $ 6,483
======== ======== ========

13
15
The following table presents information regarding the loans serviced
by the Company for investors at the dates indicated.

December 31,
------------------------------------------
1995 1994 1993
---------- ---------- ----------
(In Thousands)

Mortgage loans serviced for investors $2,511,795 $2,001,208 $1,512,974
========== ========== ==========

At December 31, 1995, the $2.5 billion of loans serviced by the Company
for others consisted of approximately 35,750 loans with an average loan balance
of approximately $70,300, a weighted average service fee of approximately .46%
per annum (inclusive of excess servicing) and a weighted average remaining term
of approximately 23 years.

The following table sets forth the coupon distribution of the loans
serviced by the Company for investors at December 31, 1995.

Coupon Principal Balance
- ------------------------------------------ -------------------------------
(Dollars in Thousands)

4.99% or less $ 4,131
5.00% - 5.99% 39,054
6.00% - 6.99% 284,262
7.00% - 7.99% 1,095,984
8.00% - 8.99% 752,070
9.00% - 9.99% 250,997
10.00% - 10.99% 71,799
11.00% and greater 13,497
----------
$2,511,795
==========

The following table sets forth the geographic locations of properties
securing the Company's portfolio of loans serviced for investors at December 31,
1995.

Percentage of Total
State Principal Balance Principal Balance
- ------------------------------- ----------------------------------- --------------------------------------
(In Thousands)

Maine $1,035,270 41.2%
New Hampshire 157,556 6.3
Massachusetts 638,899 25.4
Connecticut 152,740 6.1
Rhode Island 46,422 1.8
Other 480,908 19.1
---------- -----
Total $2,511,795 100.0%
========== =====

14
16
Nonperforming Loans and Other Real Estate Owned. The following table
sets forth information regarding nonperforming loans and leases and other
nonperforming assets held by the Company at the dates indicated.

December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in Thousands)

Residential real estate loans:
Non-accrual loans $ 4,990 $ 1,799 $ 1,819 $ 4,167 $ 5,690
Accruing loans 90 days overdue 2,274 2,883 2,930 3,281 5,229
Troubled debt restructurings -- -- 111 1,097 --
-------- -------- -------- -------- --------
Total 7,714 4,682 4,860 8,545 10,919
-------- -------- -------- -------- --------
Commercial real estate loans:
Non-accrual loans 13,247 20,413 24,453 36,239 59,176
Accruing loans 90 days overdue -- -- 279 1,631 1,424
Troubled debt restructurings 2,595 5,704 14,406 16,633 28,862
-------- -------- -------- -------- --------
Total 15,842 26,117 39,138 54,503 89,462
-------- -------- -------- -------- --------
Commercial business loans and leases:
Non-accrual loans 6,235 6,270 12,232 20,767 32,099
Accruing loans 90 days overdue -- -- 318 1,113 2,491
Troubled debt restructurings 1,859 2,013 2,404 1,543 1,224
-------- -------- -------- -------- --------
Total 8,094 8,283 14,954 23,423 35,814
-------- -------- -------- -------- --------
Consumer loans:
Non-accrual loans 2,846 2,727 1,828 2,012 1,098
Accruing loans 90 days overdue 532 468 633 656 2,560
Troubled debt restructurings -- -- 26 -- 70
-------- -------- -------- -------- --------
Total 3,378 3,195 2,487 2,668 3,728
-------- -------- -------- -------- --------
Total nonperforming loans:
Non-accrual loans 27,318 31,209 40,332 63,185 98,063
Accruing loans 90 days overdue 3,256 3,351 4,160 6,681 11,704
Troubled debt restructurings 4,454 7,717 16,947 19,273 30,156
-------- -------- -------- -------- --------
Total 35,028 42,277 61,439 89,139 139,923
-------- -------- -------- -------- --------
Other nonperforming assets:
Other real estate owned, net of related
reserves 5,073 6,658 19,002 30,370 30,678
In-substance foreclosures, net of related
reserves -- 2,096 8,224 28,013 33,289
Repossessions, net of related reserves 1,528 1,976 1,961 2,566 2,664
-------- -------- -------- -------- --------
Total 6,601 10,730 29,187 60,949 66,631
-------- -------- -------- -------- --------
Total nonperforming assets $ 41,629 $ 53,007 $ 90,626 $150,088 $206,554
======== ======== ======== ======== ========
Total nonperforming loans as a
percentage of total loans 1.58% 2.01% 3.22% 4.76% 6.84%
Total nonperforming assets as a
percentage of total assets 1.35 1.90 3.43 5.89 7.55
Total nonperforming assets as a
percentage of total loans and total
other nonperforming assets 1.87 2.51 4.67 7.77 9.79

15
17
For additional information about the Company's nonperforming assets,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations Financial Condition - Nonperforming Assets" included in Item 7 hereof
and Notes 5 and 10 to the Consolidated Financial Statements included in Item 14
hereof.

Allowance for Loan and Lease Losses. The allowance for loan and lease
losses is maintained at a level determined to be adequate by management to
absorb future charge-offs of loans deemed uncollectible and losses on loans sold
with recourse. The allowance for loan and lease losses is increased by
provisions charged to operating expense and by recoveries on loans previously
charged off. Arriving at an appropriate level of the allowance for loan and
lease losses necessarily involves a high degree of judgment.

The following table sets forth information concerning the activity in
the Company's allowance for loan and lease losses during the periods indicated.

Year Ended December 31,
------------------------------------------------------------------------------

1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------

(Dollars in Thousands)

Average loans and leases outstanding $2,209,900 $2,009,372 $1,900,105 $1,990,672 $2,119,394
========== ========== ========== ========== ==========
Allowance at the beginning of the year $ 50,484 $ 52,804 $ 54,604 $ 68,055 $ 62,854
Additions due to acquisitions and
purchases 2,314 -- -- -- --
---------- ---------- ---------- ---------- ----------
Charges-offs:
Residential real estate mortgages 1,467 1,857 2,438 8,867 4,500
Commercial real estate mortgages 7,339 5,168 6,254 17,058 42,795
Commercial business loans and leases 1,914 3,023 8,594 15,665 11,171
Consumer loans and leases 2,262 1,714 3,084 4,529 4,151
---------- ---------- ---------- ---------- ----------
Total loans charged off 12,982 11,762 20,370 46,119 62,617
---------- ---------- ---------- ---------- ----------
Recoveries:
Residential real estate mortgages 245 408 540 613 403
Commercial real estate mortgages 4,626 4,184 5,676 2,430 1,080
Commercial business loans and leases 1,615 2,506 1,260 2,663 4,450
Consumer loans and leases 406 487 1,315 1,737 2,947
---------- ---------- ---------- ---------- ----------
Total loans recovered 6,892 7,585 8,791 7,443 8,880
---------- ---------- ---------- ---------- ----------
Net charge-offs 6,090 4,177 11,578 38,676 53,737
Additions charged to operating expenses 2,430 1,857 9,779 25,225 58,938
---------- ---------- ---------- ---------- ----------
Allowance at end of year $ 49,138 $ 50,484 $ 52,804 $ 54,604 $ 68,055
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.28% 0.21% 0.61% 1.94% 2.54%
Ratio of allowance to end of period loans
and leases 2.22 2.41 2.76 2.74 3.32
Ratio of allowance to nonperforming
loans and leases at end of period 140.28 119.41 85.95 61.26 48.57

