-----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, QN2dPdSAZQbYrII5FLl0voa5JXsSqhGtOPmNGRSdKI6xAw3wj3JgVmgIu4gSHCs+ rBfG4MKOIzSm0e12rmuvZQ== 0000950133-97-001953.txt : 19970520 0000950133-97-001953.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950133-97-001953 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE 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: 97608083 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 FORM 10-Q FOR PERIOD ENDED 3/31/97 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- --------------- Commission file number 1-10633 CFX CORPORATION (Exact name of registrant as specified in its charter) 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 ----- ----- As of April 30, 1997, 13,095,818 shares of the registrant's common stock were issued and outstanding. =============================================================================== 2 CFX CORPORATION AND SUBSIDIARIES INDEX
PART I FINANCIAL INFORMATION PAGE --------------------- ---- Item 1 Financial Statements: Consolidated Balance Sheets -- March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Statements of Income -- Three months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 2 Consolidated Statement of Shareholders' Equity - Three months ended March 31, 1997 . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows -- Three months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements - March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 8 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 19 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ----------
3 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED)
======================================================================================================================= MARCH 31, December 31, ======================================================================================================================= (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 ======================================================================================================================= ASSETS Cash and due from banks $ 59,080 $ 50,404 Federal funds sold 3,000 - ----------------- -------------- CASH AND CASH EQUIVALENTS 62,080 50,404 Interest bearing deposits with other banks 4,628 197 Securities available for sale 379,423 245,324 Securities held to maturity 30,951 32,670 Mortgage loans held for sale 21,101 15,212 Loans and leases 1,150,658 1,118,164 Less allowance for loan and lease losses 15,661 15,740 ----------------- -------------- NET LOANS AND LEASES 1,134,997 1,102,424 Premises and equipment 28,227 27,386 Mortgage servicing rights 6,555 5,313 Goodwill and deposit base intangibles 9,080 9,235 Foreclosed real estate 1,806 2,223 Bank-owned life insurance 31,376 30,975 Other assets 34,225 25,729 ----------------- -------------- $ 1,744,449 $ 1,547,092 ================= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing $ 1,074,879 $ 1,020,332 Noninterest bearing 148,651 136,875 ----------------- -------------- TOTAL DEPOSITS 1,223,530 1,157,207 Short-term borrowed funds 104,535 67,374 Advances from Federal Home Loan Bank of Boston 238,681 175,081 Other liabilities 43,884 14,477 ----------------- -------------- TOTAL LIABILITIES 1,610,630 1,414,139 ----------------- -------------- SHAREHOLDERS' EQUITY Preferred stock, par value $1.00 per share-authorized 4,000,000 shares, no shares outstanding in 1997 or 1996 - - Common stock, par value $.66 2/3 per share-authorized 22,500,000 shares, issued 13,080,325 shares at March 31, 1997 and 13,008,787 shares at December 31, 1996 8,718 8,672 Paid-in capital 98,234 97,406 Retained earnings 30,094 28,223 Net unrealized losses on securities available for sale, after tax effects (2,757) (929) Cost of 30,364 shares at March 31, 1997 and 28,055 shares at March 31, 1996 of common stock in treasury (470) (419) ----------------- -------------- TOTAL SHAREHOLDERS' EQUITY 133,819 132,953 ----------------- -------------- $ 1,744,449 $ 1,547,092 ================= ============== Number of common shares outstanding 13,050 12,981 ================= ============== Common shareholders' equity per share $ 10.25 $ 10.24 ================= ==============
See accompanying notes to unaudited consolidated financial statements. -1- 4 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
======================================================================================================================= THREE MONTHS ENDED MARCH 31, ======================================================================================================================= (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 ======================================================================================================================= Interest and dividend income: Interest on loans and leases $ 24,399 $ 20,775 Interest on investment securities: Taxable 4,796 4,423 Tax-exempt 158 221 -------- --------- 4,954 4,644 Dividends on marketable equity securities 59 83 Other 91 238 -------- --------- TOTAL INTEREST AND DIVIDEND INCOME 29,503 25,740 -------- --------- Interest expense: Interest on deposits 10,577 10,079 Interest on borrowings: Short-term 3,816 1,957 Long-term 106 3 -------- --------- TOTAL INTEREST EXPENSE 14,499 12,039 -------- --------- NET INTEREST AND DIVIDEND INCOME 15,004 13,701 Provision for loan and lease losses 702 905 -------- --------- NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 14,302 12,796 -------- --------- Other income: Service charges on deposit accounts 980 969 Loan servicing fees 407 400 Net gains on trading securities - 153 Net gains (losses) on sales of investment securities (6) 57 Net gains on sales of loans 548 438 Leasing activities 775 702 Trust fees 617 559 Other 1,051 554 -------- --------- 4,372 3,832 -------- --------- Other expense: Salaries and employee benefits 6,561 5,753 Occupancy and equipment expense 1,935 1,749 Professional fees 376 619 Advertising and marketing 315 517 Operation of foreclosed real estate 45 91 Goodwill and deposit base intangible amortization 155 167 Other 2,587 2,681 -------- --------- 11,974 11,577 -------- --------- INCOME BEFORE INCOME TAXES 6,700 5,051 Income taxes 1,958 1,496 -------- --------- NET INCOME AVAILABLE TO COMMON STOCK $ 4,742 $ 3,555 ======== ========= Weighted average common shares outstanding 13,014 12,714 ======== ========= Earnings per common share $ .36 $ .28 ======== ========= Dividends declared per common share $ .22 $ .17 ======== =========
See accompanying notes to unaudited consolidated financial statements. -2- 5 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
==================================================================================================================== NET UNREALIZED LOSSES COMMON STOCK ON SECURITIES TREASURY STOCK ------------------ PAID-IN RETAINED AVAILABLE ---------------- (IN THOUSANDS) SHARES DOLLARS CAPITAL EARNINGS FOR SALE SHARES DOLLARS TOTAL =========================================================================================================================== BALANCE AT DECEMBER 31, 1996 13,009 $ 8,672 $ 97,406 $ 28,223 $ (929) (28) $ (419) $132,953 Net income - - - 4,742 - - - 4,742 Common cash dividends declared - $.22 per share - - - (2,871) - - - (2,871) Issuance of common stock under stock option plan and related tax effects 52 34 613 - - - - 647 Issuance of common stock under employee stock purchase plan 17 12 215 - - - - 227 Change in net unrealized gains (losses) on securities available for sale - - - - (1,828) - - (1,828) Cost of shares acquired for treasury 2 - - - - (2) (51) (51) ------ ------- -------- -------- -------- ----- ------- ------- BALANCE AT MARCH 31, 1997 13,080 $ 8,718 $ 98,234 $ 30,094 $ (2,757) (30) $ (470) $133,819 ====== ======= ======== ======== ======== ===== ======= ========
See accompanying notes to unaudited consolidated financial statements. -3- 6 CFX CORPORATION AND SUBSIDIARIES Part I - Financial Information Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
========================================================================================================================== THREE MONTHS ENDED MARCH 31, ========================================================================================================================== (In thousands) 1997 1996 ========================================================================================================================== OPERATING ACTIVITIES Net income $ 4,742 $ 3,555 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,067 1,439 Amortization of deferred credit on leasehold residual (292) (353) Provision for loan and lease losses 702 905 Provision for foreclosed real estate losses - 79 Loans originated and acquired for sale (42,726) (25,966) Principal balance of loans sold 36,837 24,726 Net gain on sale of portfolio loans (320) - Net gain (loss) on sale of foreclosed real estate (27) 9 Net (gain) loss on investment securities 6 (57) Net increase in trading securities - (24,400) Net deferred income tax provision 1,301 239 Increase in cash surrender value of bank-owned life insurance (401) - Other 409 (2,315) ------------ ------------- NET USED BY OPERATING ACTIVITIES 1,298 (22,139) ------------ ------------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale 54,837 1,904 Proceeds from maturities of securities available for sale 7,311 20,329 Purchase of securities available for sale (179,721) (25,048) Proceeds from maturities of securities held to maturity 2,086 15,196 Purchases of securities held to maturity (300) (23,943) Proceeds from the sale of, or payments on, foreclosed real estate 854 255 Proceeds from the sale of portfolio loans 12,061 - Net decrease (increase) in interest bearing deposits with other banks (4,431) 13 Net increase in loans and leases (45,667) (23,675) Purchases of premises and equipment (1,851) (455) ------------ ------------- NET CASH USED BY INVESTING ACTIVITIES (154,821) (35,424) ------------ ------------- FINANCING ACTIVITIES Net increase in noninterest bearing deposits and savings accounts 11,092 572 Net increase in time certificates of deposit 55,231 61,614 Net increase in short-term borrowings 37,161 5,812 Proceeds from FHLBB advances with maturities in excess of three months 178,260 225 Payments of FHLBB advances with maturities in excess of three months (70,000) - Net payments of FHLBB advances with maturities of three months or less (44,660) (3,684) Common cash dividends paid (2,708) (2,895) Proceeds from issuance of common stock 874 623 Cost of shares acquired for treasury (51) - Fractional shares paid out - (26) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 165,199 62,241 ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS 11,676 4,678 Cash and cash equivalents at beginning of period 50,404 60,041 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,080 $ 64,719 ============ ============ SUPPLEMENTARY INFORMATION: Interest paid on deposit accounts $ 10,226 $ 9,514 Interest paid on borrowed funds 3,104 2,235 Income taxes paid 250 488 Transfers from loans to foreclosed real estate 410 525 Net increase in due to broker 25,214 -
