-----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, RbFxW9xbgvD4BtTugm/FKUfNzeyxrt98PuFhGKRKJT8YePOsjZQ1gT3XOiDANpdK I/u+pSleS0/xsUYCuZUI5A== 0000950133-98-001102.txt : 19980331 0000950133-98-001102.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950133-98-001102 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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-K SEC ACT: SEC FILE NUMBER: 001-10633 FILM NUMBER: 98577497 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-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE COMMISSION 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 of (I.R.S. Employer 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 ----------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.66 2/3 PAR VALUE, LISTED ON THE AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on March 20, 1998, was $772,052,993. Although directors and executive officers of the registrant were assumed to be "affiliates" of the registrant for the purposes of this calculation, this classification is not to be interpreted as an admission of such status. As of March 20, 1998, 24,500,183 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders for the fiscal year ended December 31, 1997, which is to be filed within 120 days of the end of the Company's fiscal year, are incorporated by reference into Part III of this Form 10-K. The incorporation by reference herein of portions of the Proxy Statement shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. =============================================================================== 2 PART I ITEM 1. BUSINESS GENERAL CFX Corporation ("CFX" or the "Company") is a bank holding company incorporated under the laws of the State of New Hampshire. The Company's wholly-owned subsidiary banks are CFX Bank, headquartered in Keene, New Hampshire, Orange Savings Bank ("Orange"), headquartered in Orange, Massachusetts, and Safety Fund National Bank ("Safety Fund"), headquartered in Fitchburg, Massachusetts. CFX Bank is a New Hampshire state-chartered savings bank that has been incorporated since 1897. CFX Bank had total assets of $2.5 billion as of December 31, 1997 and operates 43 full-service branches and 184 automated and remote service units in its service area. CFX Bank's subsidiary, CFX Financial Services, Inc. ("CFX Financial"), owns 51% of CFX Funding L.L.C. ("CFX Funding"), which engages in the facilitation of lease financing and securitization. During the fourth quarter of 1997, CFX Bank dissolved its wholly-owned subsidiary, CFX Capital, which owned CFX Mortgage, Inc. CFX Mortgage was also dissolved and its operations were combined with the operations of CFX Bank. The dissolutions had no significant impact on the Company's consolidated financial statements and were undertaken to streamline the organizational structure of the Company. Orange is a Massachusetts state-chartered savings bank that had total assets of $86 million as of December 31, 1997. Orange operates two full-service branches in Orange and Athol, Massachusetts. Safety Fund, a national banking association, had total assets of $340 million as of December 31, 1997 and operates 11 full-service branches in its service area. In addition, Safety Fund operates an Investments and Trust Services division with $506 million in assets under administration. On August 29, 1997, the Company acquired Community Bankshares, Inc. ("Community"), a bank holding company with total assets of $616 million headquartered in Concord, New Hampshire, and its subsidiary banks, Concord Savings Bank and Centerpoint Bank. In connection with the merger, Concord, with 8 branches, and Centerpoint, with 4 branches, were merged into CFX Bank. A total of 5,304,293 shares of the Company's common stock was issued in exchange for all of the issued and outstanding shares of Community common stock. The transaction was accounted for as a pooling-of-interests. Also on August 29, 1997, the Company acquired Portsmouth Bank Shares, Inc. ("Portsmouth"), a bank holding company, and its subsidiary bank, Portsmouth Savings Bank, a state-chartered savings bank. Portsmouth had total assets of $259 million and operated 3 full-service branches in its service area. In connection with the Portsmouth acquisition, Portsmouth Savings Bank was merged into CFX Bank. A total of 5,502,005 shares of the Company's common stock was issued in exchange for all of the issued and outstanding shares of Portsmouth common stock. The transaction was accounted for as a pooling-of-interests. As previously reported, on October 27, 1997, the Company entered into a definitive agreement to be acquired by