16
18
The following table sets forth information concerning the allocation of
the Company's allowance for loan and lease losses by loan categories at the
dates indicated. For information about the percent of total loans in each
category to total loans, see "Loan Portfolio Composition and Maturity."

December 31,
------------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ----------------------------- ----------------------------
Allowance to Allowance to Allowance to
Percent of Percent of Percent of
Total Loans Total Loans Total Loans
Amount by Category Amount by Category Amount by Category
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)

Residential real estate $ 2,872 0.5% $ 3,078 0.5% $ 5,425 1.0%
Commercial real estate 29,240 4.7 30,545 5.1 32,916 5.9
Commercial business
loans and leases 8,201 2.5 8,219 3.1 5,833 2.4
Consumer 8,824 1.4 8,642 1.4 8,630 1.6
------- ------- -------
$49,138 2.2 $50,484 2.4 $52,804 2.8
======= ======= =======

December 31,
----------------------------------------------------------
1992 1991
----------------------------- ---------------------------
Allowance to Allowance to
Percent of Percent of
Total Loans Total Loans
Amount by Category Amount by Category
------ ----------- ------ -----------
(Dollars in Thousands)

Residential real estate $ 8,112 1.6% $ 7,700 1.4%
Commercial real estate 33,624 5.7 41,884 6.3
Commercial business
loans and leases 9,607 3.8 14,721 4.3
Consumer 3,261 0.6 3,750 0.7
------- -------
$54,604 2.9 $68,055 3.3
======= =======

For additional information relating to the Company's allowance for loan
and lease losses, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition - Allowance for Loan
and Lease Losses" included in Item 7 hereof.

17
19
INVESTMENT ACTIVITIES

The Company invests in investment securities in accordance with the
requirements of federal and state law. The Company's investment securities
portfolio is managed in accordance with a written investment policy adopted by
the Board of Directors. Investments may be made by individual officers of the
Company within specified limits and must be approved in advance by the
Investment Committee for transactions over certain limits.

The Company's investment securities portfolio currently consists
primarily of U.S. Government and federal agency securities and mortgage-backed
securities which are insured or guaranteed by the FHLMC, the FNMA or the GNMA.
Mortgage-backed securities increase the quality of the Company's assets by
virtue of the guarantees that back them, require less capital under risk-based
capital rules than non-insured or guaranteed mortgage loans, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Company.

In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which the Company adopted effective December 31,
1993, debt and equity securities that an institution has the positive intent and
ability to hold to maturity are to be reported at amortized cost; debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term are to be classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and other debt and equity securities are to be classified as securities
available for sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity. At December 31, 1995, all of the Company's investment securities were
classified as available for sale and an aggregate of $2.2 million of net
unrealized gains (net of related taxes) on investment securities available for
sale was included in the Company's shareholders' equity.

The following table sets forth the Company's investment securities
available for sale at the dates indicated.

December 31,
------------------------------------

1995 1994 1993
-------- -------- --------
(In Thousands)

Bonds and other debt securities:
U.S. Government and federal agencies $249,697 $219,220 $201,607
Tax-exempt bonds and notes 10,299 11,085 6,779
Other bonds and notes 5,417 2,706 7,581
Mortgage-backed securities 195,823 172,466 225,609
-------- -------- --------
Total debt securities 461,236 405,477 441,576
-------- -------- --------
Equities:
FHLB stock 23,793 23,236 17,321
Other securities 189 290 178
-------- -------- --------
Total equity securities 23,982 23,526 17,499
-------- -------- --------
Total investment securities $485,218 $429,003 $459,075
======== ======== ========

18
20
The following table sets forth the scheduled maturities and weighted
average yields of the Company's debt securities available for sale at December
31, 1995, based on amortized cost.

Amortized Cost Maturing in
--------------------------------------------------------------------------------------------
One Year or Less More than One to Five Years More than Five to Ten Years
------------------------ --------------------------- ---------------------------
Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ ----- ------ ----- ------ -----
(Dollars in Thousands)

U.S. Government and
federal agencies $125,088 5.86% $120,263 6.19% $ 2,076 5.57%
Tax-exempt bonds and
notes 5,390 4.81 4,881 4.29 -- --
Other bonds and notes 3,157 6.86 2,106 7.07 104 7.19
Mortgage-backed
securities 256 8.14 1,993 6.29 32,537 6.98
-------- -------- --------
Total $133,891 5.85 $129,243 6.14 $ 34,718 6.89
======== ======== ========

Amortized Cost Maturing in
---------------------------
More than Ten Years Total
----------------------- ---------------------------

Amount Yield(1) Amount Yield(1)
------ ----- ------ -----
(Dollars in Thousands)

U.S. Government and
federal agencies $ 670 7.55% $248,096 6.03%
Tax-exempt bonds and
notes -- -- 10,271 4.57
Other bonds and notes -- -- 5,368 6.95
Mortgage-backed
securities 159,231 6.91 194,018 6.91
-------- ---------
Total $159,901 6.91 457,753(2) 6.38
======== =========

- --------------------
(1) Fully-taxable equivalent basis.

(2) The market value of these securities amounted to $461.2 million at
December 31, 1995.

19
21
Actual maturities of debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

At December 31, 1995, investments in the debt and/or equity securities
of any one issuer (excluding U.S. Government and federal agencies) did not
exceed more than 1.7% of the Company's total shareholders' equity.

For additional information, see Notes 3 and 12 to the Consolidated
Financial Statements included in Item 14 hereof.

