-----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, Gfz92EDvOoNs+W7mlenKM4xSeoTszUtFJnNH2j0SVxsNKKe0B7C4K/n3xGY0gQhq /l4kcDulhBLQRXe/ApzkZw== 0000950133-97-002972.txt : 19970815 0000950133-97-002972.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950133-97-002972 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97663941 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 QUARTER ENDED 6-30-97 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 JUNE 30, 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 July 31, 1997, 13,157,620 shares of the registrant's common stock were outstanding. ================================================================================ 2 CFX CORPORATION AND SUBSIDIARIES INDEX
PART I FINANCIAL INFORMATION PAGE --------------------- ---- Item 1 Financial Statements: Consolidated Balance Sheets -- June 30, 1997 and December 31, 1996............................................................1 Consolidated Statements of Income -- Three months ended June 30, 1997 and 1996; Six months ended June 30, 1997 and 1996..........................................2 Consolidated Statement of Shareholders' Equity -- Six months ended June 30, 1997...................................................3 Consolidated Statements of Cash Flows -- Six months ended June 30, 1997 and 1996..........................................4 Notes to Consolidated Financial Statements -- June 30, 1997....................................................................5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................7 PART II OTHER INFORMATION ----------------- Item 1 Legal Proceedings...................................................................20 Item 2 Changes in Securities...............................................................20 Item 3 Defaults upon Senior Securities.....................................................20 Item 4 Submission of Matters to a Vote of Security Holders.................................20 Item 5 Other Information...................................................................21 Item 6 Exhibits and Reports on Form 8-K....................................................21 SIGNATURES..........................................................................22 ----------
3 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED)
========================================================================================================================== JUNE 30, DECEMBER 31, ========================================================================================================================== (DOLLARS IN THOUSANDS) 1997 1996 ========================================================================================================================== ASSETS Cash and due from banks $ 58,846 $ 50,404 Federal funds sold 10,000 - ----------- ----------- CASH AND CASH EQUIVALENTS 68,846 50,404 Interest bearing deposits with other banks 211 197 Securities available for sale 364,360 245,324 Securities held to maturity 30,247 32,670 Mortgage loans held for sale 14,089 15,212 Loans and leases 1,286,669 1,118,164 Less allowance for loan and lease losses 16,042 15,740 ----------- ----------- NET LOANS AND LEASES 1,270,627 1,102,424 Premises and equipment 28,553 27,386 Mortgage servicing rights 5,937 5,313 Goodwill and deposit base intangibles 8,925 9,235 Foreclosed assets 5,631 2,223 Bank-owned life insurance 32,120 30,975 Other assets 29,484 25,729 ----------- ----------- $ 1,859,030 $ 1,547,092 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing $ 1,099,236 $ 1,020,332 Noninterest bearing 159,124 136,875 ----------- ----------- TOTAL DEPOSITS 1,258,360 1,157,207 Short-term borrowed funds 117,919 67,374 Advances from Federal Home Loan Bank of Boston 326,754 175,081 Other liabilities 17,672 14,477 ----------- ----------- TOTAL LIABILITIES 1,720,705 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 13,181,500 shares at June 30, 1997 and 13,008,787 shares at December 31, 1996 8,788 8,672 Paid-in capital 99,269 97,406 Retained earnings 32,023 28,223 Net unrealized losses on securities available for sale, after tax effects (1,164) (929) Cost of 37,877 shares at June 30, 1997 and 28,055 shares at December 31, 1996 of common stock in treasury (591) (419) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 138,325 132,953 ----------- ----------- $ 1,859,030 $ 1,547,092 =========== =========== Number of common shares outstanding 13,144 12,981 =========== =========== Common shareholders' equity per share $ 10.52 $ 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 SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ================================================================================================================= (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996 ================================================================================================================= Interest and dividend income: Interest on loans and leases $ 25,593 $ 21,652 $ 49,992 $ 42,427 Interest on investment securities: Taxable 6,312 4,660 11,108 9,083 Tax-exempt 172 228 330 449 -------- -------- -------- -------- 6,484 4,888 11,438 9,532 Dividends on marketable equity securities 48 83 107 166 Other 138 269 229 507 -------- -------- -------- -------- TOTAL INTEREST AND DIVIDEND INCOME 32,263 26,892 61,766 52,632 -------- -------- -------- -------- Interest expense: Interest on deposits 11,582 9,929 22,159 20,008 Interest on borrowings: Short-term 3,250 2,639 7,066 4,596 Long-term 1,651 5 1,757 8 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 16,483 12,573 30,982 24,612 -------- -------- -------- -------- NET INTEREST AND DIVIDEND INCOME 15,780 14,319 30,784 28,020 Provision for loan and lease losses 702 750 1,404 1,655 -------- -------- -------- -------- NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 15,078 13,569 29,380 26,365 -------- -------- -------- -------- Other income: Service charges on deposit accounts 952 1,007 1,932 1,976 Mortgage banking activities 1,231 680 2,186 1,518 Net gains on trading securities - - - 153 Net gains on investment securities 133 146 127 203 Leasing activities 392 659 1,167 1,361 Bank-owned life insurance 444 242 845 242 Trust fees 650 606 1,267 1,165 Other 404 652 1,054 1,206 -------- -------- -------- -------- 4,206 3,992 8,578 7,824 -------- -------- -------- -------- Other expense: Salaries and employee benefits 6,858 5,897 13,419 11,650 Occupancy and equipment expense 2,151 1,600 4,086 3,349 Professional fees 346 489 722 1,108 Advertising and marketing expense 460 471 775 988 Operation of foreclosed assets 86 62 131 153 Goodwill and deposit base intangible amortization 155 168 310 335 Other 2,741 2,763 5,328 5,444 -------- -------- -------- -------- 12,797 11,450 24,771 23,027 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 6,487 6,111 13,187 11,162 Income taxes 1,680 2,098 3,638 3,594 -------- -------- -------- -------- NET INCOME AVAILABLE TO COMMON STOCK $ 4,807 $ 4,013 $ 9,549 $ 7,568 ======== ======== ======== ======== Weighted average common shares outstanding 13,102 12,945 13,058 12,726 ======== ======== ======== ======== Earnings per common share $ .37 $ .31 $ .73 $ .59 ======== ======== ======== ======== Dividends declared per common share $ .22 $ - $ .44 $ .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 - - - 9,549 - - - 9,549 Common cash dividends declared - $.44 per share - - - (5,749) - - - (5,749) Issuance of common stock under stock option plan and related tax effects 156 104 1,648 - - - - 1,752 Issuance of common stock under employee stock purchase plan 17 12 215 - - - - 227 Change in net unrealized gains (losses) on securities available for sale - - - - (235) - - (235) Cost of shares acquired for treasury - - - - - (10) (172) (172) -------- -------- -------- -------- -------- ------- -------- --------- BALANCE AT JUNE 30, 1997 13,182 $ 8,788 $ 99,269 $ 32,023 $ (1,164) (38) $ (591) $ 138,325 ======== ======= ======== ======== ======== ======= ======== =========