Peoples Heritage Financial Group, Inc. ("PHFG"), a bank holding company headquartered in Portland, Maine. Pursuant to the agreement, each of the issued and outstanding shares of the Company's common stock (24,071,000 at December 31, 1997) will be converted into .667 shares of PHFG common stock. The PHFG transaction is expected to be a tax-free exchange to the owners of the Company and is subject to regulatory approval. On February 9, 1998, the shareholders of the Company and PHFG approved the transaction. It is anticipated that the transaction will be accounted for as a pooling-of-interests. At December 31, 1997, PHFG reported total assets of $6.8 billion, deposits of $4.8 billion and shareholders' equity of $475 million. In connection with the acquisition, the Company's banking subsidiaries will be merged into PHFG's banking subsidiaries. Specifically, CFX Bank will be merged into Bank of New Hampshire, PHFG's New Hampshire subsidiary, and Safety Fund and Orange will both be merged into The Family Bank, F.S.B., PHFG's Massachusetts subsidiary. In connection with the PHFG merger agreement, the Company and PHFG entered into Stock Option Agreements whereby the Company gave PHFG an option to purchase up to 19.9 percent of its outstanding common stock under certain circumstances and PHFG gave the Company an option to purchase up to 10.0 percent of its outstanding common stock under certain circumstances. The Company serves as a financial intermediary, attracting deposits from, and making loans to, consumers and small-to-mid sized businesses. Its principal lines of business are mortgage banking, retail banking, commercial banking, investment and trust services, and equipment lease funding. The Company's primary retail banking markets are New 2 3 Hampshire and central Massachusetts. The Company uses loan production offices and correspondent banks attracting loan applications from throughout New Hampshire, Maine, Vermont and northern Massachusetts. CFX Bank, Orange, and Safety Fund (collectively referred to as the "Banks") use customer deposits and loan payments to fund first mortgage loans on residential real estate. In addition to originating mortgage loans, the Banks also make commercial, consumer and other term and installment loans. Other traditional services available at the Banks include: a wide range of deposit programs designed to attract both short-term and long-term deposits from the general public, businesses and local government; safe deposit boxes; travelers checks and money orders; and many other banking services. To further the Banks' goals of providing a broad range of retail services and to generate additional fee income, the Banks operate remote service units and automated teller machines located at various business locations in their respective service areas providing customers with a convenient vehicle for conducting routine banking transactions. A full line of trust and investment management services are also available to the Banks' customers. These services to customers were enhanced by the acquisition of Safety Fund, which has provided trust services to its customers for many years. These services have been expanded to CFX Bank. CFX Bank originates and purchases residential and construction mortgage loans and, in addition to keeping loans for their own portfolio, sells loans to Safety Fund and Orange and in the secondary market, while retaining the servicing for a majority of these loans. CFX Bank is an approved seller and servicer of the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Department of Housing and Urban Development, Veteran's Administration, and New Hampshire Housing Financing Authority. CFX Bank services loans for others in an aggregate amount of $1.4 billion as of December 31, 1997. The Company has operated a small-ticket lease financing and securitization business through CFX Funding. CFX Funding's strategy was to increase the availability of credit to a select group of lease originators (lessors) while controlling the risk inherent in lease portfolios through credit enhancements. Warehouse lines of credit provided by CFX Bank to these originators are typically paid down every 90 to 180 days through securitization or sales of the various lease portfolios. During the fourth quarter of 1997, the Company discontinued future operations of CFX Funding with respect to its securitization business. As part of this discontinuance, and as a result of resolving a dispute between the Company and a credit insurer of certain equipment leases held in four securitized lease pools, the Company recorded, as previously reported, a $4.4 million after-tax