SOURCES OF FUNDS

Deposits. Deposits obtained through offices of the Company have
traditionally been the principal source of the Company's funds for use in
lending and for other general business purposes. The Company's current deposit
products include regular savings and club accounts, personal and commercial
demand accounts, negotiable order of withdrawal ("NOW") accounts, money market
deposit accounts and certificates of deposit ranging in terms from three months
to ten years. Included among these deposit products are Individual Retirement
Account certificates and Keogh retirement certificates (collectively "retirement
accounts"), as well as negotiable-rate certificates of deposit with balances of
$100,000 or more ("negotiated-rate jumbo certificates").

The Company's deposits are obtained primarily from residents of the
State of Maine and, to a lesser extent, the State of New Hampshire. Management
of the Company estimates that an insignificant amount of the Company's deposits
are obtained from customers residing outside of these states. The Company
attracts deposit accounts primarily by offering a wide variety of services and
accounts, competitive interest rates, and convenient office locations and
service hours. The Company does not rely on brokered deposits. See "Regulation -
Banking Subsidiaries - Brokered Deposits."

The Company's office locations and service hours are supplemented by
the Company's BankCard, which may be used to conduct various deposit and/or
withdrawal transactions at the 77 automated teller machines ("ATMs") maintained
by the Company at December 31, 1995. The BankCard also may be used in the
"Passkey," "NYCE," "Yankee 24," "TX" and the "Exchange" regional ATM networks,
as well as in the nationwide ATM network known as "Plus." These networks provide
the Company's customers with access to over 200 ATMs in the State of Maine and
thousands of ATMs across the United States.

20
22
The following table shows the distribution of the Company's deposits by
type of deposit as of the dates indicated.

December 31,
----------------------------------------------------------------------------------------------

1995 1994 1993
--------------------------- ----------------------------- ----------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(Dollars in Thousands)

Non-brokered deposits:
Regular savings $ 303,504 12.9% $ 361,657 17.5% $ 248,069 12.0%
Money market deposit
accounts 448,998 19.0 276,064 13.4 389,191 18.8
NOW accounts 215,529 9.1 195,161 9.5 192,916 9.3
Demand accounts 269,830 11.4 218,559 10.6 199,815 9.6
Certificates:
3 - 5 months 12,728 0.5 19,293 0.9 30,430 1.5
6 - 8 months 109,161 4.6 90,505 4.4 325,594 15.7
9 - 11 months 907 0.0 1,115 0.1 1,789 0.1
12 - 23 months 225,631 9.6 113,596 5.5 148,424 7.1
24 - 35 months 118,737 5.0 85,742 4.1 117,738 5.7
36 - 47 months 192,436 8.1 280,029 13.6 68,813 3.3
48 - 59 months 14,679 0.6 14,684 0.7 16,360 0.8
60 - 120 months 212,774 9.0 202,803 9.8 126,870 6.1
Negotiated-rate jumbo
certificates 30,094 1.3 19,623 0.9 18,564 0.9
---------- ----- ---------- ----- ---------- -----
Total certificates 917,147 38.8 827,390 40.0 854,582 41.2
---------- ----- ---------- ----- ---------- -----
Retirement accounts 206,957 8.8 184,936 9.0 174,918 8.4
---------- ----- ---------- ----- ---------- -----
Total non-brokered
deposits 2,361,965 100.0 2,063,767 100.0 2,059,491 99.3
---------- ----- ---------- ----- ---------- -----
Brokered deposits -- -- -- 0.0 15,000 0.7
---------- ----- ---------- ----- ---------- -----
Total deposits at end of
period $2,361,965 100.0% $2,063,767 100.0% $2,074,491 100.0%
========== ===== ========== ===== ========== =====

At December 31, 1995, the Company had $103.7 million of certificates of
deposit in amounts of $100,000 or more outstanding maturing as follows: $24.1
million within three months; $16.8 million over three months through six months;
$13.3 million over six months through 12 months; and $49.5 million thereafter.

The ability of the Company to attract and maintain deposits and the
Company's cost of funds on these deposits have been, and will continue to be,
significantly affected by economic and competitive conditions.

21
23

Borrowings. The following table sets forth certain information
concerning the Company's borrowings at the dates indicated.

December 31,
------------------------------------

1995 1994 1993
-------- -------- --------
(In Thousands)

FHLB advances $252,446 $362,450 $251,760
Repurchase agreements 139,942 86,631 68,450
Federal funds purchased 1,500 4,404 1,600
Other 18,928 7,902 2,859
-------- -------- --------
Total $412,816 $461,387 $324,669
======== ======== ========

Each of the Bank and FNB is a member of the Federal Home Loan Bank
System ("FHLB System"), which consists of 12 regional Federal Home Loan Banks
subject to supervision and regulation by the Federal Housing Finance Board. The
Federal Home Loan Banks provide a central credit facility primarily for member
institutions. Each member of the FHLB of Boston is required to hold shares of
common stock in that FHLB in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 5% of its
advances (borrowings) from the FHLB of Boston, whichever is greater. The Bank
and FNB had an aggregate investment of $23.8 million in stock of the FHLB of
Boston at December 31, 1995. For additional information, see Note 13 to the
Consolidated Financial Statements included in Item 14 hereof.

The Company's borrowings also include funds received from sales of
securities under agreements to repurchase ("repurchase agreements"), which are
considered for reporting purposes borrowings secured by the securities sold.
These agreements generally have maturities of 180 days or less.

The following table presents certain information regarding the
Company's repurchase agreements at the dates and for the periods indicated.

At or For the Year Ended December 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(Dollars in Thousands)

Average balance outstanding $113,599 $ 75,870 $ 45,655
Maximum outstanding at any
month-end during the period 167,618 110,176 68,450
Balance outstanding at end of period 139,942 86,631 68,450
Average interest rate during the period 5.13% 3.62% 2.47%
Average interest rate at end of period 4.78 4.82 2.43

22
24
For additional information relating to the Company's borrowings, see
Notes 12 and 13 to the Consolidated Financial Statements included in Item 14
hereof.

TRUST ACTIVITIES

FNB and, commencing in February 1995, the Bank, provide full trust
services to their customers. Each of the Bank and FNB focuses on offering
employee benefit trust services in which it will act as trustee, custodian,
administrator and/or investment advisor, among other things, for employee
benefit plans for corporate, self-employed, municipal and not-for-profit
employers throughout the Company's market areas. In addition, each of the Bank
and FNB serve as trustee of both living trust and trusts under wills and as such
hold, account for and manage financial assets, real estate and special assets.
Custody, estate settlement and fiduciary tax services, among others, also are
offered by the Bank and FNB. At December 31, 1995, the Company had $401.3
million of investments held by the trust departments of its banking
subsidiaries, which are not included in the Company's consolidated balance sheet
for financial reporting purposes.

SUBSIDIARIES

At December 31, 1995, the Company's only direct subsidiaries were the
Bank and First Coastal. A description of certain indirect non-banking
subsidiaries follows.

Mortgage Banking Activities. During 1993, the Bank formed Peoples
Heritage Mortgage Company (the "Mortgage Company") for the purpose of expanding
its residential real estate mortgage origination business outside of the
Company's principal lending areas of Maine and New Hampshire. At December 31,
1995, the Mortgage Company had only one office, which was located in Burlington,
Massachusetts. Currently, the activities of the Mortgage Company are not
material.

Investments in Real Estate. The Bank holds certain investments in real
estate primarily through Four-Eighty-One Corp. and Apex, Inc., each of which is
a wholly-owned subsidiary of the Bank, and, to a lesser degree, other
wholly-owned subsidiaries of the Bank. Exclusive of other real estate owned and
investments in office properties and facilities, which are discussed under Item
2 hereof, at December 31, 1995 the Bank's investments in real estate consisted
entirely of interests in limited partnerships formed for the purpose of
investing in real estate for lower income families, elderly housing projects
and/or the preservation or restoration of historically or architecturally
significant buildings or structures. At December 31, 1995, the Bank's
investments in these limited partnerships had a carrying value of $1.5 million
and the largest single limited partnership investment was $1.1 million.

For information relating to federal laws and regulations which limit
the authority of FDIC-insured, state-chartered banks such as the Bank to engage
in real estate investment and other activities, see "Regulation - Banking
Subsidiaries - Activities and Investments of Insured State-Chartered Banks."

23
25
Equipment Leasing Activities. The Bank conducts equipment leasing
activities through the Leasing Company, which it acquired in June 1987. In July
1988, the Leasing Company acquired substantially all of the assets of Emerald
Leasing Co. of Keene, New Hampshire. The Leasing Company is headquartered in
Portland, Maine and engages in direct equipment leasing activities, primarily
involving office equipment, in the Portland, Maine metropolitan area and
elsewhere in the States of Maine, New Hampshire and Massachusetts. At December
31, 1995, the Leasing Company had $10.9 million of leases outstanding.

Financial Planning and Securities Brokerage Activities. The Bank also
conducts financial planning, investment planning and securities brokerage
activities through Heritage Investment Planning Group, Inc. ("Heritage"), a
subsidiary of the Bank. The Company also offers through Heritage investments in
mutual funds and annuities throughout the Company's market areas. Heritage
offers its services to individuals and small businesses from its office located
in Portland, Maine and from certain of the Company's other locations in Maine
and New Hampshire. Sales professionals at Heritage are registered
representatives of Royal Alliance, a registered broker/dealer, and all
securities brokerage activities are conducted through Royal Alliance. The sales
professionals receive referrals from the Company's branch offices throughout its
market areas. The Company believes that it will benefit from the growth in the
mutual fund area by offering this service through Heritage to its customers.

COMPETITION

The Company encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from savings institutions,
commercial banks and credit unions with offices in the metropolitan areas of
Maine and southeastern New Hampshire. The Company also encounters competition
for deposits from money market funds, as well as corporate and government
securities. The principal methods used by the Company to attract deposit
accounts include the variety of services offered, the competitive interest rates
offered and the convenience of office locations, ATMs and expanded banking
hours.

The Company's competition for real estate and other loans comes
principally from savings institutions, credit unions, commercial banks, mortgage
banking companies, insurance companies and other institutional lenders. The
Company competes for loans through interest rates, branch locations, loan
maturities, loan fees and the quality of service extended to borrowers and
brokers.

In recent years, Maine laws have given Maine-chartered savings banks
virtually the same powers as commercial banks, and both Maine laws and New
Hampshire laws have enabled the acquisition of Maine-chartered and New
Hampshire-chartered financial institutions, respectively, by financial
institution holding companies based outside of these states. As a result, the
Company has encountered substantial competition in its market areas,
particularly from out-of-state banking organizations that have entered the Maine
and

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New Hampshire banking markets, and the Company expects to continue to encounter
such competition in the future.

EMPLOYEES

The Company had approximately 1500 full-time employees as of December
31, 1995. None of these employees is represented by a collective bargaining
agent, and the Company believes that it enjoys good relations with its
personnel.

REGULATION OF THE COMPANY

The following references to laws and regulations which are applicable
to the Company and its banking subsidiaries are brief summaries thereof which do
not purport to be complete and are qualified in their entirety by reference to
such laws and regulations.

BHCA - General. The Company, as a bank holding company, is subject to
regulation and supervision by the Federal Reserve Board. Under the BHCA, a bank
holding company is required to file annually with the Federal Reserve Board a
report of its operations and, with its subsidiaries, is subject to examination
by the Federal Reserve Board.

BHCA - Activities and Other Limitations. The BHCA generally prohibits a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. As a
result of recent amendments to the BHCA, the Federal Reserve Board generally may
approve an application by a bank holding company that is adequately capitalized
and adequately managed to acquire control of, or to acquire all or substantially
all of the assets of, a bank located in a state other than the home state of
such bank holding company, without regard to whether such transaction is
prohibited under the law of any state, provided, however, that the Federal
Reserve Board may not approve any such application that would have the effect of
permitting an out-of-state bank holding company to acquire a bank in a host
state that has not been in existence for any minimum period of time, not to
exceed five years, specified in the statutory law of the host state.

The BHCA also generally prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as

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undue concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.

The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.

Capital Requirements. For a description of the capital adequacy
guidelines adopted by the Federal Reserve Board to assess the adequacy of
capital of bank holding companies, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Regulatory Environment -
Regulatory Capital Requirements" included in Item 7 hereof.

Affiliated Institutions. Under Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to each subsidiary
bank and to commit resources to support each subsidiary bank in circumstances
when it might not do so absent such policy. The Federal Reserve Board takes the
position that in implementing this policy it may require bank holding companies
to provide such support when the holding company otherwise would not consider
itself able to do so. The legality and precise scope of this policy is unclear,
however, in light of recent judicial precedent.

A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.

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Maine law provides for the enforcement of any pro rata assessment of
stockholders of a Maine-chartered financial institution to cover impairment of
capital by sale, to the extent necessary, of the stock of any assessed
stockholder failing to pay the assessment. Similarly, the National Bank Act
provides for such assessment with respect to the stockholders of national banks.
The Company, as the sole stockholder of its banking subsidiaries, is subject to
these requirements.