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)
====================================================================================================================== SIX MONTHS ENDED JUNE 30, ====================================================================================================================== (IN THOUSANDS) 1997 1996 ====================================================================================================================== OPERATING ACTIVITIES Net income $ 9,549 $ 7,568 Adjustments to reconcile net income to net provided (cash) used by operating activities: Depreciation and amortization 2,190 2,644 Amortization of deferred credit on leasehold residual (583) (706) Provision for loan and lease losses 1,404 1,655 Loans originated and acquired for sale (70,789) (55,536) Principal balance of loans sold 71,912 49,058 Net gain on sale of portfolio loans (560) - Net gain on sale of foreclosed real estate 72 15 Net gain on investment securities (127) (356) Net deferred income tax provision 2,912 1,870 Increase in cash surrender value of bank-owned life insurance (845) (242) Other (3,128) (2,179) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 12,008 3,791 --------- --------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale 121,126 12,904 Proceeds from maturities of securities available for sale 52,804 28,519 Purchase of securities available for sale (293,635) (49,533) Proceeds from maturities of securities held to maturity 4,140 20,855 Purchase of securities held to maturity (1,580) (40,833) Proceeds from the sale of, or payments on, foreclosed real estate 1,219 429 Proceeds from sale of portfolio loans 21,542 - Net decrease in interest bearing deposits with other banks (14) (9,045) Net increase in loans and leases (195,240) (78,551) Purchases of bank-owned life insurance (300) (20,000) Purchases of premises and equipment (3,271) (1,728) --------- ---------- NET CASH USED BY INVESTING ACTIVITIES (293,208) (136,983) --------- --------- FINANCING ACTIVITIES Net increase (decrease) in noninterest bearing deposits and savings accounts 19,924 12,246 Net increase in time certificates of deposit 81,229 53,815 Net increase (decrease) in short-term borrowings 50,545 61,534 Proceeds from FHLBB advances with maturities in excess of three months 382,080 226 Payment of FHLBB advances with maturities in excess of three months or less (147,000) (1) Net increase (decrease) FHLBB advances with maturities of three months or less (83,407) 16,375 Common cash dividends paid (5,536) (4,580) Proceeds from issuance of common stock 1,979 535 Payments on fractional shares - (26) Acquisition of treasury shares (172) - --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIE 299,642 140,124 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 18,442 6,932 Cash and cash equivalents at beginning of period 50,404 46,893 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,846 $ 53,825 ========= ========= SUPPLEMENTARY INFORMATION: Interest paid on deposit accounts $ 20,930 $ 19,108 Interest paid on borrowed funds 7,961 4,495 Income taxes paid (refunded), net 1,741 1,186 Transfers from securities held to maturity to securities available for sale 15 - Transfers from loans to foreclosed real estate 4,699 1,743
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) June 30, 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 six month period ended June 30, 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 (CFX or the Company) annual report on Form 10-K for the year ended December 31, 1996. ================================================================================ NOTE B-ACQUISITIONS ================================================================================ 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. The exchange ratio will be .9314 shares of CFX Common stock for each Portsmouth share if the average CFX Stock price exceeds $17.376. 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 June 30, 1997, Portsmouth had unaudited total assets of $259 million, deposits of $190 million and stockholders' equity of $67 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. The exchange ratio will be 2.0 shares of CFX common stock for each Community share if the average CFX stock price exceeds $20.00. 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. At June 30, 1997, Community had unaudited total assets of $616 million, deposits of $429 million and shareholders' equity of $43 million. Community's bank subsidiaries, Concord Savings Bank, headquartered in Concord, New Hampshire, and Centerpoint Bank, headquartered in Bedford, New Hampshire, collectively operate 12 branches located in Merrimack, Hillsborough, Belknap and Rockingham Counties. 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. Shareholders of CFX approved the transactions at their annual meeting held on July 30, 1997. Community shareholder approval was received at a special meeting also held on July 30, 1997. In addition, Portsmouth shareholder approval was received at their special meeting held on July 31, 1997. The final exchange ratios for the Portsmouth and Community transactions are expected to be determined in August under the terms of the respective agreements. With the exception of the Massachusetts Board of Bank Incorporation, all regulatory approvals have been received. The following unaudited pro forma combined condensed financial statements give effect to the acquisitions under the pooling-of-interests method of accounting, but do not reflect anticipated expenses and nonrecurring charges or estimated expense savings and revenue enhancements anticipated to result from the acquisitions. -5- 8 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 ================================================================================ NOTE B-ACQUISITIONS - (Cont'd.) ================================================================================ The unaudited pro forma combined financial data is not necessarily indicative of the financial position and results of future operations of the combined entity or the actual financial position and results of operations that would have been achieved had the acquisitions been consummated at the date indicated.
PRO FORMA COMBINED CONDENSED BALANCE SHEETS ==================================================================================================================================== JUNE 30, 1997 PRO FORMA PRO FORMA (IN THOUSANDS, EXCEPT PER SHARE DATA) CFX PORTSMOUTH COMMUNITY ADJUSTMENT CFX ==================================================================================================================================== ASSETS Investment securities $ 394,607 $ 116,503 $ 231 $ 664,341 Net loans and leases 1,270,627 89,362 412,299 1,772,288 Other assets 193,796 53,588 50,344 $ (10,000)(1) 287,728 ----------- ----------- ---------- ----------- ---------- TOTAL ASSETS $ 1,859,030 $ 259,453 $ 615,874 $ (10,000) $2,724,357 =========== =========== ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 1,258,360 $ 189,869 $ 428,560 $1,876,789 Borrowed funds 444,673 - 138,875 $ (10,000)(1) 573,548 Other liabilities 17,672 2,293 5,346 25,311 ----------- ----------- ---------- ----------- ---------- TOTAL LIABILITIES 1,720,705 192,162 572,781 (10,000) 2,475,698 ----------- ----------- ---------- ---------- SHAREHOLDERS' EQUITY 138,325 67,291 43,043 248,659 ----------- ----------- ---------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,859,030 $ 259,453 $ 615,874 $ (10,000) $2,724,357 =========== =========== =========== =========== ========== Common shares outstanding 13,144 10,716(2) 23,860 =========== =========== ========== Pro forma common shareholders' equity per share $ 10.52 $ 10.42 =========== ==========
PRO FORM COMBINED CONDENSED INCOME STATEMENTS ==================================================================================================================================== PRO FORMA PRO FORMA (IN THOUSANDS, EXCEPT PER SHARE DATA) CFX PORTSMOUTH COMMUNITY ADJUSTMENT CFX ==================================================================================================================================== FOR THE THREE MONTHS ENDED JUNE 30, 1997 Net interest and dividend income $ 15,780 $ 2,600 $ 6,005 $ 24,385 Provision for loan and lease losses 702 - 318 1,020 Other income 4,206 267 1,288 5,761 Other expense 12,797 815 4,541 18,153 Income taxes 1,680 524 910 3,114 --------- --------- --------- --------- NET INCOME $ 4,807 $ 1,528 $ 1,524 $ 7,859 ========= ========= ========= ========= Weighted average common shares outstanding 13,102 10,806(2) 23,908 ========= ========= ========= Earnings per common share $ .37 $ .33 ========= ========= FOR THE SIX MONTHS ENDED JUNE 30, 1996 Net interest and dividend income $ 30,784 $ 5,185 $ 11,718 $ 47,687 Provision for loan and lease losses 1,404 - 558 1,962 Other income 8,578 509 2,586 11,673 Other expense 24,771 1,703 9,211 35,685 Income taxes 3,638 955 1,688 6,281 --------- --------- --------- --------- NET INCOME $ 9,549 $ 3,036 $ 2,847 $ 15,432 ========= ========= ========= ========= Weighted average common shares outstanding 13,058 10,724(2) 23,782 ========= ========= ========= Earnings per common share $ .73 $ .65 ========= =========
(1) Pro forma adjustment is for Federal Funds sold to Community by CFX. (2) The pro forma financial statements reflect the exchange of Portsmouth Common Stock for CFX Common Stock in connection with the Portsmouth acquisition at a Portsmouth Exchange Ratio of .9314 and reflect the exchange of Community Common Stock for CFX Common Stock at a Community Exchange Ratio of 2.0951, based on the average CFX Stock price for the period preceding July 31, 1997. The actual Exchange Ratios will depend on the CFX prices at or around the actual merger date, anticipated during the third quarter of 1997. -6- 9 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 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 and Annual Report on Form 10-K for the year ended December 31, 1996. 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. 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, expenses, and income tax expense. 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, the extent and timing of legislative and regulatory actions and reforms, and the ability of the Company to realize the benefits of its' integration plans associated with acquisitions. 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 AND EARNINGS PER COMMON SHARE Net income was $4,807,000 and $9,549,000, or $.37 and $.73 per share, for the three and six months ended June 30, 1997, respectively, compared to $4,013,000 and $7,568,000, or $.31 and $.59 per share, for the corresponding periods a year ago. Return on average assets was 1.10% and 1.14% for the three and six months ended June 30, 1997, respectively, compared to 1.10% and 1.07% for the corresponding periods a year ago. For the three and six months ended June 30, 1997, return on average common equity was 13.99% and 14.07%, respectively, compared to 12.37% and 11.48% for the corresponding periods a year ago. The increase in net income was primarily due to increased net revenues (net interest and dividend income and other income). Net revenues were $19,986,000 and $39,362,000 for the three and six months ended June 30, 1997, respectively, compared to $18,311,000 and $35,844,000 for the corresponding periods a year ago, an increase of 9.15% and 9.81% for the three and six months ended June 30, 1997, respectively. The stronger net revenues were the result of a $221 million, or 16.7%, increase in average interest earning assets during the six months ended June 30, 1997, compared to the same period in 1996 and continued focus on noninterest income. However, a portion of the increase in net revenues was offset by an increase in certain operating expenses. The increase interest earning assets was due to a planned balance sheet leverage strategy designed as a result of the pending acquisition of -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. JUNE 30, 1997 ================================================================================ RESULTS OF OPERATIONS - GENERAL ================================================================================ Portsmouth Bank Shares, Inc. which has high capital ratios. When the Portsmouth acquisition is consummated, it is expected that the capital ratios, on a combined basis, will approximate the capital ratios of the Company prior to the acquisition and leverage strategy. 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 $85,000 and $160,000 for the three and six months ended June 30, 1997, respectively, compared to $94,000 and $174,000 for the corresponding periods a year ago. The taxable-equivalent income adjustments for investment securities are $107,000 and $207,000 for the three and six months ended June 30, 1997, respectively, compared to $144,000 and $282,000 for the corresponding periods a year ago. These adjustments, however, are for comparison purposes only and have no impact on reported net income available to common stock.
================================================================================================================================== THREE MONTHS ENDED JUNE 30, 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 $1,208,681 $ 25,430 8.44% $ 989,182 $ 21,468 8.73% Tax-exempt loan and leases 9,163 248 10.86 9,150 278 12.22 Taxable securities 361,823 6,361 7.05 304,686 4,742 6.26 Tax-exempt securities 14,793 279 7.56 20,291 372 7.37 Other 8,799 138 6.29 21,588 270 5.03 ---------- ---------- ----------- ---------- Total interest earning assets 1,603,259 32,456 8.12 1,344,897 27,130 8.11 ---------- ---------- Noninterest earning assets 146,852 116,201 ---------- ---------- Total $1,750,111 $1,461,098 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Savings deposits $431,713 2,410 2.24 $ 451,093 2,622 2.34 Time deposits 654,882 9,173 5.62 529,160 7,307 5.55 Advances from Federal Home Loan Bank of Boston 255,000 3,756 5.91 118,593 1,650 5.60 Other borrowed funds 88,672 1,145 5.18 83,302 994 4.80 ---------- ---------- ----------- ---------- Total interest bearing liabilities 1,430,267 16,484 4.62 1,182,148 12,573 4.28 ---------- ---------- Noninterest bearing liabilities: Demand deposits 148,440 131,035 Other 33,633 17,463 Shareholders' equity 137,771 130,452 ---------- ---------- Total $1,750,111 $1,461,098 ========== ========== Net interest and dividend income $ 15,972 $ 14,557 ========== ========== Interest rate spread 3.50% 3.83% Net interest margin 4.00% 4.35%
-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. JUNE 30, 1997 ================================================================================ RESULTS OF OPERATION - GENERAL - (Cont'd.) ================================================================================
================================================================================================================================== SIX MONTHS ENDED JUNE 30, 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 $1,182,789 $ 49,682 8.47% $ 964,293 $ 42,089 8.78% Tax-exempt loans and leases 9,197 470 10.31 8,654 512 11.90 Taxable securities 330,106 11,216 6.85 306,992 9,249 6.06 Tax-exempt securities 14,422 537 7.51 20,049 731 7.33 Other 6,081 229 7.59 21,308 508 4.79 ---------- ---------- ---------- ---------- Total interest earning assets 1,542,595 62,134 8.12 1,321,296 53,089 8.08 ---------- ---------- Noninterest earning assets 139,835 106,358 ---------- ---------- Total $1,682,430 $1,427,654 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Savings deposits $432,125 4,823 2.25 $ 450,641 5,275 2.35 Time deposits 624,100 17,337 5.60 528,825 14,733 5.60 Advances from Federal Home Loan Bank of Boston 226,875 6,501 5.78 105,900 3,032 5.76 Other borrowed funds 91,962 2,322 5.09 67,143 1,572 4.71 ---------- ---------- ---------- ---------- Total interest bearing liabilities 1,375,062 30,983 4.54 1,152,509 24,612 4.29 ---------- ---------- Noninterest bearing liabilities: Demand deposits 142,565 126,489 Other 27,933 16,127 Shareholders' equity 136,870 132,529 ---------- ---------- Total $1,682,430 $1,427,654 ========== ========== Net interest and dividend income $ 31,151 $ 28,477 ========== ========== Interest rate spread 3.58% 3.79% Net interest margin 4.07% 4.33%
-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. JUNE 30, 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 FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 1997 VS. 1996 1997 VS. 1996 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ======================================================================================================================== (IN THOUSANDS) VOLUME RATE NET VOLUME RATE NET ======================================================================================================================== Interest and dividends earned on: Loans and leases $ 8,437 $(4,475) $ 3,962 $11,742 $(4,149) $ 7,593 Tax-exempt loans and leases 3 (33) (30) 75 (117) (42) Taxable securities 968 651 1,619 720 1,247 1,967 Tax-exempt securities (156) 63 (93) (245) 51 (194) Other (475) 343 (132) (810) 531 (279) ------- ------- ------- ------- ------- ------- Total interest and dividend income 8,777 (3,451) 5,326 11,482 (2,437) 9,045 ------- ------- ------- ------- ------- ------- Interest paid on: Savings deposits (106) (106) (212) (222) (230) (452) Time deposits 1,772 94 1,866 2,604 - 2,604 Advances from Federal Home Loan Bank of Boston 2,009 97 2,106 3,459 10 3,469 Other borrowed funds 68 83 151 616 134 750 ------- ------- ------- ------- ------- ------- Total interest expense 3,743 168 3,911 6,457 (86) 6,371 ------- ------- ------- ------- ------- ------- Change in net interest and dividend income $ 5,034 $(3,619) $ 1,415 $ 5,025 $(2,351) $ 2,674 ======= ======= ======= ======= ======= =======
-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. JUNE 30, 1997 ================================================================================ RESULTS OF OPERATIONS - GENERAL - (cont'd.) ================================================================================ Taxable-equivalent net interest and dividend income was $15,972,000 and $31,151,000, respectively, for the three and six months ended June 30, 1997, compared to $14,557,000 and $28,477,000 for the same periods 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 economic environment. Although net interest and dividend income has increased during the 1997 periods compared to the respective 1996 periods, the net interest margin has declined. This is highlighted in the previous table which indicates that increased margin dollars have resulted from volume which is partially offset by decreases in rates. The Company's net interest margin of 4.00% for the three months ended June 30, 1997 decreased from 4.35% for the corresponding period a year ago. The net interest margin for the six months ended June 30, 1997 was 4.07%, compared to 4.33% for the corresponding period a year ago. The decreases in net interest margins were 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 $32 million at June 30, 1997. The increase in average interest-earning assets was primarily the result of a leverage strategy invoked to utilize excess capital being acquired with the Portsmouth merger. These assets are being funded with wholesale borrowings creating a reduction in the net interest margin (see "Financial Condition - Investment Securities" section of this "Management's Discussion and Analysis"). The investment in BOLI, which occurred in the second and third quarters of 1996, had a negative impact on the net interest margin of 11 basis points for the three months ended June 30, 1997, and 12 basis points for the six months ended June 30, 1997. 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. On a fully tax-equivalent basis, the BOLI investments are yielding approximately 10%. (For more information on BOLI, see "Financial Condition - Other Assets" section of this "Management's Discussion and Analysis".) The current leverage strategies are designed to optimize the use of capital and enhance earnings and the return on equity. As traditional retail opportunities become available it's the Company's intent that, the leveraged assets, or wholesale assets, will be redeployed into higher yielding investments and wholesale funding will be replaced with core deposits. 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. (For further discussion on interest rates, see "Asset/Liability Management" section of this "Management's Discussion and Analysis".) PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses in the three and six months ended June 30, 1997 was $702,000, and $1,404,000, respectively, compared to $750,000, and $1,655,000 for the same periods a year ago. The lower provision for loan and lease losses in 1997 is primarily the result of lower net charge-offs in 1997 and lower nonperforming loans and leases 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 $1,102,000 for the six months ended June 30, 1997 ($537,000 resulting from one borrower) as compared to $1,673,000 for the six months ended June 30, 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. At June 30, 1997, nonperforming loans were $7,730,000, or .60% 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 -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. JUNE 30, 1997 ================================================================================ RESULTS OF OPERATIONS - GENERAL - (Cont'd.) ================================================================================ of nonperforming loans as of June 30, 1997 and December 31, 1996 amounted to 207.53% and 189.66%, respectively. OTHER INCOME Other income for the three and six months ended June 30, 1997 totaled $4,206,000 and $8,578,000, respectively, compared to $3,992,000, and $7,824,000, for the same periods a year ago. The increase in other income for 1997 compared to 1996 is principally due to mortgage banking activities, investments in BOLI and trust fees. The BOLI investment, totaling $32 million at June 30, 1997 generated $444,000 in other income during the second quarter of 1997, and $845,000 for the six months ended June 30, 1997. This investment was purchased in the second quarter of 1996. (For more information on BOLI, see "Financial Condition - Other Assets" section of this "Management's Discussion and Analysis".) The increase in mortgage banking activities in 1997 compared to 1996 is due to higher net gains on sales of loans and a sale of mortgage loan servicing. Net gains on the sale of loans for the first six months of 1997 increased by $137,000 over the same period a year ago from the sale of approximately $72 million in loans in 1997 as compared to $49 million in 1996. During the second quarter of 1997, servicing rights pertaining to approximately $80 million of mortgage loans was sold for a pre-tax gain of $435,000. The increase of $202,000 in BOLI revenue in the second quarter of 1997 versus 1996 resulted from an increase in the investment of such insurance and having it for the entire 3-month period in 1997 compared to a partial period in 1996. This investment, totaling $32 million at June 30, 1997 generated $444,000 in other income during the second quarter of 1997, and $845,000 for the six months ended June 30, 1997. (For more information on BOLI, see "Financial Condition - Other Assets" section of this "Management's Discussion and Analysis".) Trust assets increased 13% over the past year, to end at $405 million at June 30, 1997. Offsetting the increase in other income for the six months ended June 30, 1997 as compared to the same period a year ago, was a decrease in leasing activities as a result of one securitization in 1997 compared to three during the first six months of 1996, and the decrease in net gains on trading and investment securities of $229,000. OTHER EXPENSE Other expense for the three and six months ended June 30, 1997 totaled $12,797,000 and $24,771,000, respectively, compared to $11,450,000 and $23,027,000, respectively, for the same periods a year ago. The increases in other expenses of $1,347,000 and $1,744,000 in the three and six month periods ended June 30, 1997, respectively, compared to the same period a year ago, are principally due to increases in salaries and employee benefits of $961,000 and $1,769,000, occupancy and equipment expenses of $551,000 and $737,000, offset by reductions in professional fees of $143,000 and $386,000 and advertising and marketing expenses of $11,000 and $213,000. The increases in salaries was the result of merit increases, an increase in staffing in the lending and data processing functions, the additional staffing for two de novo branches, the development of a trust function at CFX Bank and the expansion of the trust function at Safety Fund National Bank. Occupancy and equipment expenses have increased as a result of opening a new operations center, technology enhancements, the creation of two de novo branches, and the relocation of two branches. The reductions in professional fees are due to efficiencies gained in the 1996 mergers. 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 was announced which has increased these expenses closer to the 1996 levels for the quarter. INCOME TAX Effective income tax rates for the three and six months ended June 30, 1997 were 25.90% and 27.59%, respectively, compared to 34.33%, and 32.20% for the same periods a year ago. The effective tax rates for the three and six month periods ended June 30, 1997 were lower than the respective periods in prior year because of higher credits pertaining to low-income housing projects, the increased investment in BOLI and other tax-exempt investments and the development of a Real Estate Investment Trust (REIT). -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. JUNE 30, 1997 ================================================================================ FINANCIAL CONDITION ================================================================================ INVESTMENT SECURITIES The carrying value and estimated fair value of investment securities at June 30, 1997 and December 31, 1996, follows:
================================================================================================================= JUNE 30, 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 $ 78,897 $ 78,072 $ 129,426 $ 128,863 State and municipal 439 441 439 441 Corporate bonds 1,005 1,019 3,138 3,163 Federal agency mortgage pass-through securities 91,699 90,866 76,068 75,153 Other collateralized mortgage obligations (CMO's) 173,176 172,997 19,799 19,608 Marketable equity securities 2,910 2,719 5,960 5,961 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 18,246 18,246 12,135 12,135 --------- --------- --------- --------- TOTAL SECURITIES AVAILABLE FOR SALE $ 366,372 $ 364,360 $ 246,965 $ 245,324 ========= ========= ========= ========= Securities held to maturity: Debt securities: United States Treasury and agency obligations $ 7,566 $ 7,486 $ 9,417 $ 9,389 State and municipal 14,023 14,080 13,986 14,083 Federal agency mortgage pass-through securities 7,492 7,568 7,783 7,874 Other collateralized mortgage obligations (CMO's) 766 767 1,184 1,185 Other 400 400 300 300 --------- --------- --------- --------- TOTAL SECURITIES HELD TO MATURITY $ 30,247 $ 30,301 $ 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 June 30, 1997, Portsmouth has a Tier 1 leverage capital ratio of 25.7%. 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 strategy during the first quarter of 1997. As of June 30, 1997, the Company has purchased $128,539,000 in investment securities and $105,665,000 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". -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. JUNE 30, 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:
============================================================================================================================ JUNE 30, DECEMBER 31, ============================================================================================================================ (DOLLARS IN THOUSANDS) 1997 1996 ============================================================================================================================ % OF % OF AMOUNT PORTFOLIO AMOUNT PORTFOLIO ============================================================================================================================ Real estate: Residential $ 849,919 66.06% $ 712,980 63.76% Construction 9,309 .72 8,101 .72 Commercial 147,035 11.43 142,989 12.79 Commercial, financial, and agricultural 121,851 9.47 120,380 10.77 Warehouse lines of credit to leasing companies 20,006 1.55 18,393 1.64 Consumer lease financing 93,047 7.23 67,146 6.01 Other consumer 45,502 3.54 48,175 4.31 ----------- ------ ----------- ------ Total loans and leases 1,286,669 100.00% 1,118,164 100.00% ====== ====== Less allowance for loan and lease losses 16,042 15,740 ----------- ----------- Net loans and leases $ 1,270,627 $ 1,102,424 =========== ===========
The $168,505,000 increase in total loans and leases was primarily due to a $136,939,000 increase in residential real estate loans From the Company's leverage strategy (see "Financial Condition - Investment Securities" section of this "Management's Discussion and Analysis") and a $25,901,000 increase in consumer lease financing. 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 $117 million in leases for others. Residential loan production is primarily generated by a combination of originations and purchases by the Company's mortgage banking affiliate, CFX Mortgage. Residential loans are originated using standards established by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) allowing CFX Mortgage to sell to the secondary market those loans which are not desired by the Company's banking subsidiaries. During the first six months of 1997, CFX Mortgage originated and purchased $188 million in residential loans, compared to $153 million in the same period of 1996. As of June 30, 1997, CFX Mortgage services approximately $895 million in mortgage loans for others. OTHER ASSETS In June 1997, the Company reclassified $3,395,000 in warehouse lines of credit to a leasing company from portfolio loans to foreclosed assets. See "Risk Elements" of this Management's Discussion and Analysis for further discussion. During 1996, the Company invested $30 million in 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 -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. JUNE 30, 1997 ================================================================================ FINANCIAL CONDITION - Cont'd. ================================================================================ 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. ================================================================================ DEPOSITS AND BORROWED FUNDS ================================================================================ The following table shows the various components of deposits and borrowed funds at the dates indicated:
============================================================================================================== JUNE 30, DECEMBER 31, ============================================================================================================== (DOLLARS IN THOUSANDS) 1997 1996 ============================================================================================================== % OF % OF AMOUNT TOTAL AMOUNT TOTAL ============================================================================================================== Deposits: Noninterest bearing demand deposits $ 159,124 12.65% $ 136,875 11.83% Regular savings deposits 175,789 13.97 167,465 14.47 NOW & money market deposits 257,373 20.45 268,022 23.16 Time deposits 522,157 41.50 515,085 44.51 ------------ ------ ----------- ------ Total retail deposits 1,114,443 88.56 1,087,447 93.97 Brokered time deposits 143,917 11.44 69,760 6.03 ------------ ------ ----------- ------ Total deposits $ 1,258,360 100.00% $ 1,157,207 100.00% ============ ====== =========== ====== Borrowed Funds: Advances from Federal Home Loan Bank of Boston: Short-term $ 180,000 40.48% $ 174,657 72.04% Long-term 146,754 33.00 424 .17 Short-term borrowed funds 117,919 26.52 67,374 27.79 ----------- ------ ----------- ------ Total borrowed funds $ 444,673 100.00% $ 242,455 100.00% =========== ====== =========== ======
The increase in deposits, advances from the Federal Home Loan Bank of Boston, and other borrowed funds funded asset growth and the leverage strategy over the past six months. Management customarily directs movement of funding between brokered deposits, advances from the Federal Home Loan Bank of Boston (FHLBB)and repurchase agreements (included in short-term borrowed funds). During the first six months of 1997, there has been a shift from short-term to long-term funding from the FHLBB to meet interest-risk parameters and secure long-term funding costs. ================================================================================ SHAREHOLDERS' EQUITY ================================================================================ Shareholders' equity was $138,325,000 as of June 30, 1997, an increase of $5,372,000 when compared to $132,953,000 at December 31, 1996. The net increase was due to $9,549,000 in net income, issuance of $1,752,000 in common stock under the stock option plan and issuance of $227,000 in common stock under the employee stock purchase plan, offset by a $235,000 increase in net unrealized losses on securities available for sale, cost of shares acquired for treasury of $172,000, and declaration of $5,749,000 in cash dividends on common stock. ================================================================================ 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. -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. JUNE 30, 1997 ================================================================================ RISK ELEMENTS - Cont'd. ================================================================================ The following table provides the composition of the Company's nonperforming assets at the dates indicated:
====================================================================================================================== JUNE 30, DECEMBER 31, ====================================================================================================================== (DOLLARS IN THOUSANDS) 1997 1996 ====================================================================================================================== % OF % OF BALANCES TOTAL BALANCES TOTAL ====================================================================================================================== Nonperforming loans: Real estate: Residential $ 4,173 53.98% $ 5,986 72.13% Commercial 2,005 25.94 1,146 13.18 Commercial, financial, and agricultural 1,376 17.80 1,021 12.30 Consumer and other 176 2.28 146 1.76 ---------- ------ -------- ------- 7,730 100.00% 8,299 100.00% ---------- ====== -------- ======= Foreclosed assets: Residential real estate 1,520 26.99% 1,383 62.21% Construction 439 7.80 428 19.25 Commercial real estate 287 5.10 422 18.98 Leasing receivables - equipment 3,395 60.29 - - Valuation allowance (10) (.18) (10) (.44) ---------- ------ -------- ------- 5,631 100.00% 2,223 100.00% ---------- ====== -------- ======= Total nonperforming assets $ 13,361 $ 10,522 ========== ======== Nonperforming loans as a percent of total loans and leases .60% .74% ========== ======== Nonperforming assets as a percent of total loans and leases and foreclosed assets 1.03% .94% ========== ========
During the second quarter of 1997, the Company reclassified $3,395,000 in warehouse lines of credit to a leasing company in the CFX Funding lease financing program from portfolio loans to foreclosed assets as a result of the Company substantively taking possession of the underlying collateral. The Company has concluded that there is sufficient collateral available to cover the loans; accordingly, there has been no loss recognized. During the third quarter of 1997, the Company sold at par, $2,771,000 of this foreclosed asset. Loans delinquent less than 90 days have increased from $27,051,000 at December 31, 1996 to $31,456,000 at June 30, 1997 primarily reflecting the growth in the residential and consumer lease portfolios. Delinquencies as a percent of total loans and leases have remained consistently below 2.5%, with increases noted in the residential real estate and commercial loan portfolios. The following is a summary of information pertaining to impaired loans at the dates indicated:
=========================================================================================== JUNE 30 DECEMBER 31 =========================================================================================== (DOLLARS IN THOUSANDS) 1997 1996 =========================================================================================== Loans with a valuation allowance $ 1,810 $ 2,816 Loans without a valuation allowance 2,566 2,585 --------- --------- Total impaired loans $ 4,376 $ 5,401 ========= ========= Valuation allowance allocated to impaired loans $ 700 $ 934 ========= =========
-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. JUNE 30, 1997 ================================================================================ ALLOWANCE FOR LOAN AND LEASE LOSSES ================================================================================ The allowance for loan and lease losses is maintained through charges to earnings. Loan and lease losses recognized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loan and lease losses based on current economic conditions and historical experience. Changes in the allowance for loan and lease losses are as follows:
=========================================================================================================== SIX MONTHS ENDED JUNE 30, (IN THOUSANDS) 1997 1996 =========================================================================================================== Balance at beginning of period $ 15,740 $ 15,449 Provision for loan and lease losses 1,404 1,655 Loans and leases charged-off (1,584) (2,008) Recoveries of loans and leases previously charged-off 482 335 ------------ ---------- Balance at end of period $ 16,042 $ 15,431 ============ ========== Allowance for loan and lease losses as a percent of total loans and leases 1.25% 1.53% ============ ========== Allowance for loan and lease losses as a percent of total nonperforming loans 207.53% 150.43% ============ ========== Net charge-offs/average loans and leases(1) .18% .34% ============ ==========
- --------------------- (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. -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. JUNE 30, 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 cash flows and repricing characteristics, the weighted average maturities 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 net income and 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 to 200 basis point increases and decreases in interest rates. However, there can be no assurances that the Company's projections in this regard will be achieved. Management 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 the 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, regular cash flows from loan and securities portfolios are the primary sources of asset liquidity. Because the Company's subsidiaries 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. -18- 21 CFX CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONT'D. JUNE 30, 1997 ================================================================================ 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 June 30, 1997, the Company and each of its banking subsidiaries were in compliance with all applicable regulatory capital requirements. The decline in the capital ratios since year end is the result of the continued asset growth and the Company's leverage program. It is expected that capital ratios will increase to pre-acquisition levels following the acquisitions of Community and Portsmouth. See "Financial Condition - Investment Securities" of this "Management's Discussion and Analysis". The following table sets forth the minimum regulatory capital requirements and the actual capital ratios of the Company and its banking subsidiaries at June 30, 1997 and December 31, 1996:
==================================================================================================== ACTUAL ==================================================================================================== REQUIRED JUNE 30, DECEMBER 31, MINIMUM 1997 1996 ==================================================================================================== Total capital to risk-weighted assets: Consolidated 8.0% 13.3% 14.8% CFX Bank 8.0 11.1 12.2 Safety Fund 8.0 13.2 13.9 Orange 8.0 21.1 20.9 Tier 1 capital to risk-weighted assets: Consolidated 4.0 12.0 13.5 CFX Bank 4.0 10.0 11.0 Safety Fund 4.0 12.0 12.6 Orange 4.0 19.8 19.7 Tier 1 capital to average assets: Consolidated 4.0 7.5 8.0 CFX Bank 4.0 6.4 6.8 Safety Fund 4.0 6.7 7.0 Orange 4.0 11.0 9.8
-19- 22 CFX CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION JUNE 30, 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 At the Annual meeting of shareholders of the Company held on July 30, 1997, the proposal made by the Board of Directors to amend the CFX Corporation Articles of Incorporation to increase the authorized shares of CFX common stock from 22,500,000 to 50,000,000 was approved. The Articles of Incorporation of the Registrant, as amended, will be filed pursuant to the Securities Exchange Act of 1934, as amended, when such amended articles are filed with the New Hampshire Secretary of State. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual meeting of Shareholders of the Company, at which the holders of common shares entitled to 11,023,641 votes were represented in person or by proxy, was held on July 30, 1997. (b) Election of Directors. Five nominees were elected as directors of the Company, each for a term of three years.
For Withheld --- -------- Peter J. Baxter 10,582,224 441,417 Christopher W. Bramley 10,623,963 399,678 Calvin L. Frink 10,583,452 440,189 Douglas S. Hatfield 10,627,107 396,534 Philip A. Mason 10,559,873 463,768
In addition, the following directors will continue in office following the meeting: Eugene E. Gaffey P. Kevin Condron Richard F. Astrella David R. Grenon William E. Aubuchon, III Elizabeth Sears Hager Richard B. Baybutt Walter R. Peterson Christopher V. Bean L. William Slanetz
(c) Other Matters (i) The adoption of the Agreement and Plan of Reorganization and related Plan of Share Exchange, dated as of February 13, 1997 between CFX Corporation and Portsmouth Bank Shares, Inc. was approved.
For Against Abstained Broker Non-Votes --- ------- --------- ---------------- 9,512,376 40,457 85,126 1,385,682
(ii) The adoption of the Agreement and Plan of Reorganization and related Plan of Share Exchange, dated as of March 24, 1997 between CFX Corporation and Community Bankshares, Inc. was approved.
For Against Abstained Broker Non-Votes --- ------- --------- ---------------- 9,469,802 81,126 87,031 1,385,682
-20- 23 CFX CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION - CON'T JUNE 30, 1997 (iii) The amendment to the CFX Corporation Articles of Incorporation to increase the authorized shares of CFX Common Stock from 22,500,000 to 50,000,000 was approved.
For Against Abstained Broker Non-Votes --- ------- --------- ---------------- 10,225,941 705,875 91,825 -
(iv) The proposal for a new Stock Option Plan, the 1997 Long-Term Incentive Plan, was approved.
For Against Abstained Broker Non-Votes --- ------- --------- ---------------- 9,729,462 1,014,206 279,973 -
(v) The amendment of the Amended and Restated 1992 Employee Stock Purchase Plan was approved.
For Against Abstained Broker Non-Votes --- ------- --------- ---------------- 10,191,011 620,735 211,895 -
(vi) The appointment, by the Board of Directors, of Wolf & Company, P.C., as independent auditors for the Registrant was ratified.
For Against Abstained Broker Non-Votes --- ------- --------- ---------------- 10,747,376 53,182 223,083 -
ITEM 5 - OTHER INFORMATION As of July 31, 1997, all shareholder approvals have been received for the acquisitions of Community Bankshares, Inc. and Portsmouth Bank Shares, Inc. The final exchange ratios for the transactions are expected to be determined in August under the terms of the respective agreements. All regulatory approvals have been received, other than the Massachusetts approvals expected in August. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Description ------ ----------- 27 Financial Data Schedule 99.1 Press Release, dated July 31, 1997, announcing the shareholder approval of Community and Portsmouth mergers; regulatory approvals received or expected shortly. (b) REPORTS ON FORM 8-K (i) None -21- 24 CFX CORPORATION AND SUBSIDIARIES JUNE 30, 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 August 14, 1997 By: /s/ -------------------------------- Gregg R. Tewksbury Authorized Officer Chief Financial Officer -22- 25 CFX CORPORATION AND SUBSIDIARIES JUNE 30, 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 August 14, 1997 By: /s/ ------------------------------ Gregg R. Tewksbury Authorized Officer Chief Financial Officer -22- EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 DEC-31-1997 JUN-30-1996 JUN-30-1996 JUN-30-1997 0 0 58,846 0 0 211 0 0 10,000 0 0 0 0 0 364,360 0 0 30,247 0 0 30,301 0 0 1,286,669 0 0 16,042 0 0 1,859,030 0 0 1,258,360 0 0 297,919 0 0 17,672 0 0 326,754 0 0 0 0 0 0 0 0 8,788 0 0 129,537 0 0 1,859,030 42,427 21,652 49,992 9,532 4,888 11,438 352 673 336 26,892 52,632 61,766 9,929 20,008 22,159 12,573 24,612 30,982 14,319 28,020 30,784 1,655 750 1,404 356 146 127 23,027 11,450 24,771 11,162 6,111 13,187 7,568 4,013 9,549 0 0 0 0 0 0 0 0 9,549 .59 .31 .73 0 0 0 4.33 4.35 4.07 0 0 7,730 0 0 31,456 0 0 0 0 0 0 15,449 0 15,740 2,008 0 1,584 335 0 482 15,431 0 16,042 0 0 0 0 0 0 0 0 0
EX-99.1 3 PRESS RELEASE 1 Exhibit 99.1 [CFX NEWS RELEASE LETTERHEAD] SHAREHOLDERS APPROVE COMMUNITY AND PORTSMOUTH MERGERS; REGULATORY APPROVALS IN HAND OR EXPECTED SHORTLY Keene, NH, July 31, 1997 -- CFX Corporation (AMEX: CFX) announced today that all shareholder approvals necessary for its mergers with Community Bankshares, Inc. (NASDAQ: CBNH) and Portsmouth Bank Shares, Inc. (NASDAQ: POBS) have been received. Both transactions are scheduled to close in the third quarter of 1997. Shareholders of CFX approved the transactions at their annual meeting held on July 30, 1997. Community shareholder approval was received at a special meeting also held on July 30, 1997. In addition, Portsmouth shareholder approval was received at their annual meeting held earlier today. CFX shareholders also re-elected directors, voted to amend the Articles of Incorporation to increase the authorized shares of CFX Common Stock, approved a new stock option plan, approved the amended and restated 1992 Employee Stock Purchase Plan, and ratified the appointment of auditors. The final exchange ratios for the Community and Portsmouth transactions will be determined in August under the terms of the respective agreements. All regulatory approvals have been received, other than the Massachusetts approvals expected next month. It is anticipated that the transactions will be accounted for by the pooling-of-interests method of accounting. CFX Corporation is a multi-bank holding company with total assets of $1.86 billion as of June 30, 1997. The Company's three banking subsidiaries are CFX Bank, headquartered in Keene, New Hampshire, Orange Savings Bank, headquartered in Orange, Massachusetts, and The Safety Fund National Bank, headquartered in Fitchburg, Massachusetts. CFX Mortgage, Inc., CFX Bank's mortgage banking subsidiary, services approximately $895 million in mortgage loans for others. In addition, CFX Funding L.L.C., a 51% owned subsidiary of CFX Bank that engages in the facilitation of lease financing and rated securitizations, now services over $117 million in leases for others. The Company operates 43 full service offices, 3 loan production offices, and 68 automated teller and remote service banking locations in New Hampshire and central Massachusetts, and operates a trust division with $405 million in assets. Upon completion of the pending acquisitions and planned increases in the balance sheet leverage associated with the Portsmouth transaction, it is anticipated that the Company will have $2.8 billion in assets, 58 full-service banking offices, 3 loan production offices and 88 automated teller and remote service locations in New Hampshire and central Massachusetts. Portsmouth Bank Shares, Inc., a bank holding company headquartered in Portsmouth, New Hampshire, has 3 full-service branches, and $259 million in total assets as of June 30, 1997. Community Bankshares, Inc., a bank holding company, headquartered in Concord, New Hampshire, has 12 full-service branches and total assets of $616 million as of June 30, 1997. ### -----END PRIVACY-ENHANCED MESSAGE-----