charge. The operating results of the Company depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on earning assets, primarily loans, leases, trading and investment securities, and (ii) interest expense on interest bearing liabilities, which consist of deposits and borrowings. The Company's results of operations are also affected by the provision for loan and lease losses, resulting from the Company's assessment of the adequacy of the allowance for loan and lease losses; the level of its other operating income, including gains and losses on the sale of loans and securities, and loan and other fees; operating expenses; and income tax expenses. The Company has made, and may continue to make, various forward-looking statements with respect to earnings per share, the effect of the PHFG merger, cost savings related to acquisitions, credit quality and other financial and business matters for 1998 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 1998 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, customers' acceptance of the Company's products and services, the extent and timing of legislative and regulatory actions and reforms, changes in the interest rate environment that reduce interest margins, estimated cost savings from recent acquisitions and mergers cannot be fully realized within the expected time frame, revenues following such transactions are lower than expected, and costs or difficulties related to the integration of acquired and existing businesses are greater than expected. 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. 3 4 MARKET AREA The Banks operate primarily in New Hampshire and central Massachusetts. Based on total deposits as of June 30, 1996, CFX Bank had the largest market share in Cheshire County with 55% of the total deposit base. In each of the other three New Hampshire counties CFX Bank operates in, Belknap, Hillsborough and Merrimack, CFX Bank has less than a 4% market share. Collectively, CFX Bank ranks 5th in New Hampshire with 4.33% of total deposits. Furthermore, the acquisition of Safety Fund increased the Company's market share in Worcester County, Massachusetts from 1% to 4%. INVESTMENT PORTFOLIO The following table sets forth the book value of securities available for sale and securities held to maturity at the dates indicated. Securities available for sale are carried at estimated fair value. Securities held to maturity are carried at amortized cost.
- --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE: U. S. Treasury and agency obligations $ 115,473 $ 226,126 $ 196,875 State and municipal 447 2,005 971 Corporate bonds - 14,284 25,097 Federal agency mortgage pass-through securities 165,337 105,524 89,658 Other collateralized mortgage obligations (CMO's) 189,850 19,608 24,158 Other asset-backed securities 12,766 3,407 6,587 Other debt securities - 4,869 - Marketable equity securities 23,973 21,493 19,431 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 26,704 17,580 13,609 ------------- ------------- ------------- $ 534,550 $ 414,896 $ 376,386 ============= ============= ============= SECURITIES HELD TO MATURITY: U. S. Treasury and agency obligations $ 7,721 $ 45,883 $ 98,275 State and municipal 13,470 13,986 19,799 Corporate bonds - 2,013 4,546 Federal agency mortgage pass-through securities 6,234 28,338 33,815 Other collateralized mortgage obligations (CMO's) 359 1,184 8,098 Other 400 13,278 200 ------------- ------------- ------------- $ 28,184 $ 104,682 $ 164,733 ============= ============= =============
In the third quarter of 1997, the acquisitions of Community and Portsmouth necessitated a transfer of securities held to maturity with an amortized cost of $61,170,000 and a net unrealized loss of $95,000 to securities available for sale in order to maintain the Company's existing interest rate risk profile. In the third quarter of 1996, the acquisitions of The Safety Fund Corporation and Milford Co/operative Bank necessitated a transfer of securities classified as held to maturity with an amortized cost of $76,849,000 and a net unrealized loss of $2,522,000 to securities available for sale in order to maintain the Company's existing interest rate risk profile. In November 1995, the FASB issued guidance allowing a one-time reassesment of an entity's investment classifications during the period November 15, 1995 to December 31, 1995. As a result, securities held to maturity with an amortized cost of $111,386,000 and a net unrealized loss of $864,000 were transferred to securities available for sale and securities held to maturity with an amortized cost of $6,000,000 were sold at a net realized gain of $6,000. 4 5 The following table sets forth an analysis of the maturity distributions and the weighted average yields of all debt securities of the Company at December 31, 1997:
