-----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, K9kS4UVlgLlWikMy5srXjkhl/OjeMunYHbU1bUFbTJLrpCn79tfd8QFqHDPraTf3 aZy9VafoxzxFGzFXnmUPJA== 0000910647-96-000199.txt : 19961118 0000910647-96-000199.hdr.sgml : 19961118 ACCESSION NUMBER: 0000910647-96-000199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96666165 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 10-Q FOR 3RD 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 September 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 XX 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 12,289,687 as of October 31, 1996. - ------------------------------------------------------------------------------- CFX CORPORATION AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION Page --------------------- ---- Item 1 Financial Statements: Consolidated Balance Sheets -- September 30, 1996 and December 31, 1995............................. 1 Consolidated Statements of Income -- Three months ended September 30, 1996 and 1995; Nine months ended September 30, 1996 and 1995..... 2 Consolidated Statement of Shareholders' Equity - Nine months ended September 30, 1996.............. 3 Consolidated Statements of Cash Flows -- Nine months ended September 30, 1996 and 1995.......... 4 Notes to Consolidated Financial Statements - September 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.................................... 21 Item 2 Changes in Securities................................ 21 Item 3 Defaults Upon Senior Securities...................... 21 Item 4 Submission of Matters to a Vote of Security Holders.. 21 Item 5 Other Information.................................... 21 Item 6 Exhibits and Reports on Form 8-K..................... 21 SIGNATURES........................................... 22 ---------- CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------- September 30, December 31, - -------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1996 1995 - -------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 51,561 $ 44,393 Federal funds sold - 2,500 ---------- ---------- Cash and Cash Equivalents 51,561 46,893 Interest bearing deposits with other banks 1,306 13,475 Federal Home Loan Bank of Boston stock 9,216 8,043 Securities available for sale 259,871 193,203 Securities held to maturity 35,372 97,093 Mortgage loans held for sale 10,380 7,085 Loans and leases 1,061,776 927,430 Less allowance for loan and lease losses 15,790 15,449 ---------- ---------- Net Loans and Leases 1,045,986 911,981 Premises and equipment 25,243 25,253 Mortgage servicing rights 5,181 4,373 Goodwill and deposit base intangibles 9,385 9,884 Foreclosed real estate 2,068 1,186 Other assets 65,108 26,411 ---------- ---------- $1,520,677 $1,344,880 ========== ========== Liabilities and Shareholders' Equity Deposits: Interest bearing $1,008,775 $ 932,209 Noninterest bearing 135,126 124,615 ---------- ---------- Total Deposits 1,143,901 1,056,824 Short-term borrowed funds 87,022 44,012 Advances from Federal Home Loan Bank of Boston 139,065 102,814 Other liabilities 21,347 14,198 ---------- ---------- Total Liabilities 1,391,335 1,217,848 ---------- ---------- Shareholders' Equity Common stock, par value $.66 2/3 per share-authorized 22,500,000 shares, issued 12,257,215 shares at September 30, 1996 and 12,078,268 shares at December 31, 1995 8,172 8,052 Paid-in capital 86,680 85,902 Retained earnings 36,696 32,488 Net unrealized gains (losses) on securities available for sale, after tax effects (2,194) 590 Cost of common stock in treasury (12) - ---------- ---------- Total Shareholders' Equity 129,342 127,032 ---------- ---------- $1,520,677 $1,344,880 ========== ========== Number of common shares outstanding 12,257 12,078 ---------- ---------- Common shareholders' equity per share $ 10.55 $ 10.52 ---------- ----------
See accompanying notes to unaudited consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------- Three Months Nine Months Ended Ended September 30, September 30, - ----------------------------------------------------------------------------------------------- (In thousands, except per share data) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------- Interest and dividend income: Interest on loans and leases $22,419 $19,539 $64,828 $56,708 Interest on investment securities: Taxable 4,490 4,223 13,316 12,304 Tax-exempt 188 238 637 763 ------- ------- ------- ------- 4,678 4,461 13,953 13,067 Dividends on marketable equity securities 78 54 245 182 Other 241 445 1,022 1,379 ------- ------- ------- ------- Total Interest and Dividend Income 27,416 24,499 80,048 71,336 ------- ------- ------- ------- Interest expense: Interest on deposits 10,163 9,543 30,189 27,626 Interest on borrowings: Short-term 2,836 1,914 7,414 5,187 Long-term 6 3 14 8 ------- ------- ------- ------- Total Interest Expense 13,005 11,460 37,617 32,821 ------- ------- ------- ------- Net Interest and Dividend Income 14,411 13,039 42,431 38,515 Provision for loan and lease losses 680 625 2,335 2,283 ------- ------- ------- ------- Net Interest and Dividend Income After Provision