Federal laws limit the transfer of funds by a subsidiary bank to its
holding company in the form of loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are limited to 10% of a bank's
capital and surplus with respect to each affiliate and to 20% in the aggregate,
and are also subject to certain collateral requirements. These transactions, as
well as other transactions between a subsidiary bank and its holding company,
also must be on terms substantially the same as, or at least as favorable as,
those prevailing at the time for comparable transactions with non-affiliated
companies or, in the absence of comparable transactions, on terms or under
circumstances, including credit standards, that would be offered to, or would
apply to, non-affiliated companies.

Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of such proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to expiration of
the disapproval period if the Federal Reserve Board issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the Federal Reserve Board, the acquisition of more than 10% of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Exchange Act would, under the circumstances set forth in
the presumption, constitute the acquisition of control.

In addition, any "company" would be required to obtain the approval of
the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of
an acquiror that is a bank holding company) or more of the outstanding Common
Stock of, or such lesser number of shares as constitute control over, the
Company.

Maine Law. Under Maine law, the prior approval of the Superintendent is
required in any case where any person or company proposes to acquire more than
5% of the voting shares of any Maine financial institution holding company or
Maine financial institution. In addition, the prior approval of the
Superintendent is required for the acquisition of more than 5% of the voting
shares of the financial institution, the operations of which are principally
conducted outside the State of Maine, by a Maine financial institution or Maine
financial institution holding company.

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In addition, any person or company which directly or indirectly
acquires more than 5% of the voting shares of a Maine financial institution or a
Maine financial institution holding company is required within five days of the
acquisition to file with the Superintendent a statement containing specified
information, including the background and identity of the person or company, the
source and amount of funds or other consideration for the purchase and any plans
or proposals which the acquiring person may have to liquidate the financial
institution or financial institution holding company, to sell its assets or
merge it with any company or to make any other major change in its business,
corporate structure or management. Any person or company also must file a notice
with the Superintendent when there is a material change in ownership. Under
Maine law, the acquisition of an aggregate of more than another 5% of the voting
shares is a material change.

A Maine financial institution holding company may not engage in any
activity other than managing or controlling financial institutions or other
activities deemed permissible by the Superintendent. The Superintendent has by
regulation determined that, with the prior approval of the Superintendent, a
financial institution holding company may engage in those activities which are
permissible for bank holding companies under the BHCA and those activities which
are permissible for savings and loan holding companies under the Home Owners'
Loan Act, and additional activities as specified by regulations.

New Hampshire Law. New Hampshire law generally prohibits a bank holding
company organized under the laws of New Hampshire or doing business in the State
of New Hampshire from directly or indirectly acquiring ownership or control of
any voting stock of any bank or national bank, if upon such acquisition (i) the
bank holding company would have more than twelve bank affiliates in New
Hampshire, or (ii) the dollar volume of the total of time, savings and demand
deposits in New Hampshire of the bank holding company and all its affiliates
would exceed 20% of the dollar volume of the total of time, savings and demand
deposits of all banks, national banks and federal savings and loan associations
in the State New Hampshire as determined by the New Hampshire Bank Commissioner.
The above-referenced 20% limitation may be waived by the New Hampshire Bank
Commissioner and the New Hampshire Attorney General if both determine that it is
in the best interests of the State of New Hampshire, provided that under no
circumstances shall the total dollar volume of total deposits exceed 30%.

REGULATION OF BANKING SUBSIDIARIES

General. The Bank is subject to extensive regulation and examination by
the Bureau of Banking of the State of Maine and FNB is subject to extensive
regulation and examination by the Comptroller. Each of the Company's banking
subsidiaries also is subject to regulation and examination by the FDIC, which
insures the deposits of each of the Company's banking subsidiaries to the
maximum extent permitted by law, and requirements established by the Federal
Reserve Board. In addition, FNB is subject to regulation by the Federal Reserve
Board as a result of its membership in the Federal Reserve System and the

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Bank is subject to regulation incidental to its membership in the FHLB System.
The federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for loans. The laws and
regulations governing the Company's banking subsidiaries generally have been
promulgated to protect depositors and not for the purpose of protecting
stockholders.

Capital Requirements. For a description of regulatory capital
requirements which are applicable to the Company's banking subsidiaries, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Regulatory Environment Regulatory Capital Requirements" included in
Item 7 hereof.

Prompt Corrective Action. Section 38 of the Federal Deposit Insurance
Act ("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."

An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming

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undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.

Each of the Bank and FNB had capital levels which qualified it as a
"well-capitalized" institution at December 31, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory Environment - Regulatory Capital Requirements" in Item 7 of this
report.

FDIC Insurance Premiums. Each of the Bank and FNB are members of the
Bank Insurance Fund ("BIF") administered by the FDIC, although certain deposits
of each of these entities acquired in acquisitions are insured by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC.

As an FDIC-insured institution, each of the Bank and FNB is required to
pay deposit insurance premiums to the FDIC. On November 14, 1995, the FDIC
adopted a new assessment rate schedule of zero to .27% (subject to a $2,000
minimum) for BIF members beginning on January 1, 1996, while retaining the
existing assessment rate schedule for SAIF-member institutions, which currently
range from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns.

The Balanced Budget Act of 1995, which was vetoed by the President of
the United States in December 1995, provided for a recapitalization of the SAIF
by a one-time assessment on the deposits of all SAIF-insured institutions and an
eventual merger of the SAIF and the BIF. The deposit assessment rate was to be
determined by the FDIC and set at a level which was sufficient to recapitalize
the SAIF to the designated statutory reserve ratio. This assessment rate was
estimated to be approximately $.85 for every $100 of assessable deposits as of
March 31, 1995, with payment due on January 1, 1996. The Balanced Budget Act of
1995 provided certain relief for institutions, such as the Bank and FNB, which
are members of the BIF but have acquired SAIF insured deposits as a result of
acquisitions of savings institutions in transactions effected pursuant to
Section 5(d)(3) of the FDIA. Such institutions do not pay SAIF assessments based
on the actual amount of the SAIF deposits acquired, as adjusted to reflect
increases or decreases in such deposits subsequent to the date of acquisition,
but on the actual amount of the SAIF deposits acquired as adjusted by a growth
attribution rule set forth in Section 5(d)(3) of the FDIA. Pursuant to the
proposed legislation the amount of any deposits which are treated as insured by
SAIF under Section 5(d)(3) of the FDIA was to be reduced by ten percent if the
adjusted attributable amount of SAIF deposits of the BIF member was less than
fifty percent of the total deposits of that member as of June 30, 1995 (which
was the case for both the Bank and FNB). The Company currently is unable to
predict the likelihood of legislation effecting the foregoing changes, although
a consensus among legislators, regulators and bankers appears to be developing
in this regard.

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At December 31, 1995, the adjusted attributable amount of SAIF deposits
of the Company's banking subsidiaries amounted to $381.3 million or 16.0% of the
Company's total deposits. If an assessment of $.85 per $100 of assessable
deposits was effected on these deposits (and assuming no downward adjustment on
the assessment rate for institutions such as the Bank and FNB), the one-time
assessment which would be payable by the Company's banking subsidiaries would
aggregate approximately $3.2 million on a pre-tax basis.

Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement prescribed by its appropriate
federal banking agency. The FDIC may, on a case-by-case basis and upon
application by an adequately capitalized insured depository institution, waive
the restriction on brokered deposits upon a finding that the acceptance of
brokered deposits does not constitute an unsafe or unsound practice with respect
to such institution. The Bank and FNB currently do not accept brokered deposits,
and had no such deposits outstanding at December 31, 1995.

Activities and Investments of Insured State-Chartered Banks. Section 24
of the FDIA and regulations thereunder generally limit the activities and equity
investments of FDIC-insured, state-chartered banks to those that are
permissible for national banks. Under the regulations dealing with equity
investments, an insured state bank generally may not acquire or retain any
equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other things,
(i) acquiring or retaining a majority interest in a subsidiary, (ii) investing
as a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors' and officers'
liability insurance and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. Under the regulations
dealing with activities and investments, an insured state-chartered bank may
not, directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory

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capital requirements. The foregoing regulations have not had a material adverse
effect on the Company's banking operations.

Community Investment and Consumer Protection Laws. In connection with
its lending activities, each of the Bank and FNB is subject to a variety of
federal laws designed to protect borrowers and promote lending to various
sectors of the economy and population. Included among these are the federal Home
Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending
Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community
Reinvestment Act ("CRA").

The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank
and FNB, the FDIC and the OCC, respectively) must conduct regular CRA
examinations of insured financial institutions and assign to them a CRA rating
of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." In
1995, the Bank's CRA rating was "outstanding" and FNB's CRA rating was
"satisfactory."

Safety and Soundness. Other regulations which were recently adopted or
are currently proposed to be adopted pursuant to recent legislation include: (i)
real estate lending standards for insured institutions, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
revisions to the risk-based capital rules to account for interest rate risk,
concentration of credit risk and the risks posed by "non-traditional
activities;" (iii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks; and (iv) rules addressing various "safety
and soundness" issues, including operations and managerial standards, standards
for asset quality, earnings and stock valuations, and compensation standards for
the officers, directors, employees and principal stockholders of the insured
institution.

Limitations on Dividends. The Company is a legal entity separate and
distinct from its banking and other subsidiaries. The Company's principal source
of revenue consists of dividends from its banking subsidiaries. The payment of
dividends by the Company's banking subsidiaries is subject to various regulatory
requirements.

Maine law generally provides that institutions such as the Bank may pay
dividends to stockholders from their undistributed earnings. The Bank cannot
declare or pay any dividend, however, which would reduce its capital below (i)
the amount required to be maintained by federal and state laws and regulations,
or (ii) the amount in the liquidation account established in connection with the
Bank's conversion from mutual to stock form.

Under the National Bank Act, the approval of the Comptroller is
required for any dividend by a national bank such as FNB if the total of all
dividends declared by the bank

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in any calendar year would exceed the total of its net profits, as defined, for
that year, combined with its retained net profits for the preceding two years.
In addition, a national bank may not pay a dividend in an amount greater than
its undivided profits then on hand after deducting its losses and bad debts. For
this purpose, bad debts generally are defined to include the principal amount of
loans which are in arrears with respect to interest by six months or more unless
such loans are fully secured and in the process of collection.

Miscellaneous. The Company's banking subsidiaries are subject to
certain restrictions on loans to the Company or its non-bank subsidiaries, on
investments in the stock or securities thereof, on the taking of such stock or
securities as collateral for loans to any borrower, and on the issuance of a
guarantee or letter of credit on behalf of the Company or its non-bank
subsidiaries. The Company's banking subsidiaries also are subject to certain
restrictions on most types of transactions with the Company or its non-bank
subsidiaries, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms.

Regulatory Enforcement Authority. The enforcement powers available to
federal banking regulators is substantial and includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.

TAXATION

Federal Taxation. The Company and its banking subsidiaries are subject
to those rules of federal income taxation generally applicable to corporations
under the Internal Revenue Code of 1986, as amended ("Code"). The Company and
its banking subsidiaries, as members of an affiliated group of corporations
within the meaning of Section 1504 of the Code, file a consolidated federal
income tax return, which has the effect of eliminating or deferring the tax
consequences of inter-company distributions, including dividends, in the
computation of consolidated taxable income.

In addition to regular corporate income tax, corporations are subject
to an alternative minimum tax which generally is equal to 20% of alternative
minimum taxable income (taxable income, increased by tax preference items and
adjusted for certain regular tax items). The preference items generally
applicable to savings associations include an amount equal to 75% of the amount
by which a savings association's adjusted current earnings (generally
alternative minimum taxable income computed without regard to this preference
and prior to reduction for net operating losses) exceeds its alternative minimum
taxable income without regard to this preference. Alternative minimum tax paid
can be credited against regular tax due in later years.

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State Taxation. As a financial institution holding company, the Company
is subject to a separate state franchise tax in lieu of state corporate income
tax. The amount of the tax is the sum of 1% of Maine net income and $.08 per
$1,000 of Maine assets as defined in Maine law. Maine assets are the Company's
total end of the year assets as reported to the United States Government on the
federal income tax return. Maine net income is the Company's net income or loss
as reported by the Company on its consolidated financial statements which is
apportioned to Maine under Maine law.

The Company is subject to New Hampshire business profits tax based on
federal taxable income attributable to its New Hampshire affiliates. The tax is
essentially computed by excluding from taxable income any interest on U.S.
Government obligations, adding back New Hampshire business profits taxes used in
computing federal taxable income, and then multiplying the resulting New
Hampshire taxable income by 7.0%. The computed tax is offset by a credit for any
New Hampshire enterprise tax assessed on the affiliates' compensation, interest
and dividends paid.

For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Review of Financial
Statements - Results of Operations - Income Tax Expense (Benefit)" included in
Item 7 hereof.

ITEM 2. PROPERTIES

At December 31, 1995, the Company conducted its business from its
headquarters and main office at One Portland Square, Portland, Maine, and 76
other branch offices located throughout the State of Maine and in east and
southeast New Hampshire. The Company owns 48 of its branch offices and leases 29
of its branch offices. In addition, the Company owns four operational offices
and leases five operational offices. At December 31, 1995, the net book value of
the property and leasehold improvements of the offices of the Company amounted
to $44.4 million. For additional information regarding the Company's lease
obligations, see Note 15 to the Consolidated Financial Statements included in
Item 14 hereof.

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The following tables set forth certain information with respect to the
offices of the Company as of December 31, 1995.

STATE OF MAINE

Net Book Value of
Number of Property and Leasehold
County Offices Improvements Deposits
- ------------------ ---------- ---------------------- -----------
(Dollars in Thousands)

Androscoggin 7 $ 7,852 $ 244,766
Aroostook 13 2,776 188,975
Cumberland 17 15,165 705,101
Franklin 2 545 38,325
Hancock 1 416 48,930
Kennebec 3 2,439 143,960
Knox 3 707 105,011
Oxford 2 385 39,865
Penobscot 5 1,506 154,359
Somerset 2 435 55,059
Waldo 1 79 17,489
York 5 2,213 150,555
-- ---------- ----------
Total 61 $ 34,518 $1,892,395
== ========== ==========

STATE OF NEW HAMPSHIRE

Net Book Value of
Number of Property and Leasehold
County Offices Improvements Deposits
- --------------- -------- ------------------ --------
(Dollars in Thousands)

Carroll 5 $ 1,780 $116,285
Rockingham 8 7,167 284,665
Strafford 3 893 68,620
-- -------- --------
16 $ 9,840 $469,570
== ======== ========

In early 1988, the Company moved into new headquarters constructed in
One Portland Square, which is a mixed-use development involving six acres of
land in the Old Port area adjacent to the financial district in downtown
Portland, Maine. The first phase of the project involved the construction of a
185,000 square foot, ten-story office building. The Company is leasing 52,000
square feet of the building, which bears its name, for its corporate
headquarters and a retail branch on the street level. In 1988, the Company
purchased a 15% limited partnership interest in One Portland Square for $500,000
and received Federal Reserve Board concurrence that this is a permissible
investment under the BHCA.

35

37

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by management to
be immaterial to the financial condition and results of operations of the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

The information contained under the section captioned "Common Stock
Prices" on the inside back cover of the Company's Annual Report to Stockholders
for the year ended December 31, 1995 ("Annual Report") is incorporated herein by
reference.

ITEM 6. SELECTED FINANCIAL DATA

The information contained in the table captioned "Selected Five-Year
Consolidated Financial and Other Data" on page 14 of the Company's Annual Report
is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 15 through 29 of the Company's Annual Report is incorporated herein by
reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required are contained
on pages 30 through 51 of the Company's Annual Report and are incorporated
herein by reference.

PART III.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES

None.

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38

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to pages 2 through 4 and pages 7 through 8 of
the definitive Proxy Statement of the Company, dated March 22, 1996 ("Proxy
Statement").

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to pages 11 through 17 of the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Incorporated by reference to pages 9 through 10 of the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to pages 18 through 19 of the Proxy
Statement.

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a)(1) The following financial statements are incorporated by reference
from Item 8 hereof and the Annual Report to Stockholders included herein as
Exhibit 13:

Consolidated balance sheets at December 31, 1995 and 1994

Consolidated statements of operations for each of the years in the
three-year period ended December 31, 1995

Consolidated statements of cash flows for each of the years in the
three-year period ended December 31, 1995

Consolidated statements of changes in shareholders' equity for each of
the years in the three-year period ended December 31, 1995

Notes to Consolidated Financial Statements

Independent Auditors' Report

(a)(2) All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
omitted because of the absence

37

39

of conditions under which they are required or because the required information
is included in the financial statements and related notes thereto.

(a)(3) The following exhibits are included as part of this Form 10-K.

Exhibit No. Exhibit Location
- ----------- ------- --------

3(a) Articles of Incorporation of the Company (1)

3(b) Bylaws of the Company (1)

4(a) Specimen Common Stock certificate (1)

4(b) Form of Indenture between the Company and Mellon
Bank, N.A., as trustee (2)

4(c) Form of Debenture due 2000 (2)

10(a) Amended and Restated Severance Agreement between
the Company and William J. Ryan

10(b) Amended and Restated Severance Agreement between
the Company and Peter J. Verrill

10(c) Severance Agreement between the Company and
John W. Fridlington (3)

10(d) Severance Agreement between the Company and
Henry G. Beyer (3)

10(e) Employment Agreement between the Company and John
E. Menaro, including the Severance Agreement included
as Attachment A

10(f) Supplemental Retirement Agreement among the
Company, its subsidiaries and William J. Ryan (4)

10(g) Supplemental Retirement Agreement among the
Company, its subsidiaries and John E. Menario (4)

10(h) Supplemental Retirement Agreement among the
Company, its subsidiaries and Peter J. Verrill (4)

10(i) Supplemental Retirement Agreement among the
Company, its subsidiaries and Henry G. Beyer (3)

10(j) Supplemental Retirement Agreement among the
Company, its subsidiaries and John W. Fridlington

38

40
Exhibit No. Exhibit Location
- ----------- ------- --------

10(k) Senior Officers' Deferred Compensation Plan, as
amended (5)

10(l) Directors' Deferred Compensation Plan, as amended (5)

10(m) 1986 Stock Option and Stock Appreciation Rights
Plan, as amended (1)(6)

10(n) 1986 Employee Stock Purchase Plan, as amended (1)(6)

10(o) Restricted Stock Plan for Non-Employee Directors (7)

10(p) 1995 Stock Option Plan for Non-Employee Directors (8)

10(q)(1) Thrift Incentive Plan (9)

10(q)(2) First Amendment to Thrift Incentive Plan

10(q)(3) Second Amendment to Thrift Incentive Plan

10(r)(1) Profit Sharing Employee Stock Ownership Plan (9)

10(r)(2) First Amendment to Profit Sharing Employee Stock
Ownership Plan

10(r)(3) Second Amendment to Profit Sharing Employee Stock
Ownership Plan

10(s) 1996 Equity Incentive Plan (10)

10(t) Agreement, dated January 1, 1989, by and among the
Company and Robert P. Bahre (5)

10(u) Stockholders Rights Agreement, dated September 12,
1989, between the Company and Mellon Securities Trust
Company, as Rights Agent (11)

13 Certain sections of the Company's Annual Report
to Stockholders for 1995

21 Subsidiaries of the Company

23 Consent of KPMG Peat Marwick LLP

27 Financial Data Schedule

99 Annual Report on Form 10-K for the Company's Thrift
Incentive Plan (12)

39

41

- -----------------

(1) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-20243) filed by the Company with the Securities and Exchange Commission
("SEC") on February 22, 1988.

(2) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on February 28, 1995.

(3) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1994, filed with the SEC on March 30, 1995 and
amended on April 28, 1995.

(4) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1990, filed with the SEC on March 23, 1991.

(5) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1993, filed with the SEC on March 17, 1994.

(6) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1993.

(7) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 16, 1990.

(8) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 24, 1995.

(9) Exhibit is incorporated by reference to the Form S-1 Registration Statement
(No. 33- 53236) filed by the Company with the SEC on November 23, 1992.

(10) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 20, 1996.

(11) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on September 13, 1989.

(12) To be filed by amendment on or before April 30, 1996.

The Company's management contracts or compensatory plans or
arrangements consist of Exhibit Nos. 10(a)-(t).

40

42

(b) The Company filed a report on Form 8-K on October 25, 1995,
reporting under Item 5 thereof the execution of an agreement to acquire Bank of
New Hampshire Corporation.

(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.

(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to Stockholders which are
required to be included herein.

41

43

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly organized.

PEOPLES HERITAGE FINANCIAL GROUP, INC.

By: /s/ William J. Ryan Date: March 26, 1996
-------------------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.

/s/ Robert P. Bahre Date: March 26, 1996
- ----------------------------------------------------
Robert P. Bahre
Director

/s/ Everett W. Gray Date: March 26, 1996
- ----------------------------------------------------
Everett W. Gray
Director

/s/ Andrew W. Greene Date: March 26, 1996
- --------------------------------------------------
Andrew W. Greene
Director

/s/ Katherine M. Greenleaf Date: March 26, 1996
- --------------------------------------------------
Katherine M. Greenleaf
Director

42

44

/s/ Dana Levenson Date: March 26, 1996
- ----------------------------------------------------
Dana Levenson

/s/ Robert A. Marden, Sr. Date: March 26, 1996
- ----------------------------------------------------
Robert A. Marden, Sr.
Vice Chairman

/s/ Malcolm W. Philbrook, Jr. Date: March 26, 1996
- ---------------------------------------------------
Malcolm W. Philbrook, Jr.
Director

/s/ Pamela P. Plumb Date: March 26, 1996
- -----------------------------------------------------
Pamela P. Plumb
Vice Chairman

/s/ William J. Ryan Date: March 26, 1996
- ------------------------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer
(principal executive officer)

/s/ Curtis M. Scribner Date: March 26, 1996
- ------------------------------------------------------
Curtis M. Scribner
Director

/s/ Peter J. Verrill Date: March 26, 1996
- --------------------------------------------------------
Peter J. Verrill
Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer (principal financial
and accounting officer)

43

45

EXHIBIT INDEX

Exhibit No. Exhibit Location
- ----------- ------- --------

3(a) Articles of Incorporation of the Company (1)

3(b) Bylaws of the Company (1)

4(a) Specimen Common Stock certificate (1)

4(b) Form of Indenture between the Company and Mellon
Bank, N.A., as trustee (2)

4(c) Form of Debenture due 2000 (2)

10(a) Amended and Restated Severance Agreement between
the Company and William J. Ryan

10(b) Amended and Restated Severance Agreement between
the Company and Peter J. Verrill

10(c) Severance Agreement between the Company and
John W. Fridlington (3)

10(d) Severance Agreement between the Company and
Henry G. Beyer (3)

10(e) Employment Agreement between the Company and John
E. Menaro, including the Severance Agreement included
as Attachment A

10(f) Supplemental Retirement Agreement among the
Company, its subsidiaries and William J. Ryan (4)

10(g) Supplemental Retirement Agreement among the
Company, its subsidiaries and John E. Menario (4)

10(h) Supplemental Retirement Agreement among the
Company, its subsidiaries and Peter J. Verrill (4)

10(i) Supplemental Retirement Agreement among the
Company, its subsidiaries and Henry G. Beyer (3)

10(j) Supplemental Retirement Agreement among the
Company, its subsidiaries and John W. Fridlington

10(k) Senior Officers' Deferred Compensation Plan, as
amended (5)

10(l) Directors' Deferred Compensation Plan, as amended (5)

46
Exhibit No. Exhibit Location
- ----------- ------- --------
10(m) 1986 Stock Option and Stock Appreciation Rights
Plan, as amended (1)(6)

10(n) 1986 Employee Stock Purchase Plan, as amended (1)(6)

10(o) Restricted Stock Plan for Non-Employee Directors (7)

10(p) 1995 Stock Option Plan for Non-Employee Directors (8)

10(q)(1) Thrift Incentive Plan (9)

10(q)(2) First Amendment to Thrift Incentive Plan

10(q)(3) Second Amendment to Thrift Incentive Plan

10(r)(1) Profit Sharing Employee Stock Ownership Plan (9)

10(r)(2) First Amendment to Profit Sharing Employee Stock
Ownership Plan

10(r)(3) Second Amendment to Profit Sharing Employee Stock
Ownership Plan

10(s) 1996 Equity Incentive Plan (10)

10(t) Agreement, dated January 1, 1989, by and among the
Company and Robert P. Bahre (5)

10(u) Stockholders Rights Agreement, dated September 12,
1989, between the Company and Mellon Securities Trust
Company, as Rights Agent (11)

13 Certain sections of the Company's Annual Report
to Stockholders for 1995

21 Subsidiaries of the Company

23 Consent of KPMG Peat Marwick LLP

27 Financial Data Schedule

99 Annual Report on Form 10-K for the Company's Thrift
Incentive Plan (12)

- --------------

(1) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-20243) filed by the Company with the Securities and Exchange Commission
("SEC") on February 22, 1988.

2

47

(2) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on February 28, 1995.

(3) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1994, filed with the SEC on March 30, 1995 and
amended on April 28, 1995.

(4) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1990, filed with the SEC on March 23, 1991.

(5) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1993, filed with the SEC on March 17, 1994.

(6) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1993.

(7) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 16, 1990.

(8) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 24, 1995.

(9) Exhibit is incorporated by reference to the Form S-1 Registration Statement
(No. 33-53236) filed by the Company with the SEC on November 23, 1992.

(10) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 20, 1996.

(11) Exhibit is incorporated by reference to the Form 8-K report filed by the
Company with the SEC on September 13, 1989.

(12) To be filed by amendment on or before April 30, 1996.

3