----------------------------------------------------------------------------------------------- MATURING ----------------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS ----------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ----------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) U.S. Treasury securities and other $ 13,038 6.34% $ 47,285 6.27% $ 33,365 6.80% $ 29,506 7.49% State and municipal (1) 2,415 4.55 8,681 4.52 2,374 4.78 447 5.42 Mortgage-backed securities and CMO's (2) 134,940 6.83 99,074 7.19 73,874 6.81 66,658 6.38 Other - - - - 400 7.34 - - ------------ ---- ------------ ---- ------------ ---- ------------ ---- Total debt securities $ 150,393 6.75% $ 155,040 6.76% $ 110,013 6.77% $ 96,611 6.72% ============ ============ ============ ============
- --------------------------- (1) Yields on tax-exempt investment securities are stated on a taxable-equivalent basis (using a 38.62% tax rate). (2) Included in table based on contractual maturities. LOAN PORTFOLIO The following table shows the Company's loan distribution, net of unearned income and deferred costs, at the dates indicated:
- --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Real estate: Residential $ 1,159,147 $ 873,611 $ 732,725 $ 693,644 $ 632,469 Construction 35,318 18,594 13,778 12,578 14,686 Commercial 265,385 248,805 227,303 188,126 176,602 Commercial, financial, and agricultural 209,929 170,335 136,093 130,175 119,282 Warehouse lines of credit to leasing companies 1,922 18,393 12,906 15,339 5,428 Consumer lease financing 118,212 67,146 24,399 306 - Consumer and other 244,943 197,516 179,338 142,894 124,681 ------------- ------------- -------------- ------------- ------------- Total loans and leases $ 2,034,856 $ 1,594,399 $ 1,326,541 $ 1,183,062 $ 1,073,149 ============= ============= ============== ============= =============
The following table shows the maturity of loans (excluding residential mortgages on 1 - 4 family residences and all consumer loans) outstanding at December 31, 1997. Also provided are the amounts due after one year, classified according to sensitivity to changes in interest rates.
--------------------------------------------------------------- MATURING --------------------------------------------------------------- AFTER ONE BUT WITHIN FIVE WITHIN ONE YEAR YEARS AFTER FIVE YEARS TOTAL --------------------------------------------------------------- (IN THOUSANDS) Real estate--construction $ 35,318 $ - $ - $ 35,318 Real estate--commercial 166,591 80,048 18,746 265,385 Commercial, financial, and agricultural 141,211 47,681 21,037 209,929 Warehouse lines of credit to leasing companies 1,922 - - 1,922 ------------- ----------- ------------ -------------- Total $ 345,042 $ 127,729 $ 39,783 $ 512,554 ============= =========== ============ ============== Loans maturing after one year with: Fixed interest rates $ 42,789 $ 24,454 Variable interest rates 84,940 15,329 ----------- ------------ Total $ 127,729 $ 39,783 =========== ============
5 6 The following table summarizes the Company's nonaccrual, past due, and restructured loans and leases:
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31 (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Nonaccrual loans and leases: (1) Real estate (2) $ 11,894 $ 8,848 $ 9,647 $ 10,118 $ 14,473 Commercial, financial, and agricultural 1,587 1,634 2,131 2,211 5,293 Consumer and other 506 301 454 128 466 ----------- ---------- ----------- ----------- ---------- Total 13,987 10,783 12,232 12,457 20,232 ----------- ---------- ----------- ----------- ---------- Accruing loans and leases past due 90 days or more: Real estate (2) - - - - 3,060 Commercial, financial, and agricultural - - - - 246 Consumer and other - - - - 26 ----------- ---------- ----------- ----------- ---------- Total - - - - 3,332 ----------- ---------- ----------- ----------- ---------- Total nonperforming loans and leases $ 13,987 $ 10,783 $ 12,232 $ 12,457 $ 23,564 =========== ========== =========== =========== ========== Percentage of total loans and leases 0.69% .67% .92% 1.05% 2.19% Percentage of total assets 0.49% .46% .58% .64% 1.26% Total restructured loans and leases $ 1,231 $ 1,895 $ 1,360 $ 3,032 $ 4,217 =========== ========== =========== =========== ==========
