-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TJqiToTaTBS/PEaJp6NRjWl6pqoeFpEhWQQZFUM+HG4GRSEgJ6R39JqujFb8gj7N 5iyAYxUOASMECdn+uksrzw== 0000910647-96-000131.txt : 19960816 0000910647-96-000131.hdr.sgml : 19960816 ACCESSION NUMBER: 0000910647-96-000131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFX CORP CENTRAL INDEX KEY: 0000800042 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 020402421 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10633 FILM NUMBER: 96611983 BUSINESS ADDRESS: STREET 1: 102 MAIN ST CITY: KEENE STATE: NH ZIP: 03431 BUSINESS PHONE: 6033522502 MAIL ADDRESS: STREET 1: 194 WEST STREET STREET 2: P O BOX 429 CITY: KEENE STATE: NH ZIP: 03431 FORMER COMPANY: FORMER CONFORMED NAME: CHESHIRE FINANCIAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 BODY OF 10Q--FOR 2ND QUARTER ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter period ended June 30, 1996 ------------- Commission file number 1-10633 CFX CORPORATION (Exact name of registrant as specified in its charter) STATE OF NEW HAMPSHIRE 02-0402421 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 102 MAIN STREET KEENE, NEW HAMPSHIRE 03431 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (603) 352-2502 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of each of the issuer's classes of common stock, $0.66 2/3 par value per share, was 12,229,372 as of July 31, 1996. ================================================================================ CFX CORPORATION AND SUBSIDIARIES INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1 Financial Statements: Consolidated Balance Sheets -- June 30, 1996 and December 31, 1995..... 1 Consolidated Statements of Income -- Three months ended June 30, 1996 and 1995; Six months ended June 30, 1996 and 1995..................... 2 Consolidated Statement of Shareholders' Equity - Six months ended June 30, 1996......................................................... 3 Consolidated Statements of Cash Flows -- Six months ended June 30, 1996 and 1995.............................................................. 4 Notes to Consolidated Financial Statements - June 30, 1996............. 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 7 PART II OTHER INFORMATION Item 1 Legal Proceedings....................................................... 19 Item 2 Changes in Securities................................................... 19 Item 3 Defaults upon Senior Securities......................................... 19 Item 4 Submission of Matters to a Vote of Security Holders..................... 19 Item 5 Other Information....................................................... 20 Item 6 Exhibits and Reports on Form 8-K........................................ 20 SIGNATURES.............................................................. 21
CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------- June 30, December 31, - --------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1996 1995 - --------------------------------------------------------------------------------------------------- Assets Cash and due form banks $ 25,198 $ 28,766 Federal funds sold 7,100 -- --------------------------- Cash and Cash Equivalents 32,298 28,766 Interest bearing deposits with other banks 1,002 327 Federal Home Loan Bank of Boston stock 7,496 7,388 Trading securities -- -- Securities available for sale 109,528 98,047 Securities held to maturity 16,458 19,729 Mortgage loans held for sale 13,032 6,554 Loans and leases 775,575 698,972 Less allowance for loan and lease losses 8,081 7,689 --------------------------- Net Loans and Leases 767,494 691,283 Premises and equipment 14,265 13,548 Mortgage servicing rights 4,446 4,373 Goodwill and deposit base intangibles 9,553 9,884 Foreclosed real estate 1,729 1,129 Other assets 48,470 19,521 --------------------------- $1,025,771 $900,549 =========================== Liabilities and Shareholders' Equity Deposits: Interest bearing $ 670,283 $617,872 Noninterest bearing 59,612 47,851 --------------------------- Total Deposits 729,895 665,723 Short-term borrowed funds 68,073 31,735 Advances from Federal Home Loan Bank of Boston 117,414 100,814 Other liabilities 17,558 12,323 --------------------------- Total Liabilities 932,940 810,595 --------------------------- Shareholders' Equity Common stock, par value $.66 2/3 per share-authorized 22,500,000 shares, issued 7,566,236 shares at June 30, 1996 and 7,509,921 shares at December 31, 1995 5,044 5,007 Paid-in capital 66,182 65,763 Retained earnings 22,999 19,422 Net unrealized losses on securities available for sale, after tax effects (1,394) (238) --------------------------- Total Shareholders' Equity 92,831 89,954 --------------------------- $1,025,771 $900,549 =========================== Number of common shares outstanding 7,566 7,510 =========================== Common shareholders' equity per share $ 12.27 $ 11.98 ===========================
See accompanying notes to unaudited consolidated financial statements. 1 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ------------------------------------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30, June 30, - ------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------- Interest and dividend income: Interest on loans and leases $ 16,568 $ 14,163 $ 32,245 $ 27,465 Interest on investment securities: Taxable 1,562 1,369 3,043 2,793 Tax-exempt 218 270 428 525 ---------------------------------------------- 1,780 1,639 3,471 3,318 Interest and dividends on trading securities -- 2 -- 5 Dividends on marketable equity securities 51 62 101 128 Other 161 199 293 415 ---------------------------------------------- Total Interest and Dividend Income 18,560 16,065 36,110 31,331 ---------------------------------------------- Interest expense: Interest on deposits 6,956 6,428 13,936 12,415 Interest on borrowings: Short-term 2,240 1,517 3,986 2,902 Long-term 5 2 8 5 ---------------------------------------------- Total Interest Expense 9,201 7,947 17,930 15,322 ---------------------------------------------- Net Interest and Dividend Income 9,359 8,118 18,180 16,009 Provision for loan and lease losses 700 480 1,500 630 ---------------------------------------------- Net Interest and Dividend Income After Provision for Loan and Lease Losses 8,659 7,638 16,680 15,379 ---------------------------------------------- Other income: Service charges on deposit accounts 591 540 1,156 1,092 Loan servicing fees 342 389 742 816 Net gains on trading securities -- 294 153 518 Net gains on investment securities 61 114 118 114 Net gains on sales of loans 337 202 772 214 Leasing activities 613 527 1,361 1,037 Other 665 510 920 849 ---------------------------------------------- 2,609 2,576 5,222 4,640 ---------------------------------------------- Other expense: Salaries and employee benefits 3,684 3,393 7,206 6,939 Occupancy and equipment 969 964 2,030 1,938 Professional fees 277 351 643 736 Marketing 292 184 647 371 Operation of foreclosed real estate 72 59 128 92 FDIC deposit insurance 1 363 2 725 Goodwill and deposit base intangible amortization 168 179 335 368 Other 1,852 1,727 3,615 3,358 ---------------------------------------------- 7,315 7,220 14,606 14,527 ---------------------------------------------- Income Before Income Taxes 3,953 2,994 7,296 5,492 Income taxes 1,343 984 2,358 1,926 ---------------------------------------------- Net Income 2,610 2,010 4,938 3,566 Preferred stock dividends -- 22 -- 89 ---------------------------------------------- Net Income Available to Common Stock $ 2,610 $ 1,988 $ 4,938 $ 3,477 ============================================== Weighted average common shares outstanding 7,562 7,296 7,551 7,177 ============================================== Earnings per common share $ .34 $ .27 $ .65 $ .48 ==============================================
See accompanying notes to unaudited consolidated financial statements. 2 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Common Stock Securities ------------------ Paid-in Retained Available (In thousands) Shares Dollars Capital Earnings For Sale Total - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 7,510 $ 5,007 $ 65,763 $ 19,422 $ (238) $ 89,954 Net income -- -- -- 4,938 -- 4,938 Common cash dividends declared ($.18 per share) -- -- -- (1,361) -- (1,361) Issuance of common stock under stock option plan 41 27 296 -- -- 323 Issuance of common stock under employee stock purchase plan 16 11 148 -- -- 159 Increase in net unrealized losses on securities available for sale -- -- -- -- (1,156) (1,156) Fractional shares paid out (1) (1) (25) -- -- (26) ------------------------------------------------------------------------ Balance at June 30, 1996 7,566 $ 5,044 $ 66,182 $ 22,999 $ (1,394) $ 92,831 ========================================================================
See accompanying notes to unaudited consolidated financial statements. 3 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------ Six Months Ended June 30, - ------------------------------------------------------------------------------------------ (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------ Operating Activities Net income $ 4,938 $ 3,566 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 2,042 1,524 Amortization of deferred credit on leasehold residual (706) -- Provision for loan and lease losses 1,500 630 Loans originated and acquired for sale (55,396) (46,013) Principal balance of loans sold 48,918 42,266 Net (gain) loss on sale of foreclosed real estate 15 (51) Net gain on investment securities (118) (114) Net increase in trading securities -- (20,379) Net deferred income tax provision 2,040 1,234 Other (7,032) (5,680) ---------------------- Net Cash Used by Operating Activities (3,799) (23,022) ---------------------- Investing Activities Proceeds from sales of securities available for sale 2,650 1,949 Purchases from maturities of securities available for sale 17,672 -- Purchases of securities available for sale (33,940) (240) Proceeds from maturities of securities held to maturity 5,229 12,264 Purchases of securities held to maturity (1,970) (3,578) Proceeds from the sale of, or payments on, foreclosed real estate 415 404 Purchase of Federal Home Loan Bank of Boston stock (108) -- Net decrease in interest bearing deposits with other banks (675) (506) Net increase in loans and leases (73,987) (11,843) Purchase of bank-owned life insurance (20,000) -- Purchases of premises and equipment (1,601) (688) ---------------------- Net Cash Used by Investing Activities (106,315) (2,238) ---------------------- Financing Activities Net increase (decrease) in noninterest bearing deposits and savings accounts 11,712 (11,968) Net increase in time certificates of deposit 52,460 63,243 Net decrease in short-term borrowings 36,338 6,374 Proceeds from Federal Home Loan Bank of Boston advances with maturities in excess of three months 226 (27,707) Payment of Federal Home Loan Bank of Boston advances with maturities in excess of three months or less (1) -- Proceeds from Federal Home Loan Bank of Boston advances with maturities of three months or less 16,375 -- Common cash dividends paid (3,920) (1,945) Preferred cash dividends paid -- (89) Proceeds from issuance of common stock under dividend reinvestment plan -- 84 Proceeds from issuance of common stock under stock option plan 323 211 Proceeds from issuance of common stock under employee stock purchase plan 159 35 Fractional shares paid out (26) -- ---------------------- Net Cash Provided by Financing Activities 113,646 28,238 ---------------------- Decrease in Cash and Cash Equivalents 3,532 2,978 Cash and cash equivalents at beginning of period 28,766 22,750 ---------------------- Cash and Cash Equivalents at End of Period $ 32,298 $ 25,728 ====================== Supplementary Information: Interest paid on deposit accounts $ 13,074 $ 4,699 Interest paid on borrowed funds 3,946 1,269 Income taxes paid 357 436 Transfers from loans to foreclosed real estate 1,585 1,515
See accompanying notes to unaudited consolidated financial statements. 4 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1996 - -------------------------------------------------------------------------------- Note A-Basis of Presentation - -------------------------------------------------------------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1996 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the CFX Corporation (the Company) annual report on Form 10-K for the year ended December 31, 1995. - -------------------------------------------------------------------------------- Note B-Acquisitions - -------------------------------------------------------------------------------- On July 1, 1996, the Company acquired The Safety Fund Corporation ("Safety Fund") and the Milford Co/operative Bank ("Milford"). Pursuant to the definitive agreements, each of Safety Fund's 1,665,000 outstanding shares of common stock and Milford's 689,000 outstanding shares of common stock were converted into 1.7 shares and 2.6446 shares, respectively, of the Company's common stock, resulting in the issuance of 2,831,000 shares and 1,823,000 shares, respectively, of the Company's common stock to Safety Fund and Milford shareholders. Cash will be paid in lieu of issuing fractional shares. Milford was a state-chartered co/operative bank, headquartered in Milford, New Hampshire. Milford was merged into CFX's New Hampshire banking subsidiary, CFX Bank, as part of the transaction. Safety Fund was a bank holding company headquartered in Fitchburg, Massachusetts. Safety Fund's subsidiary bank, Safety Fund National Bank, will continue to operate as a subsidiary of CFX. Both the Safety Fund and Milford mergers were accounted for by the pooling-of-interests method of accounting. As a result of the pending acquisitions, the Company was required to omit its second quarter dividend in 1996 in order to comply with certain technical accounting rules relating to the payment of special dividends preceding a business combination. Omission of the second quarter dividend in an amount equal to the special dividend paid by CFX in January, 1996, permits CFX to account for its pending mergers with The Safety Fund Corporation and Milford Co/operative Bank as poolings-of-interests. Because the funds that would otherwise have been paid out as a cash dividend were retained by the Company and increased book value, omission of the second quarter dividend did not have an adverse economic effect on the interest of CFX shareholders. The dividend was omitted solely in connection with The Safety Fund and Milford mergers and does not reflect any change in CFX's dividend policy. Accordingly, the Company fully expects that normal dividends will resume in the third quarter. The following unaudited supplemental combined condensed financial statements give effect to the acquisitions under the pooling-of-interests method of accounting, but do not reflect anticipated expenses and nonrecurring charges or estimated expense savings and revenue enhancements anticipated to result from the acquisitions. The unaudited supplemental combined financial data is not necessarily indicative of the financial position and results of future operations of the combined entity or the actual financial position and results of operations that would have been achieved had the acquisitions been consummated at the date indicated. 5 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1996 - -------------------------------------------------------------------------------- Note B - Acquisitions - Cont'd. - -------------------------------------------------------------------------------- COMBINED CONDENSED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- June 30, 1996 Safety Pro Forma Pro Forma (Dollars in thousands, except per share data) CFX Fund Milford Adjustment CFX - ------------------------------------------------------------------------------------------------------------------- Assets Investment securities $ 125,986 $ 118,557 $ 62,493 $ 307,036 Net loans and leases 767,494 157,442 69,324 994,260 Other assets 132,291 32,277 32,080 196,648 ------------------------------------------------------------------- Total Assets $ 1,025,771 $ 308,276 $ 163,897 $ 1,497,944 =================================================================== Liabilities and Shareholders' Equity Deposits $ 729,895 $ 247,311 $ 145,465 $ 1,122,671 Borrowed funds 185,487 33,781 2,000 221,268 Other liabilities 17,558 4,532 1,042 23,132 ------------------------------------------------------------------- Total Liabilities 932,940 285,624 148,507 1,367,071 ------------------------------------------------------------------- Shareholders' Equity 92,831 22,652 15,390 130,873 ------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 1,025,771 $ 308,276 $ 163,897 $ 1,497,944 =================================================================== Common shares outstanding 7,566 4,654 12,220 =========== ======= =========== Common shareholders' equity per share $ 12.27 $ 10.71 =========== ===========
COMBINED CONDENSED INCOME STATEMENTS
- ------------------------------------------------------------------------------------------------------------------- Safety Pro Forma Pro Forma (Dollars in thousands, except per share data) CFX Fund Milford Adjustment CFX - ------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 1996 Net interest and dividend income $ 9,359 $ 3,566 $ 1,355 $ 14,280 Provision for loan and lease losses 700 30 30 760 Other income 2,609 1,204 203 4,016 Other expense 7,315 3,199 917 11,431 Income taxes 1,343 437 206 1,986 ------------------------------------------------------------------- Net Income $ 2,610 $ 1,104 $ 405 $ 4,119 ============================================ Weighted average common shares outstanding 7,562 4,654 12,216 =========== ======= =========== Earnings per common share $ .34 $ .34 =========== =========== FOR THE SIX MONTHS ENDED JUNE 30, 1996 Net interest and dividend income $ 18,180 $ 7,061 $ 2,700 $ 27,941 Provision for loan and lease losses 1,500 105 60 1,665 Other income 5,222 2,292 364 7,878 Other expense 14,606 6,492 1,867 22,965 Income taxes 2,358 762 394 3,514 ------------------------------------------------------------------- Net Income $ 4,938 $ 1,994 $ 743 $ 7,675 =================================================================== Weighted average common shares outstanding 7,551 4,654 12,205 =========== ======= =========== Earnings per common share $ .65 $ .63 =========== ===========
6 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1996 - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- All information within this section should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Form 10-Q. All references in the discussion to financial condition and results of operations are to the consolidated position of the Company and its subsidiaries taken as a whole. CFX Corporation is a bank holding company incorporated under the laws of the State of New Hampshire. The Company's wholly-owned subsidiaries are CFX Bank, headquartered in Keene, New Hampshire, and Orange Savings Bank, headquartered in Orange, Massachusetts. CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX Capital Systems, Inc. (CFX Capital) and CFX Financial Services, Inc. (CFX Financial). CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. which engages in mortgage banking. CFX Financial owns 51% of CFX Funding L.L.C. (CFX Funding), which engages in the facilitation of lease financing and securitization. Orange Savings Bank has one wholly-owned subsidiary, OSB Securities Corp, which is engaged in investment activities. On July 1, 1996 the Company completed the acquisitions of The Safety Fund Corporation, headquartered in Fitchburg, Massachusetts, and Milford Co/operative Bank, headquartered in Milford, New Hampshire. As a result of these acquisitions, the Company will take a special charge to earnings in the third quarter of 1996 of approximately $3.8 million on an after-tax basis for one-time costs of the transactions. It is intended that substantially all of the costs will be recognized upon consummation of the acquisitions and will be paid in 1996 and/or 1997. The one time after-tax charge of the transactions pertains to the following areas: premises and equipment, $250,000; personnel, $900,000; and other, $2,650,000. Premises and equipment costs consist primarily of write-offs due to consolidation of operation centers and duplication of computer hardware, software, and certain telecommunications equipment. Personnel costs consist primarily of charges related to employee severance and employee outplacement assistance. Other costs include investment banking fees, legal and accounting fees, due diligence costs, proxy registration/filing fees and mailing and printing costs. A significant portion of other costs are capitalized for tax purposes and, therefore, are not tax deductible. CFX management continues to review all these costs. There can be no assurance that such costs will not exceed the amounts described above. In addition to the above charges there is the possibility of a special assessment to certain savings institutions. Presently, Congress is considering a bill recommending that savings institutions which have deposits insured by the Federal Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF) be charged a special assessment of .85% of insured deposits in order to recapitalize the insurance fund. If a special assessment is required, a one-time charge of approximately $1.1 million would result under the SAIF deposits acquired in the Milford acquisition. The operating results of the Company depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on earning assets, primarily loans, leases, trading and investment securities, and (ii) interest expense on interest bearing liabilities, which consist of deposits and borrowings. The Company's results of operations are also affected by the provision for loan and lease losses, resulting from the Company's assessment of the adequacy of the allowance for loan and lease losses; the level of its other operating income, including gains and losses on the sale of loans and securities, and loan and other fees; operating expenses; and income tax expenses. 7 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Results of Operations - General - -------------------------------------------------------------------------------- The following tables set forth comparisons of average interest earning assets and interest bearing liabilities, and interest income and interest expense expressed as a percentage of the related asset or liability. In order to reflect the economic impact of the Company's investments in state and municipal securities and to present data on a comparative basis, the income from and yields on these securities have been restated to a taxable-equivalent basis (using a 38.62% tax rate). The taxable-equivalent income adjustments are $137,000 and $168,000 for the three months ended June 30, 1996 and 1995, respectively, and $269,000 and $330,000 for the six months ended June 30, 1996 and 1995, respectively. These adjustments, however, are for comparison purposes only and have no impact on reported net income.
- --------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1996 1995 - --------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------- Assets Interest and dividend earning assets: Loans and leases $ 773,098 $16,568 8.62% $662,646 $14,163 8.57% Taxable securities 111,633 1,616 5.82 109,266 1,433 5.26 Tax-exempt securities 19,509 355 7.32 24,734 438 7.10 Other 10,335 158 6.15 10,644 199 7.54 --------------------- ------------------- Total interest earning assets 914,575 18,697 8.22 807,290 16,233 8.07 ------- ------- Noninterest earning assets 85,818 67,799 ---------- -------- Total $1,000,393 $875,089 ========== ======== Liabilities and Shareholders' Equity Interest bearing liabilities: Savings deposits $ 284,689 1,664 2.35 $299,930 1,931 2.58 Time deposits 379,027 5,292 5.62 326,591 4,497 5.52 Advances from Federal Home Loan Bank of Boston 116,592 1,624 5.60 67,384 1,080 6.43 Other borrowed funds 53,011 621 4.71 30,411 439 5.79 --------------------- ------------------- Total interest bearing liabilities 833,319 9,201 4.44 724,316 7,947 4.40 ------- ------- Noninterest bearing liabilities: Demand deposits 58,777 48,819 Other 15,999 13,256 Shareholders' equity 92,298 88,698 ---------- -------- Total $1,000,393 $875,089 ========== ======== Net interest and dividend income $ 9,496 $ 8,286 ======= ======= Interest rate spread 3.78% 3.67% Net interest margin 4.18% 4.12%
8 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Results of Operations - General - (Cont'd.) - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate - ---------------------------------------------------------------------------------------------------------------- Assets Interest and dividend earning assets: Loans and leases $ 747,705 $32,245 8.67% $ 655,569 $27,465 8.45% Taxable securities 118,485 3,147 5.34 109,668 2,926 5.38 Tax-exempt securities 19,258 697 7.28 24,215 855 7.12 Other 9,618 290 6.06 12,645 415 6.62 -------------------- -------------------- Total interest earning assets 895,066 36,379 8.17 802,097 31,661 7.96 ------- ------- Noninterest earning assets 74,466 67,130 --------- --------- Total $ 969,532 $ 869,227 ========= ========= Liabilities and Shareholders' Equity Interest bearing liabilities: Savings deposits $ 283,823 3,312 2.35 $ 304,689 3,881 2.57 Time deposits 377,791 10,624 5.66 320,599 8,534 5.37 Advances from Federal Home Loan Bank of Boston 103,900 2,974 5.76 65,441 2,057 6.34 Other borrowed funds 43,233 1,020 4.75 30,194 850 5.68 -------------------- --------- ------- Total interest bearing liabilities 808,747 17,930 4.46 720,923 15,322 4.29 ------- ------- Noninterest bearing liabilities: Demand deposits 54,942 47,250 Other 14,189 12,761 Shareholders' equity 91,654 88,293 --------- --------- Total $ 969,532 $ 869,227 ========= ========= Net interest and dividend income $18,449 $16,339 ======= ======= Interest rate spread 3.71% 3.67% Net interest margin 4.15% 4.11%
9 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Results of Operations - General - (Cont'd.) - -------------------------------------------------------------------------------- The following table presents changes in interest and dividend income, interest expense, and net interest income which are attributable to changes in the average amounts of interest earning assets and interest bearing liabilities and/or changes in rates earned or paid thereon. The net changes attributable to both volume and rate have been allocated proportionately.
- ---------------------------------------------------------------------------------------------------- For the Three Months Ended For the Six Months Ended June 30, June 30, 1996 vs. 1995 1996 vs. 1995 Increase (Decrease) Due to Increase (Decrease) Due to - ---------------------------------------------------------------------------------------------------- (In thousands) Volume Rate Net Volume Rate Net - ---------------------------------------------------------------------------------------------------- Interest and dividends earned on: Loans and leases $2,361 $ 44 $2,405 $4,102 $678 $4,780 Investments (63) 163 100 63 (0) 63 Other (6) (35) (41) (109) (16) (125) ----------------------------------------------------------- Total interest and dividend income 2,292 172 2,464 4,056 662 4,718 ----------------------------------------------------------- Interest paid on: Savings and time deposits 631 (103) 528 1,311 210 1,521 Borrowed funds 979 (253) 726 1,184 (97) 1,087 ----------------------------------------------------------- Total interest expense 1,610 (356) 1,254 2,495 113 2,608 ----------------------------------------------------------- Change in net interest and dividend income $ 683 $ 527 $1,210 $1,561 $549 $2,110 ===========================================================
Net Income & Net Income Available to Common Stock Net income for the three and six months ended June 30, 1996 was $2,610,000, and $4,938,000, respectively, compared to $2,010,000, and $3,566,000, respectively, for the same periods a year ago. Net income available to common stock for the three and six months ended June 30, 1996 was $2,610,000, or $.34 per share, and $4,938,000 and $.65 per share, respectively, compared with $1,988,000, or $.27 per share, and $3,477,000 or $.48 per share respectively, for the corresponding periods a year ago. The increase in earnings was primarily due to increased core earnings (net interest and dividend income and noninterest income) and reduced Federal Deposit Insurance Corporation (FDIC) insurance premiums. The stronger core earnings were the result of a $92 million, or 14.05%, increase in average loans and leases over the past twelve months, and an increased focus on the generation of noninterest income. However, a portion of the increase in income was offset by an increase in the provision for loan and lease losses and certain operating expenses. Total core earnings were $11,968,000 and $23,402,000 for the three and six months ended June 30, 1996, compared to $10,694,000 and $20,649,000 for the same periods a year ago. The Company's net interest margin of 4.18% and 4.15% for the three and six months ended June 30, 1996 increased from 4.12% and 4.11% for the corresponding periods a year ago. 10 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Results of Operations - General - (Cont'd.) - -------------------------------------------------------------------------------- Net Interest and Dividend Income Taxable-equivalent net interest income was $9,496,000, and $18,449,000, respectively, for the three and six months ended June 30, 1996, compared to $8,286,000, and $16,339,000 for the same periods a year ago. The increase in net interest income in the 1996 period was principally due to higher average interest earning assets and higher demand deposits. The increase in average interest earning assets resulted principally from growth in loans and leases (see "Financial Condition - Loans and Lease" section of this Management's Discussion and Analysis), as loan and lease demand increased in the current environment. The interest rate spread in the 1996 periods increased from the 1995 periods principally as a result of increases in the yield on interest earning assets outpacing the increases in the cost of interest bearing liabilities. The increase in the net interest margin is the result of an increase in interest rate spread and demand deposits in the 1996 periods compared to the 1995 periods. Volatile interest rates can have a material impact on the performance of financial institutions. Since late 1993 interest rates have alternated between periods of significant increase and rapid decline. The Company attempts to manage and minimize the earnings impact of changing interest rates by comprehensively assessing the impact of interest rate changes on forecasted income and equity levels. Included in these analyses are estimates of prepayment variability in certain asset categories, changes in mix and cost of deposits and other liabilities, and other imbedded options throughout the balance sheet, and equity leverage or arbitrage activities. Policy guidelines for interest rate risk exposure are established and have allowed the Company to maintain a relatively stable interest margin throughout several interest rate cycles. Provision for Loan and Lease Losses The allowance for loan and lease losses is maintained through charges to earnings. Loan and lease losses realized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loans and leases based on current economic conditions and historical experience. The provision for loan and lease losses in the three and six months ended June 30, 1996 was $700,000, and $1,500,000, respectively, compared to $480,000 and $630,000, respectively, for the same periods a year ago. The higher provision for loan and lease losses in 1996 is principally the result of continued growth in the loan portfolio, the change in loan mix toward consumer loans and leases, and the higher net charge-offs in 1996 compared to 1995. Total net charge-offs amounted to $1,108,000 for the six months ended June 30, 1996 as compared to $547,000 for the six months ended June 30, 1995. At June 30, 1996, nonperforming loans stood at $7,805,000, or 1.01% of total loans and leases, compared to $7,844,000, or 1.12% of total loans and leases, as of December 31, 1995. The allowance for loan and lease losses as a percentage of nonperforming loans as of June 30, 1996 and December 31, 1995 amounted to 103.54% and 98.02%, respectively. 11 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Results of Operations - General - (Cont'd.) - -------------------------------------------------------------------------------- Other Income Other income for the three and six months ended June 30, 1996 totaled $2,609,000, and $5,222,000, respectively, compared to $2,576,000, and $4,640,000 for the same periods a year ago. The increase in other income is principally due to an increase in mortgage banking and leasing activities in 1996 compared to 1995; offset by lower trading securities gains in 1996. Net gains on sales of loans have been positively impacted by a more favorable interest rate environment in 1996. The increase in leasing activities is the result of three securitizations completed in 1996, compared to two in 1995. In addition, in 1996, CFX Funding had two additional leasing companies participating in the program. The lower trading securities gains is the result of liquidating trading securities in April of 1996. Trading securities, an investment in a money market mutual fund, was used by the Company to generate capital gains to offset capital loss carryforwards. Other Expense Other expense for the three and six months ended June 30, 1996 totaled $7,315,000, and $14,606,000, respectively, compared to $7,220,000, and $14,527,000, respectively, for the same periods a year ago. While other expense remained constant in the 1996 periods compared to the 1995 period, the increase in occupancy and equipment costs and marketing costs in 1996 was offset by a reduction in FDIC insurance premiums. The higher occupancy and equipment costs reflect the new Manchester, NH branch which opened in June 1995 and the higher snow removal costs in 1996, compared to 1995. Marketing costs increased to support the implementation of the new free CFX Bank ATM card and other marketing initiatives. Income Tax Income taxes for the three and six months ended June 30, 1996 were 33.97% and 32.32%, respectively, of pretax income, compared to 32.86%, and 35.07% of pretax income for the same periods a year ago. The effective tax rate for the six months ended June 30, 1996 was lower because of higher tax-exempt income and tax credits pertaining to low-income housing projects. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- Investment Securities The carrying value and estimated fair value of investment securities at June 30, 1996 and December 31, 1995, follows:
- ------------------------------------------------------------------------------------------------------ June 30, December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair (In thousands) Value Value Value Value - ------------------------------------------------------------------------------------------------------ Securities available for sale: Debt securities: U.S. Treasury and agency obligations $ 43,866 $ 43,866 $ 19,574 $ 19,574 Corporate bonds 4,344 4,344 5,072 5,072 Federal agency mortgage pass-through securities 48,884 48,884 55,408 55,408 Collateralized mortgage obligations (CMO's) 9,249 9,249 14,747 14,747 Marketable equity securities 3,185 3,185 3,246 3,246 ----------------------------------------------- Total securities available for sale $ 109,528 $ 109,528 $ 98,047 $ 98,047 =============================================== Securities held to maturity: Debt securities: U.S. Treasury and agency obligations $ -- $ -- $ 500 $ 498 State and municipal 16,458 16,394 19,229 19,345 ----------------------------------------------- $ 16,458 $ 16,394 $ 19,729 $ 19,843 ===============================================
12 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Financial Condition - Cont'd. - -------------------------------------------------------------------------------- Loans and Leases The table below sets forth the composition of the Company's loan and lease portfolio, net of unearned income and deferred costs, at the dates indicated:
- ------------------------------------------------------------------------------------------------------ June 30, December 31, - ------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------ % of % of Balances Portfolio Balances Portfolio - ------------------------------------------------------------------------------------------------------ Real estate: Residential $ 535,473 69.04% $ 474,015 67.82% Construction 7,509 .97 5,902 .84 Commercial 84,729 10.77 87,469 12.51 Commercial, financial, and agricultural 62,022 8.00 52,462 7.51 Warehouse lines of credit to leasing companies 3,294 .58 12,906 1.85 Consumer lease financing 44,538 5.74 24,399 3.49 Other consumer 38,010 4.90 41,819 5.98 ------------------------------------------------ 775,575 100.00% 698,972 100.00% ====== ====== Less allowance for loan and lease losses 8,081 7,689 --------- --------- Net loans and leases $ 767,494 $ 691,283 ========= =========
At June 30, 1996 and December 31, 1995, respectively, the recorded investment in impaired loans totaled $1,803,000 and $2,981,000, respectively, of which $1,091,000 and $993,000, respectively, related to loans with no valuation allowance and $712,000 and $1,988,000, respectively, related to loans with a corresponding valuation allowance of $325,000 and $853,000, respectively. The $76,603,000 increase in total loans and leases was primarily due to a $61,458,000 increase in residential real estate loans and a $20,139,000 increase in indirect automobile leasing, offset by a $9,612,000 decline in warehouse lines to leasing companies. Residential loan production is generated by a combination of originations and purchases by the Company's mortgage banking affiliate, CFX Mortgage. The consumer lease paper is generated through a lease program targeted towards automobile dealerships throughout New Hampshire and central Massachusetts. In addition, lending volumes remain strong in the warehouse lines of credit to leasing companies participating in CFX Funding's lease financing and securitization programs. Although these warehouse lines of credit to balances at June 30, 1996 totaled only $3,294,000, the average balance for the six months ended June 30, 1996 totaled $11,328,000. CFX Funding services approximately $82,000,000 in leases for others. 13 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Risk Elements - -------------------------------------------------------------------------------- Nonperforming assets are evaluated quarterly by management to ensure proper classification and to confirm that the recorded carrying value of the assets is reasonable and in accordance with generally accepted accounting principles, regulatory requirements, and the Company's policies. Loans are placed on nonaccrual status when management determines that significant doubt exists as to the collectibility of principal or interest on a loan. Moreover, loans past due 90 days or more as to principal or interest are placed on nonaccrual status. The following table provides information with respect to the Company's nonperforming loans and assets at the dates indicated:
- ------------------------------------------------------------------------------------------ June 30, December 31, - ------------------------------------------------------------------------------------------ (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------------------------------ Nonaccrual (nonperforming) loans $ 7,805 $ 7,844 Foreclosed real estate 1,729 1,179 Valuation allowance on foreclosed real estate -- (50) -------------------- Total nonperforming assets $ 9,534 $ 8,973 ==================== Nonperforming loans as a percent of total loans and leases 1.01% 1.12% ==================== Nonperforming assets as a percent of total assets .93% 1.00% ====================
The following table provides the composition of the Company's nonperforming loans and assets at the dates indicated:
- --------------------------------------------------------------------------------------------------- June 30, December 31, - --------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 - --------------------------------------------------------------------------------------------------- % of % of Balances Portfolio Balances Portfolio - --------------------------------------------------------------------------------------------------- Nonperforming loans: Real estate: Residential $ 5,549 71.1% $ 5,097 65.0% Commercial 1,381 17.7 1,487 19.0 Commercial, financial, and agricultural 768 9.8 1,161 14.8 Consumer and other 107 1.4 99 1.2 --------------------------------------------- 7,805 100.0% 7,844 100.0% ------- ===== ------- ===== Foreclosed real estate: Residential 909 52.6% 728 64.5% Construction 476 27.5 128 11.3 Commercial 344 19.9 323 28.6 Valuation allowance -- -- (50) (4.4) --------------------------------------------- 1,729 100.0% 1,129 100.0% ------- ===== ------- ===== Total nonperforming assets $ 9,534 $ 8,973 ======= =======
14 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Risk Elements - Cont'd. - -------------------------------------------------------------------------------- The increase in foreclosed real estate over the December 31, 1995 balance is more reflective of the increase in the size of the overall portfolio than an indication of economic determination. In addition, efforts have been made to expedite the foreclosure process when other solutions are not advantageous, thus increasing foreclosure totals and decreasing nonperforming loan totals. Loans delinquent less than 90 days have been decreasing since year end from $23,003,000 at December 31, 1995 to $11,552,000 at June 30, 1996. The reduction is primarily noted in the residential real estate portfolio and is principally due to a more intensified collection process. The following table provides a rollforward of the Company's foreclosed real estate for the periods indicated:
- ------------------------------------------------------------------------------- Six Months Ended June 30, (In thousands) 1996 1995 - ------------------------------------------------------------------------------- Balance at beginning of period $ 1,129 $ 1,985 Reclassification, net, to nonperforming loans to reflect adoption of SFAS No. 114 -- (714) Additions 1,282 1,515 Sales and other (682) (1,372) -------------------- Balance at end of period $ 1,729 $ 1,414 ====================
- -------------------------------------------------------------------------------- Allowance for Loan and Lease Losses - -------------------------------------------------------------------------------- The allowance for loan and lease losses is maintained through charges to earnings. Loan and lease losses recognized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loan and lease losses based on current economic conditions and historical experience. Changes in the allowance for loan and lease losses are as follows:
- ---------------------------------------------------------------------- Six Months Ended June 30, (In thousands) 1996 1995 - ---------------------------------------------------------------------- Balance at beginning of period $ 7,689 $ 7,558 Provision for loan and lease losses 1,500 630 Loans charged-off (1,295) (697) Recoveries of loans previously charged-off 187 150 -------------------- Balance at end of period $ 8,081 $ 7,647 ==================== Allowance for loan and lease losses as a percent of total loans and leases 1.04% 1.17% ==================== Allowance for loan and lease losses as a percent of total nonperforming loans 103.54% 100.54% ==================== Net chargeoffs/average loans and leases (1) .30% .19% ==================== - ------------------- Annualized
Management considers the allowance for loan and lease losses to be adequate in view of its evaluation of the Company's loan and lease portfolio, the level of nonperforming loans and leases, current economic conditions and historical experience with loan and lease losses. However, if economic conditions deteriorate, the Company may have to increase the allowance for loan and lease losses from its current level. 15 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Deposits and Borrowed Funds - -------------------------------------------------------------------------------- The following table shows the various components of average deposits and the respective rates paid on such deposits for the periods indicated:
- ------------------------------------------------------------------------------------------------ Six Months Ended, (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------------------------------------ Amount Rates Amount Rates - ------------------------------------------------------------------------------------------------ Deposits: Noninterest bearing demand deposits $ 54,942 $ 47,250 -- Regular savings deposits 120,797 2.93% 121,776 3.04% NOW & money market deposits 163,026 1.91 182,913 2.26 Time deposits 313,805 5.66 282,008 5.25 --------- --------- Total retail deposits 652,570 3.74 633,947 3.57 Brokered time deposits 63,986 5.65 38,591 6.25 --------- --------- Total deposits $ 716,556 3.91% $ 672,538 3.72% ========= ========= Borrowed Funds: Advances from Federal Home Loan Bank of Boston $ 103,900 5.76% $ 65,453 6.34% Other borrowed funds 43,234 4.75 30,181 5.68 --------- --------- Total borrowed funds $ 147,134 5.46% $ 95,634 6.13 ========= =========
Over the past twelve months, the Company has increased average demand deposits by $7,692,000 and average interest bearing retail deposits by $10,931,000. The majority of the increase in overall deposits is the result of two de novo New Hampshire branches opened in Gilford (December, 1994) and Manchester (June, 1995). In addition, as a result of fixed rate deposits (time deposits) becoming more attractive to our customers, the Company has experienced a shift in deposits from shorter-term variable rate deposits (savings, NOW, and money market accounts) to longer-term fixed rate deposits. The increase in advances from the Federal Home Loan Bank of Boston, short-term borrowed funds, and brokered deposits funded asset growth over the past twelve months. Management customarily directs movement of funding between brokered deposits, advances from the Federal Home Loan Bank and repurchase agreements (included in other borrowed funds) in order to achieve a more favorable cost of funds. - -------------------------------------------------------------------------------- Shareholders' Equity - -------------------------------------------------------------------------------- Shareholders' equity increased by $2,877,000 as of June 30, 1996 from $89,954,000 at December 31, 1995 to $92,831,000 at June 30, 1996. The increase was due to $4,938,000 in net income, issuance of $323,000 in common stock under the stock option plan, issuance of $159,000 in common stock under the employee stock purchase plan offset by a $1,156,000 increase in net unrealized losses on securities available for sale, $26,000 paid for fractional shares on a 3 for 2 stock split, and $1,361,000 in common cash dividends. Historically, CFX has, in accordance with its strategic plans, with the exception of reacting to the economic downturn from 1992 and 1994, declared cash dividends on average in excess of 80% of earnings on an annual basis in order to maximize shareholder value to appropriately leverage the Company's capital. However, as a result of the pending acquisitions described in Note B - Acquisitions of the "Notes to Consolidated Financial Statements", the Company was required to omit its second quarter dividend in 1996 in order to comply with certain technical accounting rules relating to the payment of special dividends preceding a business combination. Omission of the second quarter dividend in an amount equal to the special dividend paid by CFX in January, 1996, permits CFX to account for its pending mergers with The Safety Fund Corporation and Milford Co/operative Bank as pooling-of-interests. 16 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Asset/Liability Management - -------------------------------------------------------------------------------- The Company's primary objective regarding asset/liability management is to position the Company so that changes in interest rates do not have a materially adverse impact upon forecasted net income and the net fair value of the Company. The Company's primary strategy for accomplishing its asset/liability management objective is achieved by matching the weighted average maturities of assets, liabilities, and off-balance-sheet items (duration matching). To measure the impact of interest rate changes, the Company utilizes a comprehensive financial planning model that recalculates the fair value of the Company assuming both instantaneous, permanent parallel shifts in the yield curve of both up and down 100 and 200 basis points, or four separate calculations. Larger increases or decreases in forecasted net income and the net market value of the Company as a result of these interest rate changes represent greater interest rate risk than do smaller increases or decreases. The results of the financial planning model are highly dependent on numerous assumptions. These assumptions generally fall into two categories: those relating to the interest rate environment and those relating to general business and economic factors. Assumptions related to the interest rate environment include the prepayment speeds on mortgage-related assets and the cash flows and maturities of financial instruments. Assumptions related to general business and economic factors include changes in market conditions, loan volumes and pricing, deposit sensitivity, customer preferences, competition, and management's financial and capital plans. The assumptions are developed based on current business and asset/liability management strategies, historical experience, the current economic environment, forecasted economic conditions and other analyses. These assumptions are inherently uncertain and subject to change as time passes. Accordingly, the Company adjusts the pro forma net income and net fair values as it believes appropriate on the basis of historical experience and prudent business judgment. The Company endeavors to maintain a position where it experiences no material change in net fair value and no material fluctuation in forecasted net income as a result of assumed 100 to 200 basis point increases and decreases in interest rates. However, there can be no assurances that the Company's projections in this regard will be achieved. Management believes that the above method of measuring and managing interest rate risk is consistent with the Federal Deposit Insurance Corporation (FDIC) regulation regarding an interest rate risk component of regulatory capital. 17 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. June 30, 1996 - -------------------------------------------------------------------------------- Liquidity - -------------------------------------------------------------------------------- The Company maintains numerous sources of liquidity in the form of marketable assets and borrowing capacity. Interest bearing deposits with other banks, trading and available for sale securities, regular cash flows from loan and securities portfolios and Federal Home Loan Bank of Boston borrowings are the primary sources of asset liquidity. At June 30, 1996, interest bearing deposits with other banks totaled $1,002,000 and trading and available for sale securities totaled $109,528,000. Because the Company's subsidiaries, CFX Bank and Orange Savings Bank, maintain large residential mortgage loan portfolios, a substantial capability exists to borrow funds from the Federal Home Loan Bank of Boston. Additionally, investment portfolios are predominantly made up of securities which can be readily borrowed against through the repurchase agreement market. Relationships with deposit brokers and correspondent banks are also maintained to facilitate possible borrowing needs. The holding company also maintains liquid assets totaling $8,201,000 as of June 30, 1996, comprised of $3,485,000 in cash and due from banks and interest bearing deposits with bank subsidiaries and notes receivable from bank subsidiaries of $4,466,000. - -------------------------------------------------------------------------------- Capital Resources - -------------------------------------------------------------------------------- Federal regulation requires the Company to maintain minimum capital standards. Tier 1 capital is composed primarily of common stock, retained earnings and perpetual preferred stock in limited amounts less certain intangibles. The minimum requirements include a 3% Tier 1 leverage capital ratio for the most highly-rated institutions; all other institutions are required to meet a minimum leverage ratio that is at least 1% to 2% above the 3% minimum. In addition, the Company and its subsidiary banks are required to satisfy certain capital adequacy guidelines relating to the risk nature of an institution's assets. These guidelines, established by the Federal Reserve Board and the FDIC are applicable to bank holding companies and state chartered non-member banks, respectively. Under the "risk-based" capital rules, banks and bank holding companies are required to have a level of Tier 1 capital equal to 4% of total risk-weighted assets, as defined. Banks and bank holding companies are also required to have total capital (composed of Tier 1 plus "supplemental" or Tier 2 capital, the latter being composed primarily of allowances for loan and lease losses, perpetual preferred stock in excess of the amount included in Tier 1 capital, and certain "hybrid capital instruments" including mandatory convertible debt) equal to 8% of total risk-weighted assets. As of June 30, 1996, the Company's Tier 1 leverage capital ratio was 8.81%. In addition, the Company's Tier 1 to risk-based capital ratio and total risk-based capital ratio were 13.56% and 14.82%, respectively. 18 CFX CORPORATION AND SUBSIDIARIES Part II - Other Information June 30, 1996 Item 1 - Legal Proceedings There are no material pending legal proceedings to which the Company, its subsidiaries, or any directors, officers, affiliates or any owner of record or beneficiary of more than five percent (5%) of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company or any security holder is a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries. 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) The Annual Meeting of Shareholders of the Company, at which the holders of common shares entitled to 7,561,176 votes were represented in person or by proxy, was held on May 31, 1996. (b) Election of Directors. Three nominees were elected as directors of the Company, each for a term of three years. For Withheld --------- -------- Eugene E. Gaffey 6,148,640 76,444 Walter R. Peterson 6,147,971 77,113 Richard F. Astrella 6,188,945 106,139 (c) Other Matters (i) The adoption of the Agreement and Plan of Merger dated as of January 5, 1996 by and between CFX Corporation and The Safety Fund Corporation was approved. For Against Abstained Broker Non-Votes --------- ------- --------- ---------------- 4,545,974 58,177 50,863 1,570,070 (ii) The adoption of the Agreement and Plan or Reorganization and related Agreement and Plan of Merger, dated as of February 9, 1996 by and among CFX Corporation, CFX Bank and Milford Co/operative Bank was approved. For Against Abstained Broker Non-Votes --------- ------- --------- ---------------- 4,548,148 68,330 38,036 1,570,070 (iii)The appointment, by the Board of Directors, of Wolf & Company, P.C., as independent auditors for the Registrant was ratified. For Against Abstained --------- ------- --------- 6,187,207 15,587 22,290 19 CFX CORPORATION AND SUBSIDIARIES Part II - Other Information June 30, 1996 Item 5 - Other Information Not applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description ------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K (i) On July 16, 1996, a Form 8-K was filed updating the Current Report on Form 8-K consummating the mergers of The Safety Fund Corporation and Milford Co/operative Bank, effective July 1, 1996. The following financial statements, pro forma financial information and exhibits were included in the Form 8-K: (a) Financial Statements. (1) Audited financial statements of Safety Fund as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993, and the independent auditors' reports thereon. (2) Unaudited interim financial statements of Safety Fund as of March 31, 1996 and 1995 and for the quarters then ended. (3) Unaudited financial statements of Milford as of June 30, 1995 and 1994 and for the years ended June 30, 1995, 1994 and 1993, and the independent auditors reports thereon, and the unaudited financial statements of Milford as of December 31, 1995 and December 31, 1994 and for the six months then ended. (4) Unaudited interim financial statements of Milford as of March 31, 1996 and 1995 and the nine months then ended. (b) Pro Forma Financial Information. (1) Unaudited pro forma combined financial information as of December 31, 1995 and for the years ended December 31 1995, 1994 and 1993, giving effect to the Safety Fund Merger and the Milford Merger. (2) Unaudited pro forma combined financial information as of March 31, 1996 and for the three months ended March 31, 1996 and 1995. (c) Exhibits. First Amendment to the Safety Fund Merger, dated March 28, 1996. Second Amendment to the Safety Fund Merger Agreement, dated April 30, 1996. Joinder to the Safety Fund Merger Agreement, dated June 15, 1996. Amendment to the Milford Reorganization Agreement, dated April 29, 1996. Press Release, dated July 1, 1996. Unaudited interim financial statements of Safety Fund as of March 31, 1996. Unaudited interim financial statements of Milford as of March 31, 1996. 20 CFX CORPORATION AND SUBSIDIARIES June 30, 1996 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CFX CORPORATION August 14, 1996 /s/ --------------------------------------- Mark A. Gavin Authorized Officer Chief Financial Officer 21 EX-27 2 ART. 9--FDS FOR 2ND QUARTER 10-Q
9 This schedule contains summary financial information extracted from financial statements and footnotes of the June 30, 1996 Form 10-Q and is qualified in its entirety by reference to such Form 10-Q. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 32,298 1,002 7,100 0 109,528 16,458 16,394 775,575 8,081 1,025,771 729,895 185,061 17,558 426 0 0 5,044 87,787 1,025,771 32,245 3,471 394 36,110 13,936 3,994 18,180 1,500 271 4,951 7,296 7,296 0 0 4,938 .65 .65 8.17 7,805 0 0 0 7,689 1,295 187 8,081 8,081 0 684
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