for Loan and Lease Losses 13,731 12,414 40,096 36,232 ------- ------- ------- ------- Other income: Service charges on deposit accounts 1,020 947 2,996 2,796 Loan servicing fees 405 443 1,180 1,296 Net gains on trading securities - 273 153 791 Net gains (losses) on investment securities (13) 73 190 182 Net gains on sales of loans 156 178 932 393 Leasing activities 459 530 1,820 1,567 Trust fees 553 554 1,717 1,638 Pension settlement gain 877 - 877 - Other 958 702 2,374 2,042 ------- ------- ------- ------- 4,415 3,700 12,239 10,705 ------- ------- ------- ------- Other expense: Salaries and employee benefits 6,057 5,932 17,707 17,411 Occupancy and equipment expense 1,685 1,658 5,034 4,924 Professional fees 385 594 1,493 1,837 Advertising and marketing 329 442 1,382 1,184 Operation of foreclosed real estate 102 106 255 240 FDIC deposit insurance 98 42 294 1,202 Goodwill and deposit base intangible amortization 167 164 502 532 SAIF special assessment 908 - 908 - Merger expenses 4,522 - 4,522 - Other 2,334 2,323 7,517 7,197 ------- ------- ------- ------- 16,587 11,261 39,614 34,527 ------- ------- ------- ------- Income Before Income Taxes 1,559 4,853 12,721 12,410 Income taxes 1,108 1,624 4,702 4,234 ------- ------- ------- ------- Net Income 451 3,229 8,019 8,176 Preferred stock dividends - - - 89 ------- ------- ------- ------- Net Income Available to Common Stock $ 451 $ 3,229 $ 8,019 $ 8,087 ------- ------- ------- ------- Weighted average common shares outstanding 12,236 11,998 12,215 11,818 ------- ------- ------- ------- Earnings per common share $ .04 $ .27 $ .66 $ .68 ------- ------- ------- ------- Dividends declared per common share $ .20 $ .15 $ .38 $ .45 ------- ------- ------- -------
See accompanying notes to unaudited consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Common Stock Paid-in Retained Available Treasury (In thousands) Shares Dollars Capital Earnings For Sale Stock Total - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 12,078 $8,052 $85,902 $32,488 $ 590 $ - $127,032 Net income - - - 8,019 - - 8,019 Common cash dividends declared ($.38 per share) - - - (3,811) - - (3,811) Issuance of common stock under stock option plan 164 110 655 - - - 765 Issuance of common stock under employee stock purchase plan 17 11 148 - - - 159 Increase in net unrealized losses on securities available for sale - - - - (2,784) - (2,784) Cost of shares acquired for treasury - - - - - (12) (12) Fractional shares paid out (2) (1) (25) - - - (26) ------ ------ ------- ------- ------- ---- -------- Balance at September 30, 1996 12,257 $8,172 $86,680 $36,696 $(2,194) $(12) $129,342 ====== ====== ======= ======= ======= ==== ========
See accompanying notes to unaudited consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------ (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 8,019 $ 8,176 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 3,803 3,314 Amortization of deferred credit on leasehold residual (1,059) - Provision for loan and lease losses 2,335 2,283 Provision for foreclosed real estate losses - 31 Loans originated and acquired for sale (77,968) (88,254) Principal balance of loans sold 74,673 85,043 Net gain on sale of portfolio loans (932) (393) Net gain on sale of foreclosed real estate (51) (36) Net gains on investment securities (343) (178) Net increase in trading securities - (22,522) Net deferred income tax provision 603 1,124 Other (7,449) (2,289) --------- -------- Net Cash Provided (Used) by Operating Activities (1,631) (13,701) --------- -------- Investing Activities Proceeds from sales of securities available for sale 23,120 12,348 Purchases from maturities of securities available for sale 66,937 10,190 Purchase of securities available for sale (80,276) (29,537) Proceeds from maturities of securities held to maturity 25,330 34,247 Purchases of securities held to maturity (40,933) (33,594) Proceeds from the sale of, or payments on, foreclosed real estate 609 643 Purchase of Federal Home Loan Bank of Boston (FHLBB) stock (1,173) (29) Net decrease (increase) in interest bearing deposits with other banks 12,169 (26) Net increase in loans and leases (132,954) (16,828) Purchase of bank-owned life insurance (30,000) - Purchases of premises and equipment (2,374) (1,541) --------- -------- Net Cash Used by Investing Activities (159,545) (24,127) --------- -------- Financing Activities Net increase (decrease) in noninterest bearing deposits and savings accounts 5,613 (19,782) Net increase (decrease) in time certificates of deposit 81,464 84,473 Net increase in short-term borrowings 43,010 4,608 Proceeds from FHLBB advances with maturities in excess of three months 225 - Payments of FHLBB advances with maturities in excess of three months (1) Net proceeds from (payments of) FHLBB advances with maturities of three months or less 36,027 (16,500) Common cash dividends paid (4,654) (3,505) Preferred cash dividends paid - (89) Proceeds from issuance of common stock under dividend reinvestment plan - 209 Proceeds from issuance of common stock under stock option plan 765 336 Proceeds from issuance of common stock under employee stock purchase plan 159 35 Fractional shares paid out (26) (18) --------- -------- Net Cash Provided by Financing Activities 162,582 49,767 --------- -------- Decrease in Cash and Cash Equivalents 4,668 11,939 Cash and cash equivalents at beginning of period 46,893 43,587 --------- -------- Cash and Cash Equivalents at End of Period $ 51,561 $ 55,526 ========= ======== Supplementary Information: Interest paid on deposit accounts $ 28,958 $ 26,802 Interest paid on borrowed funds 6,774 5,025 Income taxes paid 1,533 4,365 Transfers from loans to foreclosed real estate 2,666 2,072 Transfers from securities held to maturity to securities available for sale 76,849 -