- -------------------------------- (1) All loans past due 90 days or more as to principal or interest are generally placed on nonaccrual status. In addition, a loan (including an impaired loan) is generally classified as nonaccrual when management determines that significant doubt exists as to the collectibility of principal or interest. An impaired loan may remain on accrual status if it is less than 90 days past due and guaranteed or well secured. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized when received. Cash received on impaired loans is generally allocated to principal and interest based on the contractual terms of the note, unless management believes such receipt should be applied directly to principal based on collection concerns. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. (2) Includes residential, construction and commercial real estate loans. Interest income that would have been recorded under the original terms of nonaccrual and restructured loans and the interest income actually recognized for the year ended December 31, 1997 amounted to $647,000 and $113,000, respectively. SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE This table summarizes the Company's loan and lease loss experience for the years indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan and lease losses, beginning of year $ 20,332 $ 19,843 $ 18,940 $ 21,080 $ 17,587 Loans charged-off: Real estate (1) 842 2,090 2,440 4,227 7,134 Commercial, financial and agricultural 1,992 1,359 1,000 2,157 3,219 Consumer and other 1,524 1,308 1,042 1,053 1,132 ----------- ------------ ------------ ----------- ---------- Total loans charged-off 4,358 4,757 4,482 7,437 11,485 ----------- ------------ ------------ ----------- ---------- Recoveries of amounts previously charged-off: Real estate (1) 295 382 592 952 539 Commercial, financial and agricultural 800 320 492 485 217 Consumer and other 281 259 344 238 179 ----------- ------------ ------------ ----------- ---------- Total recoveries 1,376 961 1,428 1,675 935 ----------- ------------ ------------ ----------- ---------- Net loans charged-off 2,982 3,796 2,384 5,762 10,550 Provision for loan and lease losses (2) 4,548 4,285 3,814 3,622 14,030 Change in fiscal year - Community - - 143 - - ----------- ------------ ------------ ----------- ---------- Allowance for loan and lease losses, end of year $ 21,898 $ 20,332 $ 19,843 $ 18,940 $ 21,080 =========== ============ ============ =========== ========== Net loans charged-off to average loans outstanding 0.15% 0.26% 0.19% .51% 1.00% =========== ============ ============ ============ ===========
- --------------------------------- (1) Includes residential, construction and commercial real estate loans. 6 7 (2) The amount charged to operations and the related balance in the allowance for loan and lease losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan and lease loss experience, and management's estimation of future potential losses. The large provision in 1993 resulted in part from losses incurred as a result of the earlier real estate decline as well as for the losses incurred in conjunction with a bulk sale of nonperforming assets totaling $6,600,000 to a private investor. The amount of loss recognized on this 1993 sale was $2,473,000. The combination of this bulk sale and a general economic strengthening evidenced during 1994 allowed the Company to provide substantially less to the allowance for loan and lease losses in 1994. From 1994 through 1996 the provision for loan and lease losses has remained fairly consistent. These provisions have increased the allowance for loan and lease losses, partially reduced by net charge-offs, each year since 1994. The increase in the allowance was necessary, despite a lower level of nonperforming loans and leases, due to the growth in the loan and lease portfolio which has increased 50% since 1993. ALLOWANCE FOR LOAN AND LEASE LOSS ALLOCATION The following table shows an allocation of the allowance for loan and lease losses as of the dates indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) PERCENT PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - ------------------------------------------------------------------------------------------------------------------------------------ Real estate $ 9,142 71.74% $ 7,249 70.99% $ 7,625 73,42% $ 6,471 75.60% $ 6,777 76.77% Commercial, financial, and agricultural 3,592 10.41 4,855 12.54 3,141 11.23 1,788 12.29 4,785 11.61 Consumer and other 1,922 17.85 1,971 16.46 2,102 15.35 1,834 12.10 1,562 11.61 Unallocated 7,242 - 6,257 - 6,975 - 8,847 - 7,956 - ---------- ------ ---------- ------ --------- ------ --------- ------ ---------- ------ $ 21,898 100.00% $ 20,332 100.00% $ 19,843 100.00% $ 18,940 100.00% $ 21,080 100.00% ========== ========== ========= ========= ==========
DEPOