<PAGE>   1


                                    FORM 10-Q
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

              [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 1999

                                       OR

             [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number: 0-16947

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

                           Maine                             01-0437984
               State or other jurisdiction of             (I.R.S. Employer
               incorporation or organization             Identification No.)

            One Portland Square, Portland, Maine                04112
          (Address of principal executive offices            (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.

Yes [x]   No [ ]

The number of shares outstanding of the Registrant's common stock as of August
1, 1999 is:

Common stock, par value $.01 per share                        104,808,904
              (Class)                                        (Outstanding)
<PAGE>   2
                                      INDEX

             PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                              PAGE
                                                                            ----
<S>      <C>     <C>                                                        <C>
         Item 1. Financial Statements (unaudited)

                 Consolidated Balance Sheets
                 June 30, 1999 and December 31, 1998                          3

                 Consolidated Statements of Income - Three and
                 Six Months ended June 30, 1999 and 1998                      4

                 Consolidated Statements of Changes in Shareholders'
                 Equity - Six months ended June 30, 1999 and 1998             5

                 Consolidated Statements of Cash Flows - Six months
                 ended June 30, 1999 and 1998                                 6

                 Notes to Consolidated Financial Statements                   7

         Item 2. Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                          8

         Item 3. Quantitative and Qualitative Disclosures about
                 Market Risk                                                 30


PART II. OTHER INFORMATION

         Item 1. Legal proceedings                                           30

         Item 2. Changes in securities                                       30

         Item 3. Defaults upon senior securities                             30

         Item 4. Submission of matters to a vote of security holders         30

         Item 5  Other information                                           30

         Item 6  Exhibits and reports on Form 8-K                            30
</TABLE>


                                       2
<PAGE>   3
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)

<TABLE>
<CAPTION>
                                                            June 30, 1999   December 31,1998
                                                            -------------   ----------------
<S>                                                         <C>               <C>
ASSETS
Cash and due from banks                                      $    397,060     $    415,435
Federal funds sold and other short term investments                45,194          283,878
Securities available for sale, at market value                  5,044,822        2,986,131
Securities held to maturity (fair value of $612.5 million
   at June 30, 1999)                                              601,151          245,233
Loans held for sale                                               132,325          517,754
Loans and leases:
   Residential real estate mortgages                            1,533,439        2,230,615
   Commercial real estate mortgages                             1,727,284        1,621,890
   Commercial business loans and leases                         1,267,105        1,146,242
   Consumer loans and leases                                    2,088,700        2,089,284
                                                             ------------     ------------
                                                                6,616,528        7,088,031
   Less:  Allowance for loan and lease losses                     110,639          110,561
                                                             ------------     ------------
              Net loans and leases                              6,505,889        6,977,470
Premises and equipment                                            139,541          144,574
Goodwill and other intangibles                                    117,144          124,363
Mortgage servicing rights                                          47,314           40,088
Bank-owned life insurance                                         222,262           66,944
Other assets                                                      226,996          248,369
                                                             ============     ============
                                                             $ 13,479,698     $ 12,050,239
                                                             ============     ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
   Regular savings                                           $  1,285,715     $  1,284,074
   Money market and NOW accounts                                2,112,302        2,073,793
   Certificates of deposit                                      3,335,663        3,455,541
   Brokered deposits                                              185,155          257,570
   Demand deposits                                              1,285,492        1,305,737
                                                             ------------     ------------
        Total deposits                                          8,204,327        8,376,715
Federal funds purchased and securities sold under
  repurchase agreements                                           568,413          591,970
Borrowings from the Federal Home Loan Bank of Boston            3,644,173        1,936,585
Other borrowings                                                   33,441           25,659
Other liabilities                                                  65,839          118,182
                                                             ------------     ------------
        Total liabilities                                      12,516,193       11,049,111
                                                             ------------     ------------

Company obligated, mandatory redeemable securities of
  subsidiary trust holding solely parent junior
  subordinated debentures                                          68,775          100,000

Shareholders' Equity:
Preferred stock (par value $0.01 per share, 5,000,000
  shares authorized, none issued)                                      --               --
Common stock (par value $0.01 per share, 200,000,000
shares authorized, 106,647,497 and 106,647,585
  shares issued)                                                    1,066            1,066
Paid-in capital                                                   507,914          509,473
Retained earnings                                                 471,582          447,438
Unearned compensation                                              (1,970)          (2,027)
Accumulated other comprehensive income (loss):
   Net unrealized loss on securities available for sale           (46,905)          (1,651)
Treasury stock, at cost (2,547,693 shares and 2,845,731
  shares)                                                         (36,957)         (53,171)
                                                             ------------     ------------
Total shareholders' equity                                        894,730          901,128
                                                             ------------     ------------
                                                             $ 13,479,698     $ 12,050,239
                                                             ============     ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                       3
<PAGE>   4
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) (Unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended June 30,    Six Months Ended June 30,
                                                     ---------------------------   ---------------------------
                                                         1999           1998           1999           1998
                                                     ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>
Interest and dividend income:
   Interest on loans and leases                      $    139,935   $    169,225   $    294,406   $    338,439
   Interest and dividends on securities                    80,415         39,389        136,192         79,854
                                                     ------------   ------------   ------------   ------------
      Total interest and dividend income                  220,350        208,614        430,598        418,293

Interest expense:
   Interest on deposits                                    63,428         72,072        128,404        142,945
   Interest on borrowed funds                              47,796         30,323         85,130         62,577
                                                     ------------   ------------   ------------   ------------
      Total interest expense                              111,224        102,395        213,534        205,522

      Net interest income                                 109,126        106,219        217,064        212,771
Provision for loan and lease losses                         3,565          3,235          7,130          6,484
                                                     ------------   ------------   ------------   ------------
      Net interest income after provision for
        loan and lease losses                             105,561        102,984        209,934        206,287

Noninterest income:
   Customer services                                       12,738         10,070         23,550         19,555
   Mortgage banking services                                6,576          9,517         10,781         16,884
   Insurance commissions                                    4,314          2,790          9,596          5,688
   Trust and investment advisory services                   5,200          4,189          9,645          7,796
   Bank-owned life insurance income                         3,009            878          5,318          1,926
   Net securities gains                                       260              2            278          2,052
   Other noninterest income                                 1,683          2,828          4,046          5,089
                                                     ------------   ------------   ------------   ------------
                                                           33,780         30,274         63,214         58,990
Noninterest expenses:
   Salaries and employee benefits                          39,170         40,183         79,340         82,995
   Data processing                                          7,093          5,596         14,099         11,410
   Occupancy                                                6,955          6,661         13,904         13,820
   Equipment                                                5,407          4,811         10,214         10,736
   Distributions on securities of subsidiary trust          1,585          2,286          3,571          4,530
   Amortization of goodwill and other intangibles           2,933          2,914          5,901          5,776
   Advertising and marketing                                2,321          2,884          4,654          5,653
   Special charges                                             --         34,474         33,235         35,374
   Other noninterest expenses                              13,848         14,538         25,398         29,041
                                                     ------------   ------------   ------------   ------------
                                                           79,312        114,347        190,316        199,335

Income before income tax expense                           60,029         18,911         82,832         65,942
Applicable income tax expense                              19,263          6,375         28,572         22,290
                                                     ------------   ------------   ------------   ------------
      Net income                                     $     40,766   $     12,536   $     54,260   $     43,652
                                                     ============   ============   ============   ============

Weighted average shares outstanding:
      Basic                                           103,957,104    103,404,866    103,708,421    103,391,860
      Diluted                                         105,121,969    105,761,510    105,003,725    105,750,425
Earnings per share:
      Basic                                          $       0.39   $       0.12   $       0.52   $       0.42
      Diluted                                                0.39           0.12           0.52           0.41
</TABLE>


See accompanying Notes to Consolidated Financial Statements.


                                       4
<PAGE>   5
PEOPLES  HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)

<TABLE>
<CAPTION>
                                                                                                Accumulated
                                                                                     Compen-      Other
                                                        Par     Paid-in   Retained   sation    Comprehensive   Treasury
                                                       Value    Capital   Earnings    ESOP     Income (Loss)     Stock     Total
                                                      -----------------------------------------------------------------------------
<S>                                                   <C>      <C>        <C>        <C>         <C>           <C>       <C>
Balance at December 31, 1998                          $1,066   $509,473   $447,438   ($2,027)    ($1,651)      ($53,171) $901,128

Net income                                                 -          -     54,260         -           -              -    54,260
Unrealized losses on securities, net of
   reclassification adjustment                             -          -          -         -     (45,254)             -   (45,254)
                                                                                                                         --------
        Comprehensive income                                                                                                9,006
                                                                                                                         --------

Common stock issued for employee benefit plans             -          -     (6,057)        -           -         16,214    10,157

Decrease in unearned compensation                          -        244          -        57           -              -       301

Premium on repurchase of trust preferred securities        -     (1,801)         -         -           -              -    (1,801)

Payment of fractional shares                               -         (2)         -         -           -              -        (2)

Cash dividends                                             -          -    (24,059)        -           -              -   (24,059)
                                                      ---------------------------------------------------------------------------

Balances at June 30, 1999                             $1,066   $507,914   $471,582   ($1,970)   ($46,905)      ($36,957) $894,730
                                                      ===========================================================================


Balances at December 31, 1997                         $1,053   $491,033   $379,017   ($3,123)     $7,938       ($29,663) $846,255

Net income                                                 -          -     43,652         -           -              -    43,652
Unrealized gains (losses) on securities net of
    reclassification adjustment                            -          -          -         -      (2,196)             -    (2,196)
                                                                                                                         --------
          Comprehensive income                                                                                             41,456
                                                                                                                         --------

Cancellation of treasury shares at  acquisition           (1)    (1,879)         -         -           -          1,880         -

Common stock issued for employee benefit plans             8      6,486       (763)     (567)          -          5,511    10,675

Treasury stock purchased                                   -          -          -         -           -        (24,460)  (24,460)

Decrease in unearned compensation                          -        666          -       747           -              -     1,413

Cash dividends                                             -          -    (20,345)        -           -              -   (20,345)
                                                      ---------------------------------------------------------------------------

Balances at June 30, 1998                             $1,060   $496,306   $401,561   ($2,943)     $5,742       ($46,732) $854,994
                                                      ===========================================================================
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                       5
<PAGE>   6
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