See accompanying notes to unaudited consolidated financial statements. CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 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 nine month period ended September 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 was 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, continues to operate as a subsidiary of the Company. Both the Safety Fund and Milford mergers were accounted for by the pooling- of-interests method of accounting. The financial information for all prior periods presented has been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented. As a result of these acquisitions, the Company recorded a charge to earnings in the third quarter of $3,722,000, on an after-tax basis for merger related costs. The one-time after-tax charge of the transactions pertains to the following areas: premises and equipment, $269,000; personnel, $855,000; and other, $2,598,000. Premises and equipment costs consist primarily of write- offs due to consolidation of operation centers, data processing, termination charges, 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. - ------------------------------------------------------------------------------- Note C-Forward Looking Statements - ------------------------------------------------------------------------------- The Company has made, and may continue to make, various forward-looking statements with respect to earnings per share, cost savings related to acquisitions, credit quality and other financial business matters for 1996 and, in certain instances, subsequent periods. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements for periods subsequent to 1996 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward-looking statements: continued pricing pressures on loan and deposit products, actions of competitors, changes in economic conditions, the extent and timing of actions of the Federal Reserve Board, continued customer disintermediation, customers' acceptance of the Company's products and services, and the extent and timing of legislative and regulatory actions and reforms. The Company's forward-looking statements speak only as of the date on which such statements are made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS September 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, Orange Savings Bank, headquartered in Orange, Massachusetts, and Safety Fund National Bank, headquartered in Fitchburg, 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. Safety Fund National Bank's direct subsidiaries, all of which are wholly-owned, are Prichard Plaza Realty Corp. ("Prichard Plaza"), which engages in property management, The Lenders/Massachusetts, Inc. ("Lenders"), which engages in mortgage banking, and Safety Fund Securities Corp., which is engaged in investment activities. 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. In the third quarter, the Company announced a stock repurchase program whereby the Company would purchase and hold as treasury stock up to 150,000 shares of its common stock, or approximately 1.25% of those outstanding. The shares to be acquired will depend on market conditions and will be used in connection with the Company's employee stock purchase plan, stock option plans, dividend reinvestment plan, and such other corporate purposes as may be determined. - ------------------------------------------------------------------------------- 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 tax-exempt loans and leases and investments in state and municipal securities and to present data on a comparative basis, the income from and yields on these loans and leases and securities have been restated to a taxable-equivalent basis (using a 34.00% and 38.62% tax rate, respectively). The taxable-equivalent income adjustments for loans and leases are $85,000 and $79,000 for the three months ended September 30, 1996 and 1995, respectively, and $259,000 and $189,000 for the nine months ended September 30, 1996 and 1995, respectively. The taxable-equivalent income adjustments for investment securities are $118,000 and $150,000 for the three months ended September 30, 1996 and 1995, respectively, and $401,000 and $480,000 for the nine months ended September 30, 1996 and 1995, respectively. These adjustments, however, are for comparison purposes only and have no impact on reported net income.
- ------------------------------------------------------------------------------------------------------------- Three Months Ended September 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 $1,041,765 $22,254 8.50% $ 878,027 $19,386 8.76% Tax-exempt loans and leases 9,111 250 10.92 7,823 232 11.77 Taxable securities 277,904 4,490 6.43 286,724 4,223 5.84 Tax-exempt securities 16,178 306 7.52 21,019 388 7.32 Other 19,681 319 6.45 35,154 499 5.63 ---------- ------- ---------- ------- Total interest earning assets 1,364,639 27,619 8.05 1,228,747 24,728 7.98 ------- ------- Noninterest earning assets 123,825 94,228 ---------- ---------- Total $1,488,464 $1,322,975 ---------- ---------- Liabilities and Shareholders' Equity Interest bearing liabilities: Savings deposits $ 450,657 2,670 2.36 $ 458,787 2,886 2.50 Time deposits 538,703 7,493 5.53 470,824 6,657 5.61 Advances from Federal Home Loan Bank of Boston 135,409 1,915 5.63 82,477 1,302 6.26 Other borrowed funds 80,059 927 4.61 49,305 615 4.95 ---------- ------- ---------- ------- Total interest bearing liabilities 1,204,828 13,005 4.29 1,061,393 11,460 4.28 ------- ------- Noninterest bearing liabilities: Demand deposits 130,722 120,382 Other 19,938 16,418 Shareholders' equity 132,976 124,782 ---------- ---------- Total $1,488,464 $1,322,975 ========== ========== Net interest and dividend income $14,614 $13,268 ======= ======= Interest rate spread 3.76% 3.70% Net interest margin 4.26% 4.28%
- ------------------------------------------------------------------------------------------------------------- Nine Months Ended September 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 $ 992,582 $64,325 8.66% $ 864,794 $56,341 8.71% Tax-exempt loans and leases 8,816 762 11.55 6,951 556 10.69 Taxable securities 291,309 13,316 6.11 278,485 12,304 5.91 Tax-exempt securities 18,749 1,038 7.40 23,138 1,243 7.18 Other 25,056 1,267 6.75 35,652 1,561 5.85 ---------- ------- ---------- ------- Total interest earning assets 1,338,512 80,708 8.07 1,209,020 72,005 7.96 ------- ------- Noninterest earning assets 112,612 96,679 ---------- ---------- Total $1,449,124 $1,305,699 ========== ========== Liabilities and Shareholders' Equity Interest bearing liabilities: Savings deposits $ 450,646 7,963 2.36 $ 467,574 8,889 2.54 Time deposits 532,142 22,226 5.58 463,376 18,737 5.41 Advances from Federal Home Loan Bank of Boston 115,808 4,947 5.71 72,766 3,340 6.30 Other borrowed funds 72,562 2,481 4.57 46,003 1,765 5.13 ---------- ------- ---------- ------- Total interest bearing liabilities 1,171,158 37,617 4.29 1,049,719 32,821 4.18 ------- ------- Noninterest bearing liabilities: Demand deposits 128,275 118,447 Other 19,924 15,545 Shareholders' equity 129,767 121,988 ---------- ---------- Total $1,449,124 $1,305,699 ========== ========== Net interest and dividend income $43,091 $39,184 ======= ======= Interest rate spread 3.78% 3.78% Net interest margin 4.31% 4.33%
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 Nine Months Ended September 30, September 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 $3,549 $(663) $2,886 $8,015 $ 175 $8,190 Investments (224) 409 185 431 376 807 Other (244) 64 (180) (194) (100) (294) ------ ----- ------ ------ ----- ------ Total interest and dividend income 3,081 (190) 2,891 8,252 451 8,703 ------ ----- ------ ------ ----- ------ Interest paid on: Savings and time deposits 900 (280) 620 2,619 (56) 2,563 Borrowed funds 1,106 (181) 925 2,200 33 2,233 ------ ----- ------ ------ ----- ------ Total interest expense 2,006 (461) 1,545 4,819 (23) 4,796 ------ ----- ------ ------ ----- ------ Change in net interest and dividend income $1,075 $ 271 $1,346 $3,433 $ 474 $3,907 ====== ===== ====== ====== ===== ======
Net Income & Net Income Available to Common Stock Exclusive of charges for mergers and other adjustments, net income available to common stock was $4,191,000, or $.34 per share, for the quarter ended September 30, 1996, compared to $3,229,000, or $.27 per share, for the corresponding period a year ago. On the same basis as described above, net income available to common stock for the nine months ended September 30, 1996 amounted to $11,759,000 or $.96 per share, compared to $8,087,000 or $.68 per share, for the corresponding period a year ago. A reconciliation of net income available to common stock to net income available to common stock before charges for mergers and other adjustments for the quarter and nine months ended September 30, 1996 is summarized as follows:
- ----------------------------------------------------------------------------------- Earnings Reconciliation - ----------------------------------------------------------------------------------- September 30, 1996 Three Months Nine Months (Dollars in thousands, except per share data) Ended Ended - ----------------------------------------------------------------------------------- Net Income Available to Common Stock (As Reported) $ 451 $ 8,019 Add (Subtract) - After Tax: Merger Costs (1) 3,722 3,722 FDIC-SAIF Settlement (2) 557 557 Gain From Settlement of Pension Plans (3) (539) (539) ------ ------- 3,740 3,740 ------ ------- Net Income Available to Common Stock Before Merger and Other Adjustments $4,191 $11,759 ------ ------- Earnings Per Common Share: Net Income Available to Common Stock (As Reported) $ .04 $ .66 ------ ------- Net Income Available to Common Stock Before Merger and Other Adjustments $ .34 $ .96 ------ ------- Costs related to The Safety Fund Corporation and Milford Co/operative Bank mergers completed on July 1, 1996. (See Note B - Acquisitions in the "Notes to Consolidated Financial Statements".) On September 30, 1996, a law was passed to recapitalize the FDIC - Savings Association Insurance Fund (SAIF) through a special assessment of .657 percent of SAIF insured deposits (i.e., Milford Co/operative Bank deposits). The Company terminated CFX Corporation's and Safety Fund's pension plans and transferred the assets and liabilities to a multi-employer pension plan.
After charges for mergers and other adjustments, net income available to common stock was $451,000, or $.04 per share, and $8,019,000, or $.66 per share, for the quarter and nine months ended September 30, 1996, respectively, compared to $3,229,000, or $.27 per share, and $8,087,000, or $.68 per share, for the corresponding periods a year ago, respectively. The increase in earnings before merger costs and other adjustments was primarily due to increased core earnings (net interest and dividend income and recurring noninterest income). The stronger core earnings were the result of a $130 million, or 15%, 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 $17,949,000 and $53,793,000 for the three and nine months ended September 30, 1996, compared to $16,739,000 and $49,220,000 for the same periods a year ago. Net Interest and Dividend Income Taxable-equivalent net interest and dividend income was $14,614,000, and $43,091,000, respectively, for the three and nine months ended September 30, 1996, compared to $13,268,000, and $39,184,000 for the same periods a year ago. The increase in net interest and dividend income in the 1996 periods 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, along with the net interest margin, stayed fairly consistent in the 1996 periods with the 1995 periods. The Company's net interest margin of 4.26% and 4.31% for the three and nine months ended September 30, 1996 decreased slightly from 4.28% and 4.33% for the corresponding periods a year ago. The decrease in the net interest margin is partially due to the Company's investment in Bank-Owned Life Insurance ("BOLI") which totaled $30 million at September 30, 1996. The investment occurred in the second and third quarters of 1996 and generates non-interest income for the Company, tax free, as the cash surrender value of the policies increase. However, these insurance policies are funded with wholesale borrowings, which decreases the net interest margin. (For more information on BOLI, see "Other Assets" section of this analysis.) 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, 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 nine months ended September 30, 1996 was $680,000, and $2,335,000, respectively, compared to $625,000 and $2,283,000, 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 $1,994,000 for the nine months ended September 30, 1996 as compared to $1,078,000 for the nine months ended September 30, 1995. The higher net charge-offs in 1996 were principally due to residential real estate foreclosures and the resolution of several long- term problem commercial loan relationships. At September 30, 1996, nonperforming loans stood at $9,206,000, or .87% of total loans and leases, compared to $10,034,000, or 1.08% 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 September 30, 1996 and December 31, 1995 amounted to 171.52% and 153.97%, respectively. Other Income Other income for the three and nine months ended September 30, 1996 totaled $4,415,000 and $12,239,000, respectively, compared to $3,700,000, and $10,705,000 for the same periods a year ago. The $715,000 increase in other income for the third quarter of 1996 compared to third quarter of 1995 is principally due to the recognition of a pre-tax pension settlement gain of $877,000. The Company terminated CFX Corporation's and Safety Fund's pension plans and transferred the assets and liabilities to a multi-employer pension plan. This transaction resulted in a settlement gain and a reduction of current year pension expense. In addition, other income in this category increased $239,000 for the three months ended September 30, 1996, compared to the same period in prior year principally as a result of investing in Bank-Owned Life Insurance (BOLI). This investment, totaling $30,000,000 at September 30, 1996, generated $315,000 in other income during the third quarter of 1996. This investment was not in place in 1995. (For more information on BOLI, see "Other Assets" section of this analysis.) Offsetting these increases in other income were decreases in net gains in trading securities of $273,000 and a reduction in leasing activities by $71,000. The leasing income was lower in 1996 as CFX Funding completed no lease securitizations or structured loan sales in the third quarter compared to one in the third quarter of 1995. Other Expense Other expense for the three and nine months ended September 30, 1996 totaled $16,587,000 and $39,614,000, respectively, compared to $11,261,000 and $34,527,000, respectively, for the same periods a year ago. Other expenses increased $5,326,000 in the three month period ended September 30, 1996, compared to the same period a year ago, principally due to the merger expenses associated with the purchases of Safety Fund and Milford totaling $4,522,000 (see Note B - Acquisitions in the "Notes to Consolidated Financial Statements" section) and the one-time SAIF special assessment of $908,000 which was previously discussed. These expenses were partially offset by a reduction in professional fees of $209,000 in the third quarter of 1996, compared to the same period in 1995. This reduction in professional fees is due to efficiencies gained in the two mergers. All other third quarter expenses for 1996 were in line with those of 1995. For