See accompanying notes to unaudited consolidated financial statements. -4- 7 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1997 =============================================================================== 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 three month period ended March 31, 1997 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 and Form 10-K/A for the year ended December 31, 1996. =============================================================================== NOTE B-ACQUISITIONS =============================================================================== COMPLETED On July 1, 1996, the Company acquired The Safety Fund Corporation (Safety Fund) and the Milford Co/operative Bank (Milford). 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 1.785 shares and 2.777 shares, respectively, of the Company's common stock, resulting in the issuance of 2,973,000 shares and 1,914,000 shares, respectively, of the Company's common stock to Safety Fund and Milford shareholders. Cash was paid in lieu of issuing fractional shares. 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. 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. Both the Safety Fund and Milford mergers were accounted for by the pooling-of-interests method of accounting, and as such, 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. PENDING On February 13, 1997, the Company signed a definitive agreement to acquire all of the outstanding common stock of Portsmouth Bank Shares, Inc. (Portsmouth), a New Hampshire bank holding company, headquartered in Portsmouth, N.H. Pursuant to the definitive agreement each of Portsmouth's outstanding shares of common stock will be converted into .9314 shares of the Company's common stock. In the event that the average price of the Company's common stock for the ten trading days immediately before the Company receives the last regulatory approval required for the transaction is below $15.70, the exchange ratio becomes 1.0294 shares and the exchange ratio floats between .9314 and 1.0294 shares if the average price of the Company's common stock is between $17.375 and $15.70. Portsmouth has the right to terminate the agreement if the average price of the Company's common stock is below $14.20 per share unless the Company agrees to increase the exchange ratio. At December 31, 1996, Portsmouth had (unaudited) total assets of $272 million, deposits of $198 million and stockholder's equity of $66 million. Portsmouth's bank subsidiary, Portsmouth Savings Bank, operates 3 full service offices in Portsmouth, North Hampton and Greenland, New Hampshire. On March 24, 1997, the Company entered into a definitive agreement to acquire all of the outstanding common stock of Community Bankshares, Inc. (Community), a New Hampshire bank holding company, headquartered in Concord, New Hampshire. Pursuant to the definitive agreement, each outstanding share of Community common stock will be converted into 2.2 shares of CFX common stock. If the average price of CFX common stock for the fifteen days preceding the closing date is between $18.18 and $20.00, the exchange ratio floats between 2.2 and 2.0 shares. Community may terminate the agreement if the average price of CFX common stock is below $13.50 per share unless CFX agrees to increase the exchange ratio. -5- 8 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1997 =============================================================================== NOTE B-ACQUISITIONS - (Cont'd.) =============================================================================== Both proposed transactions are expected to be tax free to the owners of Portsmouth and Community and are subject to regulatory approval and the approval of the Company's, Portsmouth's and Community's shareholders. It is anticipated that the transactions will be accounted for by the pooling-of-interests method of accounting. At December 31, 1996, Community had (unaudited) total assets of $551 million, deposits of $396 million and shareholder's equity of $41 million. Community's bank subsidiaries, Concord Savings Bank, headquartered in Concord, New Hampshire and Centerpoint Bank, headquartered in Bedford, New Hampshire, operate 11 branches located in Merrimack, Hillsborough, Belknap and Rockingham Counties. =============================================================================== NOTE C-RECENT ACCOUNTING PRONOUNCEMENTS =============================================================================== EARNINGS PER SHARE In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which requires dual presentation of basic and diluted earnings per share (EPS) on the face of the income statement and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The Company will be required to report both basic and diluted EPS, showing the effects of any dilution for common stock options. The Statement is effective for financial statements issued for periods ending after December 15, 1997. The dilutive effect of stock options is immaterial for the quarter ended March 31, 1997. CAPITAL STRUCTURE Also in March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About Capital Structure", to consolidate existing disclosure requirements to nonpublic and public entities. The Statement is effective for financial statements issued for periods ending after December 13, 1997. Management does not believe that additional disclosure is required for the Company at this time. -6- 9 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1997 =============================================================================== 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 this discussion to the 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 multi-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 results of operations for 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. 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 1997 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 1997 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. NET INCOME & EARNINGS PER COMMON SHARE Net income was $4,742,000, or $.36 per share, for the quarter ended March 31, 1997, compared to $3,555,000, or $.28 per share, for the corresponding period a year ago. Net income increased 33% while earnings per common share increased 29%. The increase in net income was primarily due to increased core earnings (net interest and dividend income and other income). Total core earnings were $19,376,000 and $17,533,000 for the three months ended March 31, 1997, and March 31, 1996, an increase of $1,843,000, or 10.5%. The increase was comprised of increases in net -7- 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. MARCH 31, 1997 =============================================================================== RESULTS OF OPERATIONS - GENERAL- (CONT'D.) =============================================================================== interest and dividend income of $1,303,000 and other income of $540,000. The stronger core earnings were the result of a $218 million, or 23%, 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 certain operating expenses. NET INTEREST AND DIVIDEND INCOME 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 $75,000 and $80,000 for the three months ended March 31, 1997 and 1996, respectively. The taxable-equivalent income adjustments for investment securities are $100,000 and $139,000 for the three months ended March 31, 1997 and 1996, respectively. These adjustments, however, are for comparison purposes only and have no impact on reported net income.
=========================================================================================================================== THREE MONTHS ENDED MARCH 31, 1997 1996 =========================================================================================================================== 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 $ 1,156,557 $ 24,252 8.50% $ 939,378 $ 20,621 8.83% Tax-exempt loans and leases 9,231 222 9.75 8,184 234 11.50 Taxable securities 297,922 4,855 6.61 309,298 4,507 5.86 Tax-exempt securities 14,047 258 7.45 19,808 359 7.29 Other 6,187 91 5.97 21,027 238 4.55 ----------- ---------- ----------- ------------ Total interest earning assets 1,483,944 29,678 8.11 1,297,695 25,959 8.05 ---------- ------------ Noninterest earning assets 134,153 96,516 ----------- ----------- Total $ 1,618,097 $ 1,394,211 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Savings deposits $ 432,542 2,413 2.26 $ 450,187 2,653 2.37 Time deposits 592,975 8,164 5.58 528,492 7,426 5.65 Advances from Federal Home Loan Bank of Boston 198,438 2,745 5.61 93,207 1,382 5.96 Other borrowed funds 98,140 1,177 4.86 50,984 578 4.56 ----------- ---------- ----------- ------------ Total interest bearing liabilities 1,322,095 14,499 4.45 1,122,870 12,039 4.31 ---------- ------------ Noninterest bearing liabilities: Demand deposits 136,624 121,942 Other 23,418 14,793 Shareholders' equity 135,960 134,606 ----------- ----------- Total $ 1,618,097 $ 1,394,211 =========== =========== Net interest and dividend income $ 15,179 $ 13,920 ========== ============ Interest rate spread 3.66% 3.74% Net interest margin 4.15% 4.31%
-8- 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. MARCH 31, 1997 ================================================================================ 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 MARCH 31, 1997 VS. 1996 INCREASE (DECREASE) DUE TO =================================================================================================================== (IN THOUSANDS) VOLUME RATE NET =================================================================================================================== Interest and dividends earned on: Loans and leases $ 8,463 $(4,832) $ 3,631 Tax-exempt loans and leases 125 (137) (12) Taxable securities (958) 1,306 348 Tax-exempt securities (153) 52 (101) Other (516) 369 (147) ------ ------- ------- Total interest and dividend income 6,961 (3,242) 3,719 ------- ------- ------- Interest paid on: Savings deposits (110) (130) (240) Time deposits 1,342 (604) 738 Advances from Federal Home Loan Bank of Boston 1,915 (552) 1,363 Other borrowed funds 558 41 599 ------- ------- ------- Total interest expense 3,705 (1,245) 2,460 ------- ------- ------- Change in net interest and dividend income $ 3,256 $(1,997) $ 1,259 ======= ======= =======
-9- 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. MARCH 31, 1997 =============================================================================== RESULTS OF OPERATIONS - GENERAL - (Cont'd.) =============================================================================== Taxable-equivalent net interest and dividend income was $15,179,000 for the three months ended March 31, 1997, compared to $13,920,000 for the same period a year ago. The increase in net interest and dividend income in the 1997 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 Company's net interest margin of 4.15% for the three months ended March 31, 1997 decreased from 4.31% for the corresponding period a year ago. The decrease in net interest margin was partially due to the increase in average earning assets being funded with higher cost liabilities (predominantly FHLBB borrowings, repurchase agreements and brokered certificates of deposits) and due to the Company's investment in Bank-Owned Life Insurance ("BOLI") which totaled $30 million at March 31, 1997. This investment in BOLI, which occurred in the second and third quarters of 1996, had a negative impact on the net interest margin of 5 basis points. BOLI 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 decrease the Company's 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, 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 provision for loan and lease losses in the three months ended March 31, 1997 was $702,000, compared to $905,000, for the same period a year ago. The lower provision for loan and lease losses in 1997 is primarily the result of the higher net charge-offs in 1996 compared to 1997 as discussed in the "Risk Elements - Allowance for Loan and Lease Losses" section of the Management's Discussion and Analysis. Total net charge-offs amounted to $781,000 for the three months ended March 31, 1997 as compared to $1,032,000 for the three months ended March 31, 1996. 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. The majority of the total charge-offs for the first quarter of 1997 resulted from one borrower totaling $537,000 in a full settlement. At March 31, 1997, nonperforming loans were $8,803,000, or .77% of total loans and leases, compared to $8,299,000, or .74% of total loans and leases, as of December 31, 1996. The allowance for loan and lease losses as a percentage of nonperforming loans as of March 31, 1997 and December 31, 1996 amounted to 177.91% and 189.66%, respectively. The increase in nonperforming loans was in the commercial loan portfolio. -10- 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. MARCH 31, 1997 OTHER INCOME Other income for the three months ended March 31, 1997 totaled $4,372,000, compared to $3,832,000, for the same period a year ago. The increase of $540,000 in other income for the first quarter of 1997 compared to first quarter of 1996 is principally due to investments in Bank-Owned Life Insurance (BOLI). This investment, totaling $30,000,000 at March 31, 1996 generated $401,000 in other income during the first quarter of 1997. This investment was not in place during the first quarter of 1996. (For more information on BOLI, see "Other Assets" section of this analysis.) Income from leasing activities and trust fees increased slightly in the first quarter of 1997 as compared to the first quarter of 1996. The increase of $73,000 in leasing activities was the result of the 67% growth in the leases serviced for others, which totaled $108,294,000 at March 31, 1997, as well as the increase in the amount of leases securitized/sold of 18%. Trust assets increased 6% over the past year, to end at $371 million at March 31, 1997. Offsetting the increase in other income was a net decrease of $106,000 for the first quarter of 1997 compared to the first quarter of 1996 in net gains on trading and investment securities and sale of loans. Net gains on the sale of loans increased $110,000 from the sale of approximately $37 million in the first quarter of 1997 as compared to $25 million in the first quarter of 1996. Net gains on trading securities decreased $153,000 as a result of not investing in trading securities in the first quarter of 1997. OTHER EXPENSE Other expense for the three months ended March 31, 1997 totaled $11,974,000, compared to $11,577,000, for the same period a year ago. The increase in other expenses of $397,000 in the three month period ended March 31, 1997, compared to the same period a year ago, is principally due to increases in salaries and employees benefits of $808,000, partially offset by a reduction in professional fees of $243,000 and advertising and marketing expenses of $202,000. The reduction in professional fees is due to efficiencies gained in the 1996 mergers. The increase in salaries was the result of merit increases, the development of a trust function at CFX Bank, the additional staffing for two de novo branches, and the increase in staffing in the lending functions. The decrease in advertising and marketing is primarily due to timing of expenditures related to specific product initiatives. Beginning in the second quarter of 1997 a relationship account will be announced which is anticipated to increase these expenses to the 1996 levels. INCOME TAXES Income taxes for the three months ended March 31, 1997 was 29.22% of pretax income, compared to 29.62%, of pretax income for the same period a year ago. -11- 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. MARCH 31, 1997 =============================================================================== FINANCIAL CONDITION =============================================================================== GENERAL Over the past several years, the Company has actively acquired banks and leveraged the balance sheet. Both strategies have been undertaken to enhance shareholder value. In the first quarter of 1997, two additional acquisitions were announced and continued the leverage of shareholders' equity. Total assets increased $197 million during the first quarter to $1.7 billion at March 31, 1997. This increase was primarily comprised of securities of $132 million and loans and leases of $32 million. INVESTMENT SECURITIES The carrying value and estimated fair value of investment securities at March 31, 1997 and December 31, 1996, follows:
====================================================================================================================== MARCH 31, December 31, 1997 1996 ====================================================================================================================== AMORTIZED FAIR AMORTIZED FAIR (IN THOUSANDS) COST VALUE COST VALUE ====================================================================================================================== Securities available for sale: Debt securities: United States Treasury and agency obligations $ 176,249 $ 173,368 $ 129,426 $128,863 State and municipal 439 432 439 441 Corporate bonds 1,133 1,146 3,138 3,163 Federal agency mortgage pass-through securities 68,758 66,817 76,068 75,153 Other collateralized mortgage obligations (CMO's) 119,270 118,709 19,799 19,608 Marketable equity securities 2,987 3,719 5,961 5,961 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 15,232 15,232 12,135 12,135 --------- --------- --------- -------- TOTAL SECURITIES AVAILABLE FOR SALE $ 384,068 $ 379,423 $ 246,965 $245,324 ========= ========= ========= ======== Securities held to maturity: Debt securities: United States Treasury and agency obligations $ 8,491 $ 8,317 $ 9,417 $ 9,389 State and municipal 13,568 13,517 13,986 14,083 Federal agency mortgage pass-through securities 7,598 7,642 7,783 7,874 Other collateralized mortgage obligations (CMO's) 994 994 1,184 1,185 Other 300 300 300 300 --------- --------- --------- -------- TOTAL SECURITIES HELD TO MATURITY $ 30,951 $ 30,770 $ 32,670 $ 32,831 ========= ========= ========= ========
As discussed in Note B-Acquisitions in the "Notes to Consolidated Financial Statements" section the Company signed a definitive agreement to acquire all of the outstanding capital stock of Portsmouth. At December 31, 1996, Portsmouth has a Tier 1 leverage capital ratio of 24.3%. A total of approximately $300 million in interest earning assets and interest bearing liabilities are anticipated to be added to the Company to leverage this higher capital base. The Company commenced the leverage program during the first quarter of 1997 by purchasing $118,539,000 in investment securities and $35,731,000 in mortgage loans. The purchase of the investment securities and loans were funded through additional advances from the Federal Home Loan Bank of Boston. See "Financial Condition - Deposits and Borrowed Funds" of this Management's Discussion and Analysis. -12- 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. MARCH 31, 1997 =============================================================================== 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:
============================================================================================================= MARCH 31, December 31, ============================================================================================================= (DOLLARS IN THOUSANDS) 1997 1996 ============================================================================================================= % OF % of AMOUNT PORTFOLIO Amount Portfolio ============================================================================================================= Real estate: Residential $ 745,987 64.83% $ 712,980 63.76% Construction 7,070 .61 8,101 .72 Commercial 147,224 12.79 142,989 12.79 Commercial, financial, and agricultural 117,211 10.19 120,380 10.77 Warehouse lines of credit to leasing companies 6,823 .59 18,393 1.64 Consumer lease financing 80,773 7.02 67,146 6.01 Other consumer 45,570 3.96 48,175 4.31 ------------ --------- ---------- ------ Total loans and leases 1,150,658 100.00% 1,118,164 100.00% ========= ====== Less allowance for loan and lease losses 15,661 15,740 ------------ ---------- Net loans and leases $ 1,134,997 $1,102,424 ============ ==========
The $32,494,000 increase in total loans and leases was primarily due to a $33,007,000 increase in residential real estate loans, and a $13,627,000 increase in indirect automobile leasing offset by a $11,570,000 decline in warehouse lines to leasing companies due to an end of quarter securitization. Residential loan production is generated by a combination of originations and purchases by the Company's mortgage banking affiliate, CFX Mortgage. The consumer lease financing 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 $108 million 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 surrender value (CSV) of the policy. The CSV 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 when an employee dies. 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 of Boston advances). While the earnings from the investment are recorded in other income as the CSV increases, the net interest margin is negatively impacted as a result of funding the investment with wholesale borrowings. -13- 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. MARCH 31, 1997 =============================================================================== DEPOSITS AND BORROWED FUNDS =============================================================================== The following table shows the various components of deposits and borrowed funds at the dates indicated:
=========================================================================================================== MARCH 31, December 31, =========================================================================================================== (DOLLARS IN THOUSANDS) 1997 1996 =========================================================================================================== % OF % of AMOUNT TOTAL Amount Total =========================================================================================================== Deposits: Noninterest bearing demand deposits $ 148,651 12.15% $ 136,875 11.83% Regular savings deposits 174,319 14.25 167,465 14.47 NOW & money market deposits 260,483 21.29 268,022 23.16 Time deposits 526,118 43.00 515,085 44.51 ------------ ------- ----------- ------- Total retail deposits 1,109,571 90.69 1,087,447 93.97 Brokered time deposits 113,959 9.31 69,760 6.03 ------------ ------- ----------- ------- Total deposits $ 1,223,530 100.00% $ 1,157,207 100.00% ============ ======= =========== ======= Borrowed Funds: Advances from Federal Home Loan Bank of Boston $ 238,681 69.54% $ 175,081 72.21% Other borrowed funds 104,535 30.46 67,374 27.79 ------------ ------- ----------- ------- Total borrowed funds $ 343,216 100.00% $ 242,455 100.00% ============ ======= =========== =======
The increase in deposits, advances from the Federal Home Loan Bank of Boston, and other borrowed funds funded asset growth over the past twelve months. Management customarily directs movement of funding between brokered deposits, advances from the Federal Home Loan Bank of Boston and repurchase agreements (included in other borrowed funds) in order to achieve a more favorable cost of funds. =============================================================================== SHAREHOLDERS' EQUITY =============================================================================== Shareholders' equity increased by $866,000 as of March 31, 1997 from $132,953,000 at December 31, 1996 to $133,819,000 at March 31, 1997. The increase was due to $4,742,000 in net income, issuance of $647,000 in common stock under the stock option plan, issuance of $227,000 in common stock under the employee stock purchase plan offset by a $1,828,000 increase in net unrealized losses on securities available for sale, cost of shares acquired for treasury of $51,000, and declaration of $2,871,000 in cash dividends on common stock. -14- 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. MARCH 31, 1997 =============================================================================== 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:
======================================================================================================================= MARCH 31, December 31, ======================================================================================================================= (DOLLARS IN THOUSANDS) 1997 1996 ======================================================================================================================= % OF % of AMOUNT TOTAL Amount Total ======================================================================================================================= Nonperforming loans: Real estate: Residential $ 5,318 60.41% $ 5,986 72.13% Commercial 2,410 27.38 1,146 13.81 Commercial, financial, and agricultural 977 11.10 1,021 12.30 Consumer and other 98 1.10 146 1.76 ---------- ------- ---------- ------ 8,803 100.00% 8,299 100.00% ---------- ======= ---------- ====== Foreclosed real estate: Residential 1,101 60.96% 1,383 62.21% Construction 428 23.70 428 19.25 Commercial 287 15.89 422 18.98 Valuation allowance (10) (.55) (10) (.44) ---------- ------- ---------- ------ 1,806 100.00% 2,223 100.00% ---------- ====== ---------- ====== Total nonperforming assets $ 10,609 $ 10,522 ========== ========== Nonperforming loans as a percent of total loans and leases .77% .74% ====== ====== Nonperforming assets as a percent of total loans and leases and foreclosed real estate .92% .94% ====== ======
-15- 18 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. MARCH 31, 1997 =============================================================================== RISK ELEMENTS - (Cont'd.) =============================================================================== The decrease in foreclosed real estate over the December 31, 1996 balance is reflective of the efforts to expedite the foreclosure sale process. Loans delinquent less than 90 days have decreased since year end to $24,118,000 at March 31, 1997 from $27,051,000 at December 31, 1996. The reduction is primarily noted in the residential real estate portfolio and is principally due to a more intensified collection process. The following is a summary of information pertaining to impaired loans:
=========================================================================================================== MARCH 31 December 31 =========================================================================================================== (DOLLARS IN THOUSANDS) 1997 1996 =========================================================================================================== Loans with a valuation allowance $ 2,176 $ 2,816 Loans without a valuation allowance 3,100 2,585 -------- --------- Total impaired loans $ 5,276 $ 5,401 ======== ========= Valuation allowance allocated to impaired loans $ 754 $ 934 ======== =========
=============================================================================== 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:
=============================================================================================================== THREE MONTHS ENDED MARCH 31, (IN THOUSANDS) 1997 1996 =============================================================================================================== Balance at beginning of period $ 15,740 $ 15,449 Provision for loan and lease losses 702 905 Loans charged-off (1,021) (1,203) Recoveries of loans previously charged-off 240 171 --------- --------- Balance at end of period $ 15,661 $ 15,322 ========= ========= Allowance for loan and lease losses as a percent of total loans and leases 1.36% 1.62% ========= ========= Allowance for loan and lease losses as a percent of total nonperforming loans 177.91% 135.79% ========= ========= Net charge-offs/average loans and leases (1) .27% .44% --------- ---------
(1) 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. -16- 19 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONT'D. MARCH 31, 1997 =============================================================================== 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. =============================================================================== 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 March 31, 1997, interest bearing deposits with other banks totaled $4,628,000 and trading and available for sale securities totaled $379,423,000. 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 $8,922,000 as of March 31, 1997, comprised of $3,961,000 in cash and due from banks and interest bearing deposits with bank subsidiaries and notes receivable from bank subsidiaries of $4,961,000. -17- 20 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. MARCH 31, 1997 =============================================================================== LIQUIDITY (CON'T) =============================================================================== 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 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. 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. 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). As of March 31, 1997, the Company and each of its banking subsidiaries were in compliance with all applicable regulatory capital requirements. The following table sets forth the minimum regulatory capital requirements and the actual capital ratios of the Company and its banking subsidiaries at March 31, 1997:
==================================================================================================== REQUIRED MINIMUM ACTUAL ==================================================================================================== Total capital to risk-weighted assets: Consolidated 8.0% 14.2% CFX Bank 8.0 11.8 Safety Fund 8.0 13.7 Orange 8.0 21.2 Tier 1 capital to risk-weighted assets: Consolidated 4.0 13.0 CFX Bank 4.0 10.7 Safety Fund 4.0 12.4 Orange 4.0 19.9 Tier 1 capital to average assets: Consolidated 4.0 7.9 CFX Bank 4.0 6.8 Safety Fund 4.0 6.8 Orange 4.0 11.3
-18- 21 CFX CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION MARCH 31, 1997 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 On February 21, 1997, a Form 8-K was filed announcing the Company entered into a definitive agreement for the acquisition of Portsmouth Bank Shares, Inc., headquartered in Portsmouth, New Hampshire. -19- 22 CFX CORPORATION AND SUBSIDIARIES MARCH 31, 1997 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 May 15, 1997 /s/ Gregg R. Tewksbury ------------------------------- Gregg R. Tewksbury Authorized Officer Chief Financial Officer -20- EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 3-MOS DEC-31-1996 DEC-31-1997 MAR-31-1996 MAR-31-1997 0 59,080 0 4,628 0 3,000 0 0 0 379,423 0 30,951 0 30,770 0 1,150,658 0 15,661 0 1,744,449 0 1,223,530 0 276,535 0 43,884 0 66,681 0 0 0 0 0 8,718 0 125,101 0 1,744,449 20,775 24,399 4,644 4,954 321 150 25,740 29,503 10,079 10,577 12,039 14,499 13,701 15,004 905 702 648 542 11,577 11,974 5,051 6,700 3,555 4,742 0 0 0 0 3,555 4,742 .28 .36 0 0 4.31 4.15 0 8,803 0 24,118 0 0 0 0 15,449 15,740 1,203 1,021 171 240 15,322 15,661 0 0 0 0 0 0
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