<TABLE>
<CAPTION>
                                                                  Six Months Ended June 30,
                                                                 --------------------------
                                                                     1999           1998
                                                                 -----------    -----------
<S>                                                              <C>            <C>
Cash flows from operating activities:
   Net income                                                    $    54,260    $    43,652
   Adjustments to reconcile net income to net cash provided
     by operating activities:
       Provision for loan and lease losses                             7,130          6,484
       Depreciation                                                    9,709         10,008
       Amortization of goodwill and other intangibles                  5,901          5,776
       Net increase (decrease) in net deferred tax liabilities        (1,675)        30,323
       ESOP and restricted stock expense                                 301          1,413
       Net (gains) losses realized from sales of securities
         and consumer loans                                             (278)        (2,052)
       Net (gains) losses realized from sales of loans held
         for sale (a component  of mortgage banking services)          1,561         13,857
       Earnings from bank owned life insurance                        (5,318)        (1,926)
       Net (increase) in mortgage servicing rights                    (7,226)       (35,418)
       Proceeds from sales of loans held for sale                    687,667      1,611,015
       Residential loans originated and purchased for sale          (303,799)    (1,860,175)
       Net decrease (increase) in interest and dividends
         receivable and other assets                                 (33,039)        (4,082)
       Net increase (decrease) in other liabilities                   31,982        (30,049)
                                                                 -----------    -----------
Net cash provided (used) by operating activities                 $   447,176    ($  211,174)
                                                                 -----------    -----------

Cash flows from investing activities:
   Proceeds from sales of securities available for sale          $    27,461    $   304,920
   Proceeds from maturities and principal repayments of
     securities available for sale                                   821,397        567,701
   Purchases of securities available for sale                     (2,734,212)      (648,388)
   Proceeds from maturities and principal repayments of
     securities held to maturity                                      31,584         41,086
   Purchase of securities held to maturity                                --        (81,846)
   Net (increase) decrease in loans and leases                      (168,284)        83,257
   Purchase of bank owned life insurance                            (150,000)            --
   Net additions to premises and equipment                            (4,676)        (4,623)
                                                                 -----------    -----------
Net cash provided (used) by investing activities                 ($2,176,730)   $   262,107
                                                                 -----------    -----------

Cash flows from financing activities:
   Net increase (decrease) in deposits                           ($  172,388)   $   173,616
   Net increase (decrease) in securities sold under
     repurchase agreements                                           (23,557)       (26,787)
   Proceeds from Federal Home Loan Bank of Boston
     borrowings                                                    2,155,000      2,306,769
   Payments on Federal Home Loan Bank of Boston
     borrowings                                                     (447,412)    (2,149,067)
   Net increase (decrease) in other borrowings                         7,782          8,408
   Repurchase of trust preferred securities                          (33,026)            --
   Issuance of stock                                                  10,155         11,546
   Purchase of treasury stock                                             --        (24,460)
   Dividends paid                                                    (24,059)       (20,345)
                                                                 -----------    -----------
Net cash provided by financing activities                        $ 1,472,495    $   279,680
                                                                 -----------    -----------

Increase (decrease) in cash and cash equivalents                 ($  257,059)   $   330,613
   Cash and cash equivalents at beginning of period                  699,313        390,426
                                                                 -----------    -----------
   Cash and cash equivalents at end of period                    $   442,254    $   721,039
                                                                 ===========    ===========

For  the six months ended June 30, 1999 and 1998,
  interest of $211,739 and $209,864 and income taxes
  of $17,403 and $22,052 were paid, respectively
</TABLE>


                                       6
<PAGE>   7
             PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999
                                 (IN THOUSANDS)
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and predominant
practices within the banking industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 1998 Annual Report
on Form 10-K.

In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations and other data for the
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for any other interim period or the entire year ending
December 31, 1999. Certain amounts in the prior periods have been reclassified
to conform to the current presentation.

On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc.
("SIS"), which was accounted for under the pooling-of-interests method.
Accordingly, the consolidated financial statements of the Company have been
restated to reflect the acquisition at the beginning of each period presented.
At December 31, 1998, SIS had total assets of $2.0 billion and total
shareholders' equity of $139 million. Effective January 1, 1999, the Company
transferred all securities classified by SIS as "held to maturity" to "available
for sale." This transfer was done to be consistent with the Company's interest
rate risk management policies.

NOTE 2 - OTHER COMPREHENSIVE INCOME

The components of total comprehensive income for the Company are net income
and unrealized gains (losses) on securities available for sale, net of tax.
The following is a reconciliation of comprehensive income for the six months
ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                                       Six Months Ended
                                                            June 30,
                                                     --------------------
                                                       1999        1998
                                                     --------    --------
<S>                                                  <C>         <C>
     Net income                                      $ 54,260    $ 43,652

     Other comprehensive income (loss), net of tax
     Unrealized gains (losses) on securities:
       Unrealized holding gains (losses) arising
         during the period                            (45,073)       (862)
     Less: reclassification adjustment for gains
        included in net income                            181       1,334
                                                     --------    --------
     Net                                              (45,254)     (2,196)
                                                     --------    --------

     Comprehensive income                            $  9,006    $ 41,456
                                                     ========    ========
</TABLE>

NOTE 3 - OTHER MATTERS

In June 1999, the Company reached a definitive agreement to acquire Banknorth
Group, Inc. ("Banknorth"), a $4.4 billion bank holding company based in
Burlington, Vermont. Under the terms of the agreement, shareholders of Banknorth
will receive 1.825 shares of Peoples Heritage Common Stock for each whole share
of Banknorth Common stock, plus cash in lieu of any fractional share. The
exchange is expected to be tax-free and accounted for as a pooling-of-interests.
The transaction, which is subject to approval by shareholders of both Banknorth
and the Company and various regulatory agencies, is anticipated to be completed
by the end of 1999.


                                       7
<PAGE>   8
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS

SUMMARY

The Company reported net income of $40.8 million, or $0.39 per diluted share,
for the second quarter of 1999. This compares with $12.5 million, or $0.12 per
diluted share, for the second quarter of 1998 and $13.5 million, or $0.13 per
diluted share, for the first quarter of 1999. Special charges were recorded in
the first quarter of 1999 and the second quarter of 1998. See Non-Interest
Expense and Table 5 for more information related to special charges.

 The Company reported operating income (exclusive of special charges) of $40.8
million, or $0.39 per diluted share, for the second quarter of 1999 compared
with $36.6 million, or $0.35 per diluted share, for the second quarter of 1998
and $37.6 million, or $0.36 per diluted share, for the first quarter of 1999.
The second quarter results represent an 11% increase in operating earnings per
diluted share, compared to the same period last year.

Second quarter operating return on equity was 18.08%, which compared to 17.08%
in the second quarter of 1998 and 17.23% in the first quarter of 1999. The
operating return on assets was 1.25% for the second quarter of 1999, compared to
1.27% in the second quarter of 1998 and 1.25% in the first quarter of 1999.

The improved operating results for the second quarter of 1999, compared to the
second quarter of 1998, primarily reflect noninterest income growth coupled with
cost savings achieved as a result of the SIS acquisition. Noninterest income
increased 12% compared to the second quarter of 1998. The efficiency ratio
(noninterest expense excluding distributions on securities of subsidiary trust
and special charges, as a percentage of net interest income and noninterest
income, excluding net securities gains) was 54.49% for the second quarter of
1999 compared to 56.84% for the second quarter of 1998 and 55.17% for the first
quarter of 1999. Selected quarterly data and ratios and per share data, both as
reported and on an operating basis, are provided in Table 1.


                                       8
<PAGE>   9
TABLE 1 - Selected Quarterly Data
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                        1999        1999        1998        1998        1998        1998
                                       Second       First      Fourth       Third      Second       First
                                      --------------------------------------------------------------------
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>
Net interest income                   $109,126    $107,938    $106,233    $107,469    $106,219    $106,552
Provision for loan and lease losses      3,565       3,565       3,973       3,973       3,235       3,249
                                      --------------------------------------------------------------------
Net interest income after loan
  and lease loss provision             105,561     104,373     102,260     103,496     102,984     103,303

Noninterest income (excluding
  securities transactions)              33,520      29,416      28,350      27,499      30,272      26,666
Net securities gains                       260          18       2,395       1,457           2       2,050
Noninterest expenses (excluding
  special charges)                      79,312      77,769      79,574      78,296      79,873      84,088
Special charges (1)                         --      33,235       3,798          --      34,474         900
                                      --------------------------------------------------------------------
Income before income taxes              60,029      22,803      49,633      54,156      18,911      47,031
Income tax expense                      19,263       9,309      17,703      16,914       6,375      15,915
                                      --------------------------------------------------------------------
Net income                            $ 40,766    $ 13,494    $ 31,930    $ 37,242    $ 12,536    $ 31,116
                                      ====================================================================

Earnings per share:
Basic                                 $   0.39    $   0.13    $   0.31    $   0.36    $   0.12    $   0.30
Diluted                                   0.39        0.13        0.30        0.35        0.12        0.29

Operating earnings per share
  (excluding special charges):
Basic                                     0.39        0.36        0.35        0.36        0.35        0.31
Diluted                                   0.39        0.36        0.34        0.35        0.35        0.30

Return on average assets (2)              1.25%       0.45%       1.07%       1.27%       0.43%       1.10%
Return on average equity (2)             18.08%       6.19%      14.21%      17.23%       5.86%      14.79%

Operating ratios:
Return on average assets
  (excluding special charges) (2)         1.25%       1.25%       1.22%       1.27%       1.27%       1.13%
Return on average equity
  (excluding special charges) (2)        18.08%      17.23%      16.13%      17.23%      17.08%      15.06%

Efficiency ratio (3)                     54.49%      55.17%      57.44%      56.33%      56.84%      61.44%
</TABLE>

(1)  Special charges consists of merger-related expenses and one-time charges
     related to the discontinuance of the Company's correspondent mortgage
     business.

(2)  Annualized

(3)  Represents operating expenses, excluding distributions on securities of
     subsidiary trust and special charges, as a percentage of net interest
     income and noninterest income, excluding net securities gains.


                                       9
<PAGE>   10
RESULTS OF OPERATIONS

NET INTEREST INCOME

The Company's fully-taxable-equivalent net interest income in the second quarter
of 1999 increased $1.2 million compared to the first quarter of 1999 and $2.6
million compared to the second quarter of 1998. The favorable effect of
increased levels of average earning assets was substantially offset by lower
margins as certain higher rate assets prepaid and new loan refinancings and
investments were recorded at lower market rates. Table 2 shows the 1999 and 1998
quarterly average balances and net interest income by category and Table 3 shows
the changes in tax equivalent net interest income by category due to changes in
rate and volume. The net interest margin for the second quarter of 1999 was
3.62% compared to 3.86% for the first quarter of 1999 and 4.03% in the second
quarter of 1998. The decline in the net interest margin reflects the decrease in
average loan yields due to the repricing and mix of interest earning assets and
an increase in average borrowings as a percent of total average fundings. See
"Interest Rate Risk and Asset Liability Management" below.