the nine months ended September 30, 1996, other expenses increased $5,087,000 over the same period a year ago. This increase was primarily due to the merger-related expenses and SAIF special assessment incurred in the third quarter totaling $5,430,000, partially offset by a reduction in FDIC deposit insurance premiums of $908,000. The decrease in the year-to-date professional fees of $344,000 of which most was from efficiencies gained from the 1996 mergers, was partially offset from increases in advertising and marketing expenses of $198,000. The marketing expense increase was principally due to the promotion of a free ATM card and other marketing initiatives. The increase in the "other" other expense category of $320,000 for the period was due to various items, none of which were individually significant. Income Tax Income taxes for the three and nine months ended September 30, 1996 were 71.07% and 36.96%, respectively, of pretax income, compared to 33.46%, and 34.12% of pretax income for the same periods a year ago. The effective tax rate for the nine months ended September 30, 1996 was higher due to the merger-related expenses of $4,522,000, $2,537,000 of which were not tax deductible. Excluding these charges, the effective tax rates for the three and nine months ended September 30, 1996 would have been 27.05% and 30.82%, respectively. The lower rates for 1996 are primarily due to higher tax credits pertaining to low income housing projects and the reversal of a portion of a valuation allowance established by Safety Fund for net operating loss carryforwards at one of their subsidiaries as a result of current and projected profits from that subsidiary. - ------------------------------------------------------------------------------- Financial Condition - ------------------------------------------------------------------------------- Investment Securities The carrying value and estimated fair value of investment securities at September 30, 1996 and December 31, 1995, follows:
- --------------------------------------------------------------------------------------------------- September 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 $160,338 $160,338 $102,531 $102,531 Corporate bonds 3,185 3,185 5,072 5,072 Federal agency mortgage pass-through securities 70,459 70,459 65,118 65,118 Other asset backed collateralized mortgage obligations (CMO's) 19,487 19,487 14,747 14,747 State and municipal 435 435 - - Marketable equity securities 5,686 5,686 5,454 5,454 Other securities 281 281 281 281 -------- -------- -------- -------- Total securities available for sale $259,871 $259,871 $193,203 $193,203 ======== ======== ======== ======== Securities held to maturity: Debt securities: U.S. Treasury and agency obligations $ 10,337 $ 10,230 $ 48,323 48,879 State and municipal 15,383 15,399 19,229 19,345 Federal agency mortgage pass-through securities 9,352 9,402 21,243 21,502 Other asset backed, collateralized mortgage obligations (CMO's) - - 8,098 8,243 Other securities 300 256 200 172 -------- -------- -------- -------- Total securities held to maturity $ 35,372 $ 35,287 $ 97,093 $ 98,141 ======== ======== ======== ========
As discussed in Note B - Acquisitions in the "Notes to Consolidated Financial Statements" section, the Company acquired The Safety Fund Corporation and the Milford Co/operative Bank on July 1, 1996. To be consistent with the Company's current interest risk profile, certain securities held to maturity with an amortized cost of $76,849,000 and a net unrealized loss of $2,522,000 were transferred to securities available for sale. 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:
- -------------------------------------------------------------------------------------------------- September 30, December 31, - -------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------------------------- % of % of Balances Portfolio Balances Portfolio - -------------------------------------------------------------------------------------------------- Real estate: Residential $ 672,313 63.32% $586,489 63.24% Construction 8,616 0.81 9,190 0.99 Commercial 139,890 13.18 141,618 15.27 Commercial, financial, and agricultural 114,923 10.82 104,412 11.26 Warehouse lines of credit to leasing companies 22,435 2.11 12,906 1.39 Consumer lease financing 54,963 5.18 24,399 2.63 Other consumer 48,636 4.58 48,416 5.22 ---------- ------ -------- ------ 1,061,776 100.00% 927,430 100.00% ====== ====== Less allowance for loan and lease losses 15,790 15,449 ---------- -------- Net loans and leases $1,045,986 $911,981 ========== ========
The $134,346,000 increase in total loans and leases was primarily due to a $85,824,000 increase in residential real estate loans, a $10,511,000 increase in commercial business loans, and a $30,564,000 increase in indirect automobile leasing. 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. CFX Funding services approximately $86,000,000 in leases for others. Other Assets During 1996, the Company invested $30,000,000 in Bank-Owned Life Insurance ("BOLI") to help finance the cost of certain employee benefit plan expenses. The BOLI investment is accomplished through the purchase of life insurance on the lives of certain employees through two insurance companies with a Standard & Poors rating of AA+ or better. The Company, not the employee or family, is the beneficiary of the insurance policies. The first source of income is from the growth of the cash value of the policy. The cash value increases each year as interest (rate is guaranteed each year and changes annually to reflect market rates) is added by the insurance company. The second source of income comes from the insurance proceeds paid to the bank upon the death of an employee. The payment of the insurance proceeds and the earnings from the cash value are income tax free (unless the policy is surrendered). The Company finances the cost of the premium payment with wholesale funding (i.e. Federal Home Loan Bank borrowings). While the earnings from the investment are captured in other income as the cash surrender value (CSV) increases, the net interest margin is negatively impacted as a result of funding the investment with wholesale borrowings. - ------------------------------------------------------------------------------- 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:
- -------------------------------------------------------------------------------------------- September 30, December 31, - -------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------------------- Nonaccrual (nonperforming) loans $ 9,206 $10,034 Foreclosed real estate 2,068 1,236 Valuation allowance on foreclosed real estate - (50) ------- ------- Total nonperforming assets $11,274 $11,220 ------- ------- Nonperforming loans as a percent of total loans and leases .87% 1.08% ------- ------- Nonperforming assets as a percent of total assets .74% .83% ------- -------
The following table provides the composition of the Company's nonperforming loans and assets at the dates indicated:
- -------------------------------------------------------------------------------------------- September 30, December 31, - -------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------------------- % of % of Balances Portfolio Balances Portfolio - -------------------------------------------------------------------------------------------- Nonperforming loans: Real estate: Residential $ 6,685 72.62% $ 6,177 61.56% Commercial 1,933 21.00 1,710 17.04 Commercial, financial, and agricultural 527 5.72 2,039 20.32 Consumer and other 61 .66 108 1.08 ------- ------ ------- ------ 9,206 100.00% 10,034 100.00% ------- ------ ------- ------ Foreclosed real estate: Residential 1,197 57.88% 735 61.97% Construction 477 23.07 128 10.79 Commercial 394 19.05 373 31.45 Valuation allowance - - (50) (4.22) ------- ------ ------- ------ 2,068 100.00% 1,186 100.00% ------- ------ ------- ------ Total nonperforming assets $11,274 $11,220 ------- -------
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 deterioration. 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 $27,149,000 at December 31, 1995 to $19,405,000 at September 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:
- ----------------------------------------------------------------------- Nine Months Ended September 30, (In thousands) 1996 1995 - ----------------------------------------------------------------------- Balance at beginning of period $ 1,186 $ 2,599 Reclassification, net, to nonperforming loans to reflect adoption of SFAS No. 114 - (714) Additions 2,221 2,320 Sales and other (1,339) (3,057) ------- ------- Balance at end of period $ 2,068 $ 1,148 ======= =======
- ------------------------------------------------------------------------------- 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:
- ------------------------------------------------------------------ Nine Months Ended September 30, (In thousands) 1996 1995 - ------------------------------------------------------------------ Balance at beginning of period $15,449 $14,402 Provision for loan and lease losses 2,335 2,283 Loans charged-off (2,508) (1,727) Recoveries of loans previously charged-off 514 649 ------- ------- Balance at end of period $15,790 $15,607 ------- ------- Allowance for loan and lease losses as a percent of total loans and leases 1.49% 1.68% ------- ------- Allowance for loan and lease losses as a percent of total nonperforming loans 171.52% 155.54% ------- ------- Net charge-offs/average loans and leases (1) .27% .17% ------- ------- 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. - ------------------------------------------------------------------------------- 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:
- ----------------------------------------------------------------------------------- Nine Months Ended September 30, 1996 1995 - ----------------------------------------------------------------------------------- (Dollars in thousands) Amount Rates Amount Rates - ----------------------------------------------------------------------------------- Deposits: Noninterest bearing demand deposits $ 128,275 - $ 118,447 - Regular savings deposits 169,180 2.70% 166,581 2.82% NOW & money market deposits 281,466 2.15 300,993 2.39 Time deposits 469,489 5.57 431,001 5.34 ---------- ---------- Total retail deposits 1,048,410 3.51 1,017,022 3.43 Brokered time deposits 62,653 5.67 32,375 6.28 ---------- ---------- Total deposits $1,111,063 3.63% $1,049,397 3.52% ---------- ---------- Borrowed Funds: Advances from Federal Home Loan Bank of Boston $ 115,808 5.71% $ 72,766 6.30% Other borrowed funds 72,562 4.57 46,003 5.13 ---------- ---------- Total borrowed funds $ 188,370 5.27% $ 118,769 5.85% ---------- ----------