The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yields; (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost; (iii) net
interest income; (iv) interest rate spread; and (v) net interest margin. For
purposes of the tables and the following discussion, (i) income from
interest-earning assets and net interest income is presented on a fully-taxable
equivalent basis primarily by adjusting income and yields earned on tax-exempt
interest received on loans to qualifying borrowers and on certain of the
Company's securities to make them equivalent to income and yields earned on
fully-taxable investments, assuming a federal income tax rate of 35%, and (ii)
nonaccrual loans have been included in the appropriate average balance loan
category, but unpaid interest on nonaccrual loans has not been included for
purposes of determining interest income. Average balances are based on average
daily balances during the indicated periods.


                                       10
<PAGE>   11
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                  1999 Second Quarter                      1999 First Quarter
                                        --------------------------------------   --------------------------------------
                                                                       Yield/                                   Yield/
                                        Average Balance   Interest     Rate(1)     Average Balance   Interest   Rate(1)
                                        --------------------------------------   --------------------------------------
<S>                                      <C>               <C>         <C>        <C>               <C>          <C>
Loans and leases (2):
  Residential real estate mortgages       $  1,801,616      32,589      7.24%      $ 2,556,325     $ 47,050      7.36%
  Commercial real estate mortgages           1,689,588      36,952      8.77         1,653,097       36,880      9.05
  Commercial loans and leases                1,232,071      26,029      8.47         1,139,847       25,784      9.17
  Consumer loans and leases                  2,081,520      44,796      8.63         2,127,014       45,073      8.59
                                          ------------------------                 ------------------------
     Total loans and leases                  6,804,795     140,366      8.27         7,476,283      154,787      8.36
Securities (3)                               5,103,801      78,130      6.12         3,583,507       54,105      6.05
Federal funds sold and other short
  term investments                             189,798       2,331      4.93           186,465        1,820      3.96
                                          ------------------------                 ------------------------
   Total earning assets                     12,098,394     220,827      7.31        11,246,255      210,712      7.55
                                                          --------                                 --------
Nonearning assets                              950,405                                 912,961
                                          ------------                             -----------
   Total assets                           $ 13,048,799                             $12,159,216
                                          ============                             ===========

Interest-bearing deposits:
  Regular savings                         $  1,268,159       6,428      2.03       $ 1,283,505        6,445      2.04
  NOW and money market accounts              2,078,200      12,464      2.41         2,036,837       12,006      2.39
  Certificates of deposit                    3,391,976      41,725      4.93         3,449,865       43,893      5.16
  Brokered deposits                            201,244       2,811      5.60           211,412        2,632      5.05
                                          ------------------------                 ------------------------
    Total interest-bearing deposits          6,939,579      63,428      3.67         6,981,619       64,976      3.77
Borrowed funds                               3,769,847      47,796      5.09         2,923,476       37,334      5.18
                                          ------------------------                 ------------------------
    Total interest-bearing liabilities      10,709,426     111,224      4.17         9,905,095      102,310      4.19
                                                          --------                                 --------
Non-interest bearing deposits                1,284,420                               1,235,688
Other liabilities (3)                           80,378                                  46,166
Securities of subsidiary trust                  69,987                                  88,000
Shareholders' equity (3)                       904,588                                 884,267
                                          ============                             ===========
   Total liabilities and shareholders'
     equity                               $ 13,048,799                             $12,159,216
                                          ============                             ===========

Net earning assets                        $  1,388,968                             $ 1,341,160
                                          ============                             ===========

Net interest income (fully-taxable
   equivalent)                                             109,603                                  108,402
Less: fully-taxable equivalent
  adjustments                                                 (477)                                    (464)
                                                          --------                                 --------
   Net interest income                                    $109,126                                 $107,938
                                                          ========                                 ========
Net interest rate spread (fully-taxable
  equivalent)                                                           3.14%                                    3.36%
Net interest margin (fully-taxable
  equivalent)                                                           3.62%                                    3.86%
</TABLE>

(1)  Annualized.

(2)  Loans and leases include loans held for sale.

(3)  Excludes effect of unrealized gains or losses on securities available for
     sale.


                                       11
<PAGE>   12
 TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                    1998 Fourth Quarter                      1998 Third Quarter
                                          --------------------------------------   --------------------------------------
                                                                        Yield/                                    Yield/
                                          Average Balance   Interest    Rate(1)      Average Balance   Interest   Rate(1)
                                          --------------------------------------   --------------------------------------
<S>                                        <C>              <C>         <C>         <C>              <C>          <C>
Loans and leases (2):
  Residential real estate mortgages         $ 2,919,838     $ 53,662     7.35%       $ 3,272,641     $ 61,006      7.46%
  Commercial real estate mortgages            1,611,739       38,667     9.52          1,594,023       38,186      9.50
  Commercial loans and leases                 1,126,061       24,598     8.67          1,122,187       25,828      9.13
  Consumer loans and leases                   2,092,081       45,308     8.59          2,006,297       45,011      8.90
                                            ------------------------                 ------------------------
    Total loans and leases                    7,749,719      162,235     8.33          7,995,148      170,031      8.46
Securities (3)                                3,010,073       45,319     5.97          2,583,739       39,833      6.12
Federal funds sold and other short
  term investments                              167,001        2,233     5.30             97,657        1,295      5.26
                                            ------------------------                 ------------------------
    Total earning assets                     10,926,793      209,787     7.63         10,676,544      211,159      7.87
                                                            --------                                 --------
Nonearning assets                               898,969                                  924,025
                                            ------------                             ------------
   Total assets                             $11,825,762                              $11,600,569
                                            ============                             ============

Interest-bearing deposits:
   Regular savings                          $ 1,283,063        7,198     2.23        $ 1,306,657        7,960      2.42
   NOW and money market accounts              2,017,616       13,018     2.56          1,938,800       11,989      2.45
   Certificates of deposit                    3,484,536       46,997     5.35          3,437,848       47,046      5.43
   Brokered deposits                            249,110        3,635     5.79            280,012        4,147      5.88
                                            ------------------------                 ------------------------
 Total interest-bearing deposits              7,034,325       70,848     4.00          6,963,317       71,142      4.05
Borrowed funds                                2,387,353       31,874     5.30          2,285,054       31,600      5.49
                                            ------------------------                 ------------------------
 Total interest-bearing liabilities           9,421,678      102,722     4.33          9,248,371      102,742      4.41
                                                            --------                                 --------
Non-interest bearing deposits                 1,308,902                                1,260,212
Other liabilities (3)                           103,862                                  134,455
Securities of subsidiary trust                  100,000                                  100,000
Shareholders' equity (3)                        891,320                                  857,531
                                            -----------                              -----------
Total liabilities and shareholders'
  equity                                    $11,825,762                              $11,600,569
                                            ===========                              ===========

Net earning assets                          $ 1,505,115                              $ 1,428,173
                                            ===========                              ===========

Net interest income (fully-taxable
  equivalent)                                                107,065                                  108,417
Less: fully-taxable equivalent
  adjustments                                                   (832)                                    (948)
                                                            --------                                 --------
   Net interest income                                      $106,233                                 $107,469
                                                            ========                                 ========
Net interest rate spread (fully-taxable
  equivalent)                                                            3.30%                                     3.46%
Net interest margin (fully-taxable
  equivalent)                                                            3.90%                                     4.05%
</TABLE>

(1)  Annualized.

(2)  Loans and leases include loans held for sale.

(3)  Excludes effect of unrealized gains or losses on securities available for
     sale.


                                       12
<PAGE>   13
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                   1998 Second Quarter                      1998 First Quarter
                                         ---------------------------------------  --------------------------------------
                                                                       Yield/                                   Yield/
                                         Average Balance   Interest    Rate(1)      Average Balance   Interest  Rate(1)
                                         --------------------------------------   --------------------------------------
<S>                                        <C>             <C>          <C>         <C>             <C>          <C>
Loans and leases (2):
     Residential real estate mortgages     $ 3,363,259     $ 62,583     7.44%       $ 3,388,356     $ 64,971     7.75%
     Commercial real estate mortgages        1,600,841       37,693     9.44          1,596,801       37,644     9.56
     Commercial loans and leases             1,090,450       25,418     9.35          1,015,809       23,143     9.25
     Consumer loans and leases               2,017,090       44,618     8.87          1,972,781       43,671     8.98
                                           ------------------------                 ------------------------
          Total loans and leases             8,071,640      170,312     8.45          7,973,747      169,429     8.61
Securities (3)                               2,462,955       38,478     6.27          2,439,674       39,521     6.57
Federal funds sold and other short
  term investments                              96,298          634     2.64             90,671        1,290     5.77
                                           ------------------------                 ------------------------
          Total earning assets              10,630,893      209,424     7.90         10,504,092      210,240     8.11
                                                           --------                                 --------
Nonearning assets                              948,706                                  918,811
                                           -----------                              -----------
          Total assets                     $11,579,599                              $11,422,903
                                           ===========                              ===========

Interest-bearing deposits:
     Regular savings                       $ 1,361,919        8,094     2.38        $ 1,372,469        8,470     2.50
     NOW and money market accounts           1,915,109       12,239     2.56          1,809,653       11,524     2.58
     Certificates of deposit                 3,472,084       47,232     5.46          3,452,992       46,633     5.48
     Brokered deposits                         315,289        4,507     5.73            290,177        4,246     5.93
                                           ------------------------                 ------------------------
          Total interest-bearing
            deposits                         7,064,401       72,072     4.09          6,925,291       70,873     4.15
Borrowed funds                               2,215,643       30,323     5.49          2,334,920       32,254     5.60
                                           ------------------------                 ------------------------
          Total interest-bearing
            liabilities                      9,280,044      102,395     4.43          9,260,211      103,127     4.52
                                                           --------                                 --------
Non-interest bearing deposits                1,220,460                                1,123,814
Other liabilities (3)                          120,338                                   85,381
Securities of subsidiary trust                 100,000                                  100,000
Shareholders' equity (3)                       858,757                                  853,497
                                           -----------                              -----------
          Total liabilities and
            shareholders' equity           $11,579,599                              $11,422,903
                                           ===========                              ===========

Net earning assets                         $ 1,350,849                              $ 1,243,881
                                           ===========                              ===========

Net interest income (fully-taxable
  equivalent)                                               107,029                                  107,113
Less: fully-taxable equivalent
  adjustments                                                  (810)                                    (561)
                                                           --------                                 --------
          Net interest income                              $106,219                                 $106,552
                                                           ========                                 ========
Net interest rate spread
  (fully-taxable equivalent)                                            3.47%                                    3.59%
Net interest margin
  (fully-taxable equivalent)                                            4.03%                                    4.13%
</TABLE>

(1)  Annualized.

(2)  Loans and leases include loans held for sale.

(3)  Excludes effect of unrealized gains or losses on securities available for
     sale.


                                       13
<PAGE>   14
The following table presents certain information on a fully-taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).

TABLE 3 -  RATE VOLUME ANALYSIS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                      Three Months Ended June 30, 1999 vs. 1998
                                             Increase (decrease) due to
                                    --------------------------------------------
                                                             Rate &      Total
                                      Volume      Rate     Volume (1)   Change
                                    --------------------------------------------
<S>                                 <C>         <C>        <C>         <C>
Interest income:
Loans and leases                    ($26,689)   ($3,622)    $   365    ($29,946)
Securities                            41,282       (921)       (709)     39,652
Federal funds sold and other
  short term investments                 615        550         532       1,697
                                    --------------------------------------------
Total interest income                 15,208     (3,993)        188      11,403
                                    --------------------------------------------

Interest expense:
Interest-bearing deposits
   Regular savings                      (450)    (1,188)        (28)     (1,666)
   NOW and money market accts          1,041       (716)       (100)        225
   Certificates of deposit            (1,090)    (4,588)        171      (5,507)
   Brokered deposits                  (1,629)      (102)         35      (1,696)
                                    --------------------------------------------
Total interest-bearing deposits       (2,128)    (6,594)         78      (8,644)

Borrowed funds                        21,273     (2,210)     (1,590)     17,473
                                    --------------------------------------------
Total interest expense                19,145     (8,804)     (1,512)      8,829

Net interest income (fully
  taxable equivalent)               ($ 3,937)   $ 4,811     $ 1,700    $  2,574
                                    ============================================
</TABLE>

(1)  Includes changes in interest income and expense not due solely to volume or
     rate changes.


                                       14
<PAGE>   15

NON-INTEREST INCOME

Second quarter non-interest income of $33.8 million increased 12% from the
second quarter of 1998, and increased 15% from the first quarter of 1999. The
increase over the second quarter of 1998 related to insurance agency commissions
($1.5 million or 55%), customer service income ($2.7 million or 26%),
trust/investment advisory service fees ($1.0 million or 24%) and bank owned life
insurance income ($2.1 million or 243%.) These increases were partially offset
by a $2.9 million decline in mortgage banking income due primarily to
discontinuance of the correspondent lending business in the first quarter of
1999. Second quarter non-interest income increased by $4.3 million (or 15%) over
the first quarter of 1999 due to a $2.4 million increase in mortgage banking
income and a $1.9 million increase in customer service income.

Customer services income in the second quarter of 1999 increased 26% from the
second quarter of 1998 and 18% from the first quarter of 1999. The increases
were primarily attributable to growth in the number of transaction accounts and
increased ATM fees.

Insurance commission revenue was $4.3 million for the second quarter of 1999,
compared to $2.8 million for the same period in 1998. The increase primarily
relates to the acquisition of insurance agencies in Massachusetts and New
Hampshire in the fourth quarter of 1998, which were accounted for using the
purchase method.

Trust and investment advisory services income reflects the continued growth in
trust assets under management and increased commissions earned on sales of third
party mutual funds and annuities. Assets under management were $3.1 billion,
$3.0 billion and $2.9 billion at June 30, 1999, December 31, 1998 and June 30,
1998, respectively.

Bank-owned life insurance ("BOLI") income was $3.0 million for the second
quarter of 1999, compared to $878 thousand for the same period in 1998. The
increase relates to higher levels of BOLI. At June 30, 1999, the cash surrender
value of BOLI was $222 million compared to $65 million at June 30, 1998. BOLI
covers certain officers of the Company's bank subsidiaries. Most of the
Company's BOLI is invested in the "general account" of quality insurance
companies. All such companies were rated AA or better by Standard and Poors at
June 30, 1999.

Mortgage banking services income of $6.6 million, $4.2 million and $9.5 million
provided 19%, 14% and 31% of noninterest income for the quarters ended June 30,
1999, March 31, 1999 and June 30, 1998, respectively. Mortgage banking services
income increased from the first quarter due to increased gains on sales of
mortgage servicing of $2.9 million and a $900 thousand valuation net gain on the
mortgage servicing rights asset and hedging instruments, offset by a $1.9
million lower of cost or market adjustment on loans held for sale.  The decline
in the first quarter was largely due to discontinuing the correspondent mortgage
lending business in January 1999. Also, the second quarter of 1998 included a
$1.7 million gain on sales of mortgage servicing compared to a $17 thousand loss
in the first quarter of 1999.  See "Special Charges" below for a discussion of
the costs to discontinue the correspondent mortgage lending business. The amount
of loans serviced for others was $3.9 billion, $4.3 billion and $7.4 billion at
June 30, 1999, March 31, 1999 and June 30, 1998, respectively. The Company
recorded $1.9 million in mortgage servicing income in the second quarter of 1999
compared to $1.6 million in the first quarter of 1999 and $3.6 million in the
second quarter of 1998. See Table 4 for a summary of mortgage banking services
income by quarter for 1999 and 1998.

Capitalized mortgage servicing rights amounted to $47.3 million at June 30,
1999, compared to $45.3 million at March 31, 1999 and $96.1 million at June 30,
1998. The decrease from the second quarter last year was due to the sale of
mortgage servicing rights totaling $59.2 million in the third and fourth
quarters of 1998. See Table 4 for details. Because mortgage servicing rights are
an interest-rate sensitive asset, the value of the Company's mortgage servicing
rights and the related mortgage banking income may be adversely impacted if
mortgage interest rates decline and actual or expected loan prepayments
increase. To mitigate the prepayment risk associated with adverse changes in
interest rates and the resultant impairment to capitalized mortgage servicing
rights and effects on mortgage banking income, the Company has established a
hedge program against a portion of its capitalized mortgage servicing rights to
help protect its value and mortgage banking income. Notwithstanding the
foregoing, there can be no assurance that significant declines in interest rates
will not have a material impact on the Company's mortgage servicing rights and
mortgage banking income or that the hedge program will be successful in
mitigating the effects of such a decline.


                                       15
<PAGE>   16

TABLE 4 - MORTGAGE BANKING SERVICES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                            At or for the Three Months Ended
                                                     6/30/99        3/31/99      12/31/98       9/30/98      6/30/98       3/31/98
                                                   ---------------------------------------------------------------------------------
<S>                                                <C>            <C>           <C>           <C>          <C>           <C>
RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS       $3,913,525     $4,328,668    $4,243,181    $5,289,015   $7,374,982    $6,974,292
                                                   =================================================================================
MORTGAGE BANKING SERVICES INCOME:
      Residential mortgage sales income                $2,799         $3,313        $7,123        $8,124       $4,596        $3,280
      Lower of cost or market adjustment -
               loans held for sale                     (1,934)            --            --            --           --            --
      Residential mortgage servicing income, net        1,880          1,559         1,137         2,320        3,599         4,087
      Change in impairment reserve                      2,382            950        (4,545)       (6,182)        (359)           --
      Valuation adjustments - interest rate floor      (1,475)        (1,600)          200         2,180           --            --
      Gain (loss) on sale of capitalized mortgage
          servicing rights                              2,924            (17)          958          (997)       1,681            --
                                                   ---------------------------------------------------------------------------------
      Total                                            $6,576         $4,205        $4,873        $5,445       $9,517        $7,367
                                                   =================================================================================

MORTGAGE SERVICING RIGHTS:
      Balance at beginning of period                  $45,266        $40,088       $57,640       $96,056      $80,278       $60,638
      Mortgage servicing rights capitalized
         and purchased                                  2,747          7,535         6,803        13,940       24,364        35,709
      Amortization charged against
         mortgage servicing fee income                 (2,736)        (2,828)       (3,644)       (3,161)      (3,647)       (3,918)
      Change in impairment reserve                      2,382            950        (4,545)       (6,182)        (359)           --
      Mortgage servicing rights sold                     (345)          (479)      (16,166)      (43,013)      (4,580)      (12,151)
                                                   ---------------------------------------------------------------------------------
      Balance at end of period                        $47,314        $45,266       $40,088       $57,640      $96,056       $80,278
                                                   =================================================================================
</TABLE>


                                       16
<PAGE>   17

NON-INTEREST EXPENSE

Excluding special charges, amortization of intangibles and distribution on
securities of subsidiary trust, non-interest expense was $74.8 million, $72.8
million and $74.7 million for the quarters ended June 30, 1999, March 31, 1999,
and June 30, 1998, respectively. The efficiency ratio was 54.49%, 56.84% and
55.17% for the quarters ended June 30, 1999, June 30, 1998 and March 31, 1999,
respectively, excluding special charges, distributions on securities of
subsidiary trust and net securities gains.

Salaries and benefits expense of $39.2 million decreased $1.0 million from both
the second quarter of last year and from the first quarter of 1999. Staff
reductions related to the SIS acquisition was the primary reason for this
decline.

Data processing expense increased $1.5 million from the second quarter of last
year and increased $87 thousand from the first quarter of 1999. The increase
from last year was due to new systems initiatives, the costs of year 2000
testing (see "Impact of the Year 2000" section) and increased transaction
volumes.

Occupancy expense increased $294 thousand from the second quarter of 1998 and $6
thousand from the first quarter of 1999. The increase from the second quarter of
1998 was primarily due to a $206 thousand loss on the disposition of a branch in
the second quarter of 1999. The Company had 220 branch offices at June 30, 1999
as compared to 227 branch offices at June 30, 1998.

Equipment expense increased $596 thousand from the second quarter of last year
and $600 thousand from the first quarter of 1999, while advertising and
marketing expense decreased $563 thousand and $12 thousand from the second
quarter of 1998 and the first quarter of 1999, respectively. The increase in
equipment expense was due to increased amounts of depreciation on new equipment.
The decreases in advertising and marketing expenses were primarily due to cost
savings and efficiencies related to the SIS acquisition.

Amortization of goodwill and other intangibles during the first quarter of 1999
increased $19 thousand from the second quarter of 1998 due to the goodwill
associated with the fourth quarter 1998 purchase acquisitions of two insurance
agencies.

There were no special charges in the second quarter of 1999. Special charges of
$34.5 million pre-tax were incurred during the second quarter of 1998 related to
the acquisition of CFX on April 10, 1998. Special charges of $33.2 million
pre-tax were incurred during the first quarter of 1999, which included
merger-related expenses of $25.9 million incurred in connection with the
acquisition of SIS and $7.4 million related to the discontinuance of the
Company's correspondent mortgage lending business. On an after-tax basis,
special charges amounted to $24.0 million and $24.1 million for the quarters
ended June 30, 1998 and March 31, 1999, respectively.

The following table summarizes activity related to special charges recorded
since December 31, 1998 and shows the balance as of June 30, 1999.


                                       17
<PAGE>   18

TABLE 5 - SPECIAL CHARGES
(Dollars in thousands)

<TABLE>
<CAPTION>
                                               Special Charges in First Six Months of 1999
                                               -------------------------------------------
                                                               Discontinuing              Plus:
                                                               Correspondent             Accrual        Less:     Less:    Accrual
                                                               Mortgage                 Balance at      Cash     Write-   Balance at
                                                Merger         Business        Total    12/31/98   Transactions  downs     6/30/99
                                                ------         --------        -----    --------   ------------  -----     -------
<S>                                            <C>             <C>           <C>        <C>        <C>           <C>      <C>
 Severance costs                               $11,345         $1,986        $13,331        $32       ($9,995)       $0     $3,368
 Data processing/systems integration             5,176             --          5,176         --        (4,386)       --        790
 Professional fees                               3,314          1,793          5,107         --        (4,511)       --        596
 Asset write-downs and lease terminations        4,067          1,293          5,360         --          (478)   (2,905)     1,977
 Customer  communications                        1,148             --          1,148         --        (1,703)       --       (555)
 Fund charitable foundation                      3,000             --          3,000         --        (3,000)       --         --
 Correspondent losses                               --            957            957         --        (1,945)       --       (988)
 Pension curtailment gain                       (4,000)            --         (4,000)        --            --        --     (4,000)
 Other costs                                     1,821          1,335          3,156      1,131        (2,342)       --      1,945
                                               -------------------------------------     ------      --------   -------     ------
                                               $25,871 (1)     $7,364 (2)    $33,235     $1,163      ($28,360)  ($2,905)    $3,133
                                               =====================================     ======      ========   =======     ======
</TABLE>

     (1)  On an after-tax basis merger charges amounted to $18,779.
     (2)  On an after-tax basis charges for discontinuing the correspondent
          mortgage business amounted to $5,300.

Other noninterest expenses for the second quarter of 1999 decreased $690
thousand from the second quarter of 1998 and increased $2.3 million from the
first quarter of 1999. The following table summarizes the principal components
of other non-interest expenses by quarter.


    TABLE 6 - OTHER NON-INTEREST EXPENSES
    (Dollars in thousands)

<TABLE>
<CAPTION>
                                             1999      1999      1998      1998      1998      1998
                                            Second     First    Fourth     Third    Second     First
                                            Quarter   Quarter   Quarter   Quarter   Quarter   Quarter
                                           ----------------------------------------------------------
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>
    Miscellaneous loan costs                $1,952    $1,934    $1,457    $2,035    $2,612    $1,264
    Telephone                                2,566     2,561     2,306     2,315     1,951     1,973
    Postage and freight                      1,771     2,103     1,893     1,542     1,884     1,887
    Office supplies                          1,805     1,471     1,706     1,664     2,017     1,773
    Deposits and other assessments             727       668       651       657       675       705
    Collection and carrying costs
        of non-performing assets               313       701       666      (583)      268       737
    Other                                    4,714     2,112     2,615     4,666     5,131     6,164
                                           ---------------------------------------------------------
    Total                                  $13,848   $11,550   $11,294   $12,296   $14,538   $14,503
                                           =========================================================
</TABLE>

TAXES

The effective tax rate for the second quarter of 1999, excluding the effect of
special charges, was 32% compared to 31% for the second quarter of 1998 and 33%
for the first quarter of 1999.


                                       18
<PAGE>   19

OTHER COMPREHENSIVE INCOME

FASB Statement No. 130 requires disclosure of "Other comprehensive income."
Unlike net income, "other comprehensive income" includes the after-tax change in
unrealized gains and losses on securities. As a result of an increase in
interest rates in the first six months of 1999, the unrealized loss on the
Company's securities portfolio increased $45.3 million, net of taxes and gains
and losses realized on sales of securities. At June 30, 1999, unrealized losses,
net of tax, represented less than 1% of securities available for sale. The
Company attempts to balance the Interest Rate Risk of its assets with its
liabilities (see "Interest Rate Risk and Asset Liability Management"). However,
the change in value of its liabilities, which tends to improve in rising
interest rate environments, is not included in "other comprehensive income." The
Company has no current intention to sell any of its available for sale assets.


FINANCIAL CONDITION


LOANS AND LEASES

Average loans of $6.8 billion during the second quarter of 1999 decreased $671
thousand or 9% from the first quarter of 1999 and $1.3 million or 16% from the
second quarter of 1998. The decreases were primarily in residential real estate
mortgages resulting from declines in loans held for sale, prepayments on
residential real estate loans, and the April 1999 securitization of $633 million
of 1-4 family residential loans into a real estate mortgage investment conduit
("REMIC") which is classified as securities held to maturity.  Loans as a
percent of average earning assets were 56% at June 30, 1999 compared to 66% at
March 31, 1999 and 76% at June 30, 1998.

Average residential real estate loans (which includes mortgage loans held for
sale) of $1.8 billion during the second quarter of 1999 declined $1.6 billion
from the second quarter of last year. As a result of declining interest rates
during the period, prepayments on residential real estate loans accelerated,
particularly in adjustable rate mortgages which had previously been retained in
portfolio. Mortgage loans held for sale amounted to $132 million at June 30,
1999 and $653 million at June 30, 1998.  The decline in loans held for sale was
due primarily to discontinuance of the correspondent mortgage business in the
first quarter of 1999.

Average commercial real estate loans of $1.7 billion increased 6% from the
second quarter of last year. The average yield on commercial real estate loans
during the second quarter of 1999 was 8.77% as compared to 9.44% in the second
quarter of 1998, which is indicative of increased competition and lower
prevailing interest rates. Market forces have also influenced the term of new
commercial real estate loans as customers are frequently requesting fixed rates
and longer terms.

Commercial loans averaged $1.2 billion during the second quarter of 1999, an
increase of 13% over the second quarter of 1998. The yield on commercial loans
decreased to 8.47% in the second quarter of 1999 from 9.35% in the second
quarter of 1998.

Average consumer loans of $2.1 billion during the second quarter of 1999
increased 3% from the second quarter of 1998. The increase was primarily in
indirect automobile, student and home equity loans. The average yield on
consumer loans declined from 8.87% in the second quarter of 1998 to 8.63% in the
second quarter of 1999.

SECURITIES AND OTHER EARNING ASSETS

The Company's securities portfolio averaged $5.1 billion during the second
quarter of 1999, as compared to $3.6 billion in the first quarter of 1999 and
$2.5 billion in the second quarter of 1998, and consisted primarily of
mortgage-backed securities, most of which are seasoned 15 year agency
securities, and U.S. Treasury securities. Other securities consisted of
collateralized mortgage obligations, asset-backed securities and securitized
portfolio loans held in a REMIC and classified as held to maturity.
Substantially all securities are rated AAA or equivalently rated. A significant
portion of the increase in securities was to replace the decline in residential
real estate loans.  The average yield on securities was 6.12%, 6.05% and 6.27%
for the quarters ended June 30, 1999, March 31, 1999 and June 30, 1998,
respectively. The fluctuations in yields was due to reinvestment of maturing
securities at lower yields during a declining interest rate environment and
increased amortization of premiums as prepayments on mortgage backed securities
have accelerated. The REMIC securities have a weighted average yield of 7.53%
and increased the portfolio yield by 16 basis points in the second quarter of
1999 compared to the first quarter of 1999. Securities available for sale are
carried at fair value and had an after-tax unrealized loss of $45.3 million and
$50 thousand at June 30, 1999 and March 31, 1999, respectively.  The unrealized
loss was 0.9% of total securities available for sale at June 30, 1999.


                                       19
<PAGE>   20

ASSET QUALITY

As shown in Table 7, nonperforming assets were $62.3 million at June 30, 1999,
or 0.46% of total assets, compared to $60.1 million at March 31, 1999 and $71.7
million at June 30, 1998. The Company continues to monitor asset quality with
regular reviews of its portfolio in accordance with its lending and credit
policies.

The Company's residential loan portfolio accounted for 23% of the total loan
portfolio at June 30, 1999, as compared with 30% at March 31, 1999. The
Company's residential loans are generally secured by 1-4 family homes and have a
maximum loan to value ratio of 80%, unless they are protected by mortgage
insurance. At June 30, 1999, 0.76% of the Company's residential loans were
nonperforming, as compared with 0.48% at March 31, 1999. The increase from the
first quarter was due mainly to the securitization of $633 million of 1-4 family
loans now classified as securities held to maturity.

The Company's commercial real estate loan portfolio accounted for 26% of the
total loan portfolio at June 30, 1999 compared to 23% at March 31, 1999. At June
30, 1999, 0.92% of the Company's commercial real estate loans were
nonperforming, as compared with 1.08% at March 31, 1999.

The Company's commercial business loan portfolio accounted for 19% of the total
loan portfolio at June 30, 1999 and 17% at March 31, 1999. Commercial business
loans are not concentrated in any particular industry, but reflect the
broad-based economies of Maine, New Hampshire, Massachusetts, and to a lesser
extent, Connecticut. The Company's commercial business loans are generally to
small and medium size businesses located within its geographic market area. At
June 30, 1999, 1.47% of the Company's commercial business loans were
non-performing, as compared with 1.06% at March 31, 1999. The increase was
primarily related to one relationship which is believed to be adequately
secured.

The Company's consumer loan portfolio accounted for 32% of the total loan
portfolio at June 30, 1999 and 30% at March 31, 1999. The Company has a
diversified consumer loan portfolio consisting of home equity, automobile,
mobile home, boat and recreational vehicles and education loans. At June 30,
1999, 0.26% of the Company's consumer loans were nonperforming, as compared with
0.36% at March 31, 1999.

At June 30, 1999, the Company had $18.0 million of accruing loans which were 90
days or more delinquent, as compared to $25.0 million of such loans at March 31,
1999 and $10.1 million at June 30, 1998. The increase in the first quarter was
primarily attributable to an increase in residential real estate loans over 90
days delinquent, which the Company believes are well secured and in the process
of collection.  As noted, accruing loans 90 days or more delinquent declined
during the second quarter of 1999.


                                       20
<PAGE>   21

TABLE 7 - NONPERFORMING ASSETS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                6/30/99    3/31/99    12/31/98   9/30/98   6/30/98    3/31/98
                                                                -------------------------------------------------------------
<S>                                                             <C>        <C>        <C>        <C>       <C>        <C>
Residential real estate loans:
Nonaccrual loans                                                $11,643    $10,124     $9,917    $13,976   $10,802    $14,134
                                                                -------------------------------------------------------------
Commercial real estate loans:
Nonaccrual loans                                                 14,494     16,657     19,944     20,521    20,398     22,239
Troubled debt restructurings                                      1,391      1,110          6        475     1,477      3,298
                                                                -------------------------------------------------------------
    Total                                                        15,885     17,767     19,950     20,996    21,875     25,537
                                                                -------------------------------------------------------------
Commercial business loans and leases:
Nonaccrual loans                                                 18,600     12,694     14,920     15,174    18,409     19,833
Troubled debt restructurings                                         80         40        874         70        71        207
                                                                -------------------------------------------------------------
   Total                                                         18,680     12,734     15,794     15,244    18,480     20,040
                                                                -------------------------------------------------------------
Consumer loans and leases:
Nonaccrual loans                                                  5,531      7,566     10,865      8,887     8,323     10,000
                                                                -------------------------------------------------------------
Total nonperforming loans:
Nonaccrual loans                                                 50,268     47,041     55,646     58,558    57,932     66,206
Troubled debt restructurings                                      1,471      1,150        880        545     1,548      3,505
                                                                -------------------------------------------------------------
   Total                                                         51,739     48,191     56,526     59,103    59,480     69,711
                                                                -------------------------------------------------------------
Other nonperforming assets:
Other real estate owned, net of related reserves                  7,170      7,468      7,030      7,435     7,790      6,270
Repossessions, net of related reserves                            3,411      4,446      3,624      3,786     4,380      4,158
                                                                -------------------------------------------------------------
Total other nonperforming assets                                 10,581     11,914     10,654     11,221    12,170     10,428
                                                                -------------------------------------------------------------
Total nonperforming assets                                      $62,320    $60,105    $67,180    $70,324   $71,650    $80,139
                                                                =============================================================
Accruing loans which are 90 days overdue                        $17,990    $24,967    $21,962     $7,933   $10,078     $9,136
                                                                =============================================================

Total nonperforming loans as a percentage of total loans (1)      0.78%      0.68%      0.80%      0.81%     0.82%      0.96%
Total nonperforming assets as a percentage of total assets        0.46%      0.48%      0.56%      0.60%     0.62%      0.68%
Total nonperforming assets as a percentage of  total loans
   and leases (1) and total other nonperforming assets            0.94%      0.85%      0.95%      0.96%     0.98%      1.10%

(1) Total loans and leases are exclusive of loans held for sale.
</TABLE>

PROVISION/ALLOWANCE FOR LOAN LOSSES

The Company provided $3.6 million for loan and lease losses in the second
quarter of 1999, compared to $3.2 million in the second quarter of 1998. As
shown in Table 8, net charge-offs for the second quarter of 1999 were $3.5
million, or 21 basis points of average loans outstanding, compared to $4.4
million, or 22 basis points of average loans outstanding, for the second quarter
of 1998.

At June 30, 1999, the allowance for loan and lease losses amounted to $110.6
million or 1.67% of total portfolio loans and leases, as compared to $110.4
million or 1.52% at June 30, 1998. The ratio of the allowance for loan and lease
losses to nonperforming loans was 214% at June 30, 1999 and 186% at June 30,
1998. Management considers the allowance appropriate and adequate to cover
potential losses inherent in the loan portfolio based on the current economic
environment.

Provisions for loan losses are attributable to management's ongoing evaluation
of the adequacy of the allowance for loan and lease losses, which includes,
among other procedures, consideration of the character and size of the loan
portfolio such as internal risk ratings and credit concentrations, trends in
nonperforming loans, delinquent loans and net charge-offs, the volume of new
loan originations and other asset quality factors. Although management utilizes
its best judgment in providing for possible losses, there can be no


                                       21
<PAGE>   22

assurance that the Company will not have to change its provisions for loan and
lease losses in subsequent periods. Changing economic and business conditions in
northern New England, fluctuations in local markets for real estate, future
changes in nonperforming asset trends, large movements in market-based
interest rates or other reasons could affect the Company's future provisions for
loans losses.

    TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
    (Dollars in thousands)

<TABLE>
<CAPTION>
                                                        1999 Second   1999 First  1998 Fourth  1998 Third  1998 Second   1998 First
                                                          Quarter      Quarter      Quarter      Quarter     Quarter      Quarter
                                                        ---------------------------------------------------------------------------
<S>                                                     <C>          <C>          <C>         <C>          <C>          <C>
    Average loans and leases outstanding
       during the period (1)                            $6,804,795   $7,476,283   $7,744,371  $7,990,408   $8,068,140   $7,973,747
                                                        ===========================================================================
    Allowance at beginning of period                      $110,573     $110,561     $111,413    $110,371     $111,507     $112,064
    Charge-offs:
    Real estate mortgages                                    1,982          530        1,169       2,929        2,426        1,518
    Commercial business loans and leases                       346        1,137        2,634         717        1,304          601
    Consumer loans and leases                                3,904        3,550        3,822       2,868        2,966        3,727
                                                        ---------------------------------------------------------------------------
    Total loans charged off                                  6,232        5,217        7,625       6,514        6,696        5,846
                                                        ---------------------------------------------------------------------------
    Recoveries:
    Real estate mortgages                                    1,402          550        1,142       1,991        1,431        1,186
    Commercial business loans and leases                       688          627          932         889          501          166
    Consumer loans and leases                                  643          487          726         703          393          688
                                                        ---------------------------------------------------------------------------
    Total loans recovered                                    2,733        1,664        2,800       3,583        2,325        2,040
                                                        ---------------------------------------------------------------------------
    Net charge-offs                                          3,499        3,553        4,825       2,931        4,371        3,806
    Additions charged to operating expenses                  3,565        3,565        3,973       3,973        3,235        3,249
                                                        ---------------------------------------------------------------------------
    Allowance at end of period                            $110,639     $110,573     $110,561    $111,413     $110,371     $111,507
                                                        ===========================================================================

    Ratio of net charge-offs to average loans and
       leases outstanding during the period,
       annualized (1)                                        0.21%        0.19%        0.25%       0.15%        0.22%        0.19%
    Ratio of allowance to total loans and leases
       at end of period (2)                                  1.67%        1.56%        1.56%       1.52%        1.52%        1.54%
    Ratio of allowance to nonperforming loans at end
       of period                                              214%         229%         196%        189%         186%         161%
    Ratio of net charge-offs as a percent of average
        outstanding loans, annualized (1):
          Real estate mortgages                             0.067%      -0.002%       0.002%      0.076%       0.080%       0.027%
          Commercial business loans and leases             -0.111%       0.181%       0.603%     -0.061%       0.296%       0.174%
          Consumer loans and leases                         0.628%       0.584%       0.587%      0.428%       0.512%       0.625%
</TABLE>

     (1)  Average loans and leases include portfolio loans and loans held for
          sale.
     (2)  Total loans and leases are exclusive of loans held for sale.


                                       22
<PAGE>   23

DEPOSITS

Average deposits of $8.2 billion during the second quarter of 1999 remained
relatively unchanged from the second quarter of 1998. Excluding brokered
deposits, average total deposits increased $53 million compared to the second
quarter of 1998. The ratio of portfolio loans to retail deposits was 83% and 92%
at June 30, 1999 and June 30, 1998, respectively.

Average non-interest bearing deposit accounts of $1.3 billion during the second
quarter of 1999 increased $64.0 million or 5% from the second quarter of 1998.
The increase reflects growth in both commercial and retail deposit balances.

Average interest-bearing deposit accounts, excluding brokered deposits, of $6.7
billion during the second quarter of 1999 decreased $10.8 million or less than
1% from the second quarter of 1998. The average rates paid on all deposit types
decreased from 4.09% in the second quarter of 1998 to 3.67% in the second
quarter of 1999.

OTHER FUNDING SOURCES

The Company's primary source of funding, other than deposits, are securities
sold under repurchase agreements and advances from the Federal Home Loan Bank of
Boston ("FHLB"). Average FHLB borrowings for the second quarter of 1999 were
$3.2 billion, which increased by $1.5 billion or 88% from the second quarter of
1998 in order to fund the growth in earning assets. FHLB collateral consists
primarily of first mortgage loans secured by 1 - 4 family properties, certain
unencumbered securities and other qualified assets. At June 30, 1999, the
Company's FHLB borrowings amounted to $3.6 billion and its additional borrowing
capacity was $2.3 billion.

Average balances for securities sold under repurchase agreements were $515
million, $537 million and $479 million for the quarters ended June 30, 1999,
March 31, 1999, and June 30, 1998, respectively. These borrowings are secured by
mortgage-backed securities and U.S. Government obligations.

INTEREST RATE RISK AND ASSET-LIABILITY MANAGEMENT

The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-Liability management is governed by policies
reviewed and approved annually by the Company's Board of Directors (the "Board")
and monitored periodically by a committee of the Board. The Board delegates
responsibility for asset-liability management to the corporate Liquidity and
Funds Management Committee ("LFMC"), which is comprised of members of senior
management who sets strategic directives that guide the day-to-day
asset-liability management activities of the Company. The LFMC also reviews and
approves all major risk, liquidity and capital management programs.

Market Risk

Market risk is the sensitivity of income to changes in interest rates, foreign
exchange rates, commodity prices and other market-driven rates or prices. The
Company has no trading operations and thus is only exposed to non-trading market
risk.

Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-credit risk to which the Company in exposed. Interest-rate risk
is the sensitivity of income to changes in interest rates. Changes in interest
rates, as well as fluctuations in the level and duration of assets, affect net
interest income, the Company's primary source of revenue. This risk arises
directly from the Company's core banking activities - lending, deposit gathering
and loan servicing. In addition to directly impacting net interest income,
changes in the level of interest rates can also affect (i) the amount of loans
originated and sold by the institution, (ii) the ability of borrowers to repay
adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the
rate of amortization of capitalized mortgage servicing rights and premiums paid
on securities, (v) the amount of unrealized gains and losses on securities
available for sale and (vi) the value of an institution's investment securities
and mortgage loans and the resultant ability to realize gains on the sale of
such assets.

The primary objective of interest-rate risk management is to control the
Company's exposure to interest-rate risk both within limits approved by the
Board of Directors and guidelines established by the LFMC. These limits and
guidelines reflect the Company's tolerance for interest-rate risk over both
short-term and long-term horizons. The Company controls interest-rate risk by
identifying, quantifying and, where appropriate, hedging its exposure.

The Company quantifies and measures interest-rate exposures using a model to
dynamically simulate net-interest income under various interest rate scenarios
over 12 months. Simulated scenarios include deliberately extreme interest


                                       23
<PAGE>   24

rate "shocks" and more gradual interest rate "ramps." Key assumptions in these
simulation analyses relate to behavior of interest rates and spreads, the growth
or shrinkage of product balances and the behavior of the Company's deposit and
loan customers. The most material assumption relates to the prepayment of
mortgage assets (including mortgage loans, securities and mortgage servicing
rights). The risk of prepayment tends to increase when interest rates fall.
Since future prepayment behavior of loan customers is uncertain, the resultant
interest rate sensitivity of loan assets cannot be determined exactly.
Complicating management's efforts to measure interest rate risk is the
uncertainty of the maturity, repricing and/or runoff of some of the Company's
assets and liabilities.

To cope with these uncertainties, management gives careful attention to its
assumptions. For example, many of the Company's interest-bearing deposit
products (e.g. interest checking, savings and money market deposits) have no
contractual maturity and based on historical experience have only a limited
sensitivity to movements in market rates. Because management believes it has
some control with respect to the extent and timing of rates paid on non-maturity
deposits, certain assumptions regarding rate changes are built in to the model.
In the case of prepayment of mortgage assets, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.

The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments, mainly fixed-rate
portfolio securities and borrowed fund maturities. When appropriate, the Company
will utilize off-balance sheet interest rate instruments such as interest-rate
swaps, forward-rate agreements, options, options on swaps and exchange traded
futures and options. The Company owns two interest-rate floors with a combined
notional amount of $20 million, expiring from 1999-2000, which were purchased to
protect certain rate sensitive assets against falling interest rates. The
Company has no direct or contingent liability as a result of these floors.

The Company's policy on interest-rate risk simulation specify that if interest
rates were to immediately shift up or down 200 basis points, estimated net
interest income for the subsequent 12 months should decline by less than 10%.
The Company was in compliance with this limit at June 30, 1999. The Company also
monitors gradual changes in market interest rates which it believes better
represents its exposure to net interest income.  The following table reflects
the estimated exposure of the Company's net interest income for the 12 months
following the date indicated assuming a gradual shift in market interest rates
of 100 and 200 basis points, respectively.


<TABLE>
<CAPTION>
                         200 Basis Point      100 Basis Point        100 Basis Point      200 Basis Point
                          Rate Decrease        Rate Decrease          Rate Increase        Rate Increase
                          -------------        -------------          -------------        -------------
                                                      (Dollars in thousands)
<S>                         <C>                 <C>                    <C>                  <C>
June 30, 1999               $ (3,876)           $  7,012                $(10,497)            $(14,458)
                            ========            ========                ========             ========
March 31, 1999              $(11,349)           $  1,781                $ (4,674)            $(11,596)
                            ========            ========                ========             ========
</TABLE>

The results implied in the above table indicate estimated changes in simulated
net interest income for the subsequent 12 months assuming a gradual shift up or
down in market rates of 100 and 200 basis points across the entire yield curve.
Assuming a downward shift in rates, savings, money market and NOW accounts have
implied interest rate floors and it is assumed that the related interest expense
on these accounts will not decrease in proportion to the downward shift in
rates. Assuming a upward shift in rates of 200 basis points, the simulated
increase in interest income would be less than the simulated increase in
interest expense as the Company's fixed-rate earning assets exceed its
fixed-cost paying liabilities. It should be emphasized, however, that the
results are dependent on material assumptions such as those discussed above.

The Company uses interest rate floors, U.S. Treasury debt instruments and
principal only strips to mitigate the prepayment risk associated with mortgage
servicing rights (see "Non-Interest Income" for further details). At June 30,
1999, the Company had $200 million notional amount in interest rate floors, $20
million in U.S. Treasury bonds and $20 million in principal only strips. For
mortgage servicing rights, the adverse impact of current movements in interest
rates on expected future cash flows must be recognized immediately through an
adjustment to their carrying value. If interest rates decline, estimated future
fee income from mortgage servicing rights is reduced because of an expected
increase in mortgage prepayments.

The following table sets forth the net exposure at June 30, 1999 of the carrying
value of mortgage servicing rights and identified hedging instruments, assuming
an immediate shift by the indicated amount in market interest rates.


                                       24
<PAGE>   25

<TABLE>
<CAPTION>
                                  200 Basis Point     100 Basis Point      100 Basis Point      200 Basis Point
                                   Rate Decrease       Rate Decrease        Rate Increase        Rate Increase
                                   ---------------------------------------------------------------------------
                                                               (Dollars in thousands)

<S>                               <C>                  <C>                  <C>                 <C>

   Mortgage servicing rights       ($20,800)              ($9,900)               $7,400              $10,400
   Interest Rate floors               7,700                 3,600                (1,000)              (1,700)
   U.S. Treasury bonds                6,800                 3,000                (2,400)              (4,400)
   Principal only strips              7,300                 3,400                (2,000)              (3,000)
                                    ========================================================================
   Net exposure                     $ 1,000                  $100                $2,000               $1,300
                                    ========================================================================
</TABLE>


The foregoing estimates of the effects of specified changes in interest rates on
the Company's net interest income and the carrying value of its mortgage
servicing rights are based on various assumptions, as discussed above, which
approximate actual experience and which management of the Company considers to
be reasonable. The effects of changes in interest rates on the Company could
vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.

The most significant factors affecting market risk exposure of net interest
income during the first half of 1999 were (i) the increase in interest rates,
(ii) changes in the composition of mortgage assets, (iii) increases in consumer
savings accounts and increase in net free funds and (iv) the increase and
diversification of assets and off-balance sheet interest-rate instruments used
to hedge mortgage servicing rights.

The Company's earnings are not directly and materially impacted by movements in
foreign currency rate or commodity prices. Virtually all transactions are
denominated in the US dollar. Movements in equity prices may have an indirect
but modest impact on earnings by affecting the volume of activity of the amount
of fees from investment-related businesses.

LIQUIDITY

On a parent-only basis, the Company does not have substantial commitments or
debt service requirements. At June 30, 1999, such commitments consisted
primarily of junior subordinated debentures issued to a subsidiary, Peoples
Heritage Capital Trust I, in connection with that subsidiary's issuance of 9.06%
Capital Securities due 2027. The principal sources of funds for the Company to
meet parent-only obligations are dividends from its banking subsidiaries, which
are subject to regulatory limitations. Other sources of funds available to the
Company on a parent-only basis include borrowings from public and private
sources.

For banking subsidiaries of the Company, liquidity represents the ability to
meet both loan commitments and deposit withdrawals. Funds to meet these needs
generally can be obtained by converting liquid assets to cash or by attracting
new deposits or other sources of funding. Many factors affect a bank's ability
to meet liquidity needs, including variations in the markets served, its
asset-liability mix, its reputation and credit standing in the market and
general economic conditions.

In addition to traditional in-market deposit sources, banks have many other
sources of liquidity, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and other non-relationship funding
sources, such as FHLB borrowings, senior or subordinated debt, commercial paper
and wholesale purchased funds. Management believes that the high proportion of
residential and installment consumer loans in its banks' loan portfolios also
provides a significant amount of contingent liquidity through the conventional
securitization programs that exist today.

Management believes that the level of liquidity is sufficient to meet current
and future funding requirements.


                                       25
<PAGE>   26

CAPITAL

At June 30, 1999, shareholders' equity amounted to $894.7 million. In addition,
through a subsidiary trust, the Company had outstanding $68.8 million of Capital
Securities which mature in 2027 and qualify as Tier 1 Capital. The Company paid
a $0.115 per share dividend on its common stock during the second quarter of
1999.

Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 9. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.

The Company's banking subsidiaries are also subject to federal, and in certain
cases state, regulatory capital requirements. At June 30, 1999, each of the
Company's banking subsidiaries was deemed to be "well capitalized" under the
regulations of the applicable federal banking agency and in compliance with
applicable state capital requirements.


      TABLE 9 - REGULATORY CAPITAL REQUIREMENTS
      (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 For Capital Adequacy
                                                                Actual                  Purposes               Excess
                                                            ---------------        ------------------     -----------------
                                                            Amount    Ratio        Amount       Ratio     Amount      Ratio
                                                            ------    -----        ------       -----     ------      -----
<S>                                                        <C>         <C>        <C>           <C>      <C>          <C>
      As of June 30, 1999:

      Total capital (to risk weighted assets)              $988,680    12.30%     $643,875      8.00%    $ 344,805    4.30%
      Tier 1 capital (to risk weighted assets)              888,074    11.05%      321,537      4.00%      566,537    7.05%
      Tier 1 leverage capital ratio (to average assets)     889,965     6.88%      517,760      4.00%      372,205    2.88%

      As of December 31, 1998:

      Total capital (to risk weighted assets)               968,974    13.02%      595,426      8.00%      373,548    5.02%
      Tier 1 capital (to risk weighted assets)              875,723    11.76%      297,713      4.00%      578,010    7.76%
      Tier 1 leverage capital  (to average assets)          875,723     7.50%      467,096      4.00%      408,627    3.50%
</TABLE>


IMPACT OF THE YEAR 2000

The Company recognizes the significant potential impact from what is generally
called the "year-2000" computer problem. This problem results from a computer
programming convention where the specification of year data is truncated to two
digits instead of the literal four digits (i.e., the year "1998" is represented
as "98" and the century indicator of "19" is only assumed or automatically added
after processing is completed). As computer software programs using this
programming convention encounter data with year-2000 dates, they may
misinterpret the resulting "00" year representation as the year "1900" instead
of "2000." Date-based calculations under these conditions could result in
inaccurate results or system failures.

The use of embedded chips into non-information processing applications has also
increased the risk of year-2000 problems in automated control and production
systems where date and calendar programming is involved (e.g., in automated
building environment controls or automated production equipment).

Year-2000 computer software or embedded chip system failures external to the
Company have the potential for negative impacts if they occur "upstream" (at
suppliers, service providers, fiduciary counter-parties or funding sources) or
"downstream" (at customers or other third-parties).

As with most large financial service providers, the Company relies on a
substantial number of information processing systems to deliver and manage its
financial services products and the year-2000 problem presents a significant
challenge. The Company relies heavily on external sources for computer software,
basic infrastructure services, product-line support services and other goods and
materials. The Company also exchanges a significant volume of data with external
parties, including other financial institutions, government entities, customers,
and business partners. The extent of the Company's reliance on external support
for its business operations adds to the challenge of getting "year-2000 ready."


                                       26
<PAGE>   27

SOLUTION STRATEGY

The Company initiated a formal Year-2000 Readiness Project in 1997. A senior
management committee monitors the project and receives status reports on a
bi-weekly basis. The Board of Directors receives quarterly status updates. A
project team chaired by the Vice President of Technology and made up of a
full-time project coordinator and team leaders from core support and data
processing business units directs the detail readiness effort. Business unit
representatives are involved in assessment, testing and implementation tasks as
required. The Company is using both internal and external resources for various
project tasks.

The project plan has been segregated into five phases and closely follows the
guidelines provided by the Federal Financial Institutions Examination Council
(FFIEC), an inter-agency collaborative sponsored by the Federal Reserve Board,
the Federal Deposit Insurance Corp., the Office of the Comptroller of the
Currency, the Office of Thrift Supervision, and the National Credit Union
Administration. The project phases and description are as follows:

Awareness phase - the problem and project effort was initially defined and
senior project sponsorship and support was obtained. The project team was formed
and the overall nature of the project effort was communicated to employees and
other important external parties. This phase was initiated in January 1997 and,
except for the on-going customer and community awareness efforts, was completed
in July 1998.

         Assessment phase - a system component inventory was conducted across
the Company.  This included identifying all internally managed and controlled
hardware, software, networks, unique processing platforms, and external customer
and vendor data processing interdependencies. Various non-information
processing systems such as physical security, elevator, HVAC/building
environment and vault control systems were included in the inventory.

Each system component was rated on its importance to the enterprise and its
year-2000 compliance status. This assessment was used as a guide for repair or
replacement priority and resource assignments. The Company identified nearly 100
internally controlled or managed systems or system categories as "critical."
Twelve external services or data interfaces are currently considered as
"critical." Assessments of building environment and security control systems
indicated they were a low risk to the Company.

During this phase, a plan to identify material customers (as funds takers, funds
providers, or capital market/asset management counterparties), assess their
Year-2000 readiness, evaluate the risks to the Company, and develop appropriate
risk management strategies was formulated. The Assessment phase for company
systems and external suppliers and servicers was concluded in August 1998.

         Renovation phase - a solution strategy was determined and planned for
each system at risk and the strategies were executed. This included re-coding,
hardware and software replacement or upgrade, and other associated changes. For
systems and services supplied by external parties, the Company obtained from
vendors their year-2000 readiness certifications and statements or monitored the
vendor's progress in renovation, internal testing and availability of certified
systems or upgrades. The review of current service contracts for year-2000
implications was also included in this phase.

The Company relies on vendors for over 90% of its software systems and
components, including the core mainframe-based software. The remaining
approximately 10% of software is mainframe-based customized product or in-house
developed micro-computer database applications. The renovation phase commenced
in October 1997 and software upgrades, replacements and other remediation were
completed in June 1999.

Validation Phase - this phase includes developing and executing test scripts in
specific testing environments where system dates can be set ahead and
documenting the results. The validation plans closely follow regulatory
guidances dictating the independent testing of critical systems in the Company's
test centers even when vendor certifications are available. Testing designs
include unit, integrated (with internal and external systems), point-to-point
and end-to-end testing as appropriate. Business unit management, project
management and internal audit provide final validation of the testing process
and year-2000 readiness.

The testing of critical rated and non-critical rated internal systems and
external servicers and data interfaces, user acceptance and audit review was
completed in June 1999.

The Company is communicating with, or otherwise monitoring, the year-2000
readiness progress of significant external providers of infrastructure services
on an on-going basis; the Company does not expect to directly test with these
providers. At this time, the Company is not aware of any material disruption of
infrastructure services which may be likely to occur.


                                       27
<PAGE>   28
 Implementation phase - once systems are validated as year-2000 ready, repairs,
upgrades or replacements are installed into production during this phase. All
critical systems have been validated as Year 2000 ready, or repaired or replaced
as necessary and put into production by June 1999. All non-critical systems have
been validated as Year 2000 ready, or repaired or replaced as necessary and put
into production by June 1999. Also as part of the implementation phase, the
Company conducted systematic analyses regarding core critical business processes
in order to create a Y2K specific Business Resumption Contingency Plan, an
addendum to the already existing Company wide Business Recovery Plan focusing on
the uniqueness of potential Y2K failure scenarios. Business processes critical
to the Company have been analyzed and broken down into manual processes or other
workaround tasks and fully documented. A method to evaluate the validity of the
Y2K plan has been developed and was approved by the Board in May 1999. The final
Y2K plan is anticipated to receive Board approval in the third quarter. The
Company has also developed an Event Management Plan and strategy to serve as a
master management tool for all tasks necessary to meet the millennium rollover
period, including those necessary for a swift and expedient return from any
alternate operating contingency procedures back to normal operations. The plan
includes preparation tasks, validation procedures, and internal and external
communications protocols, and forms a Y2K "Command Center" consisting of senior
management and Y2K support units to function as communications/coordination
centers for possible event disruptions. The Event Management Plan and strategy
are expected to be complete and validated in September 1999. The Company is also
proactively working with employees, customers, and industry peers, media and the
White House Council on Y2K in efforts to increase awareness and educate
customers and the public with regard to Y2K preparedness and safety.

Ongoing activities include the monitoring and evaluation of internal system
changes for year-2000 risk impacts, the monitoring of material customer, vendor,
and counterparty risk, and the continuing development and implementation of
customer and community awareness efforts.

COST

The Company does not separately track the internal costs incurred for the year-
2000 project, except for the dedicated salary of the project coordinator. The
vast majority of internal costs relates to the payroll cost for staff assigned
to the year-2000 project team and Company personnel assigned to testing the
changes resulting from the Year 2000 effort. The Company has incurred $1.6
million of expenses in 1999 and anticipates that the incremental cost of the
Year 2000 project will be approximately $2.0 million in 1999. All year 2000
costs are expensed as incurred, and are being funded out of the Company's
operating cash flow.

SUMMARY

Based on the risk assessment, remediation, testing and monitoring efforts to
date, the Company expects substantially all of its critical and important
systems will operate successfully in all material respects through the century
change. Therefore, the Company believes internal system failures are unlikely to
materially adversely affect the Company's operations or financial condition,
although there can be no assurances in this regard. The Company has already
successfully tested with several critical external service providers and will
continue in 1999 to validate and monitor changes in the readiness of its
critical service providers, including the Company's electric power,
telecommunications and transportation service providers. At this time, the
Company believes the most likely "worst case" scenario consists of temporary and
localized disruptions in infrastructure services, which may disrupt the
Company's ability to service customers and/or the ability of external service
providers to service the Company.

The magnitude and scope of the Company's efforts to address the year-2000
problem may be revised periodically as the quality and quantity of knowledge
about the project increases. It should also be noted that this description of
the Company's efforts involves estimates and projections that are subject to
change as work continues and such changes could be substantial.

Pursuant to FFIEC guidelines, the Company is required to develop commercial
credit risk controls to monitor and assess Year 2000 risk. As of July 1999, the
Company had exceeded its target for reviewing commercial loan balances for year-
2000 readiness.


                                       28

<PAGE>   29

IMPACT OF NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which sets accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This Statement currently is
scheduled to be effective for the Company for years beginning January 1, 2001.

FORWARD LOOKING STATEMENTS

Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of events or circumstances
after the date of such statements.


                                       29
<PAGE>   30

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate Risk
and Asset - Liability Management" is incorporated herein by reference.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 2.    Changes in securities - not applicable.

Item 3.    Defaults upon senior securities - not applicable.

Item 4.    Submission of matters to a vote of security holders.

          (a)  An annual meeting of shareholders of the Company was held on
               April 27, 1999 ("Annual Meeting").

          (b)  Not applicable.

          (c)  There were 104,070,044 shares of Common Stock of the Company
               eligible to be voted at the Annual Meeting and 86,813,803 shares
               were represented at the meeting by the holders thereof, which
               constituted a quorum. The items voted upon at the Annual Meeting
               and the vote for each proposal were as follows:

               1.   Election of directors for a three-year term

                    DIRECTOR NOMINEES ELECTED
                    FOR THREE YEAR TERMS:           FOR            WITHHELD
                    -------------------------       ---            --------

                    P. Kevin Condron             86,035,821        777,794
                    Douglas S. Hatfield, Jr.     85,968,992        852,803
                    Philip A. Mason              85,927,234        886,561
                    William J. Ryan              86,031,364        782,431
                    Curtis M. Scribner           86,035,488        778,307

                    DIRECTOR NOMINEES ELECTED
                    FOR TWO YEAR TERMS
                    -------------------------

                    John M. Naughton             86,000,266        773,529
                    Seth A. Resnicoff            85,911,821        901,974

                    DIRECTOR NOMINEE ELECTED
                    FOR ONE YEAR TERM
                    ------------------------

                    David D. Hindle              86,018,329        795,465

               2.   Proposal to ratify the appointment of KPMG LLP as the
                    Company's independent auditors for the year ending December
                    31, 1999.

                         FOR                      AGAINST          ABSTAIN

                         86,369,695               218,828          225,271

          (d)  Not applicable.

Item 5.    Other Information - not applicable.

Item 6.    Exhibits and reports on Form 8-K.

          (a)  Exhibit 10 - Agreement, dated as of August 5, 1999, between the
               Company and F.William Marshall, Jr.

               Exhibit 27 - Financial Data Schedule.

           (b) The Company filed a Current Report on Form 8K on April 23, 1999,
               June 2, 1999 (as amended on June 9, 1999), June 10, 1999, July
               27, 1999 and July 28, 1999.


                                       30
<PAGE>   31

                                   SIGNATURES


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


                                         PEOPLES HERITAGE FINANCIAL GROUP, INC.



Date     August 16, 1999                 By:      /s/ William J. Ryan
                                                  -----------------------------
                                                  William J. Ryan
                                                  Chairman, President and
                                                  Chief Executive Officer



Date     August 16, 1999                 By:      /s/ Peter J. Verrill
                                                  -----------------------------
                                                  Peter J. Verrill
                                                  Executive Vice President,
                                                  Chief Operating Officer and
                                                  Chief Financial Officer
                                                  (principal financial and
                                                  accounting officer)


                                       31