Over the past twelve months, the Company has increased average demand deposits by $9,828,000 and average interest bearing retail deposits by $21,560,000. 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 $2,310,000 as of September 30, 1996 from $127,032,000 at December 31, 1995 to $129,342,000 at September 30, 1996. The increase was due to $8,019,000 in net income, issuance of $765,000 in common stock under the stock option plan, issuance of $159,000 in common stock under the employee stock purchase plan offset by a $2,784,000 decrease in net unrealized losses on securities available for sale, $26,000 paid for fractional shares on a 3 for 2 stock split, cost of shares acquired for treasury of $12,000, and $3,811,000 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. - ------------------------------------------------------------------------------- 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 cash flows and repricing characteristics of assets, liabilities, and off-balance-sheet items. 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 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 and 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 considers interest rate risk exposure in concert with other business risks, such as credit risk and liquidity risk. The Company's Board of Directors and the directors of each subsidiary bank establish various policy guidelines and limitations for interest rate risk. Management communicates regularly with boards of directors and board committees about key assumptions, current strategies, and exposure positions being deliberated by the Company's Asset/Liability Management Committee. Management feels that these processes in place at the Company are in compliance with new risk management guidelines issued jointly by the Company's three primary regulatory agencies. Interest rate risk and liquidity positions were affected by the recent acquisition of Milford Co/operative Bank and The Safety Fund Corporation. Interest rate risk in a declining interest rate environment was increased slightly primarily as a result of callable securities in the investment portfolio at Milford Co/operative Bank and adjustable rate commercial loans at Safety Fund National Bank. Interest rate risk is, however, still small and well within the Company's policy guidelines. Adjustments to wholesale liability maturity structures and loan mixes in coming months are expected to reduce interest rate risk exposures further. - ------------------------------------------------------------------------------- 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 and regular cash flows from loan and securities portfolios are the primary sources of asset liquidity. At September 30, 1996, interest bearing deposits with other banks totaled $1,306,000 and trading and available for sale securities totaled $259,590,000. Because two of 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 $9,578,000 as of September 30, 1996, comprised of $4,436,000 in cash and due from banks and interest bearing deposits with bank subsidiaries and notes receivable from bank subsidiaries of $5,142,000. Due to the relatively large investment portfolios and the high proportion of core deposit funding at both banks acquired in 1996, liquidity levels at the Company have increased from their previous levels. The Company maintains asset and liability liquidity levels in accordance with conservative guidelines established by each subsidiary bank's board of directors and the Company's board of directors. - ------------------------------------------------------------------------------- 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 September 30, 1996, the Company's Tier 1 leverage capital ratio was 8.31%. In addition, the Company's Tier 1 to risk-based capital ratio and total risk-based capital ratio were 13.96% and 15.23%, respectively. CFX CORPORATION AND SUBSIDIARIES Part II - Other Information September 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 Not Applicable 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) None CFX CORPORATION AND SUBSIDIARIES September 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 November 14, 1996 /s/ Mark A. Gavin ------------------------------ Mark A. Gavin Authorized Officer Chief Financial Officer EX-27 2 ARTICLE 9 FDS FOR 3RD QUARTER 10-Q
9 9-MOS 9-MOS 3-MOS DEC-31-1996 DEC-31-1995 DEC-31-1995 SEP-30-1996 SEP-30-1995 SEP-30-1995 51,561 44,393 0 1,306 13,475 0 0 2,500 0 0 0 0 259,590 193,203 0 35,372 97,093 0 35,287 98,141 0 1,061,776 927,430 0 15,790 15,449 0 1,520,677 1,344,880 0 1,143,901 1,056,824 0 225,662 146,826 0 21,347 14,198 0 425 201 0 0 0 0 0 0 0 8,172 8,052 0 121,170 118,980 0 1,520,677 1,344,880 0 64,828 56,708 19,539 13,953 13,067 4,461 1,267 1,561 499 80,048 71,336 24,499 30,189 27,626 9,543 37,617 32,821 11,460 42,431 38,515 13,039 2,335 2,283 625 343 973 346 39,614 34,527 11,261 12,721 12,410 4,853 8,019 8,087 3,229 0 0 0 0 0 0 8,019 8,087 3,229 .66 .68 .27 .66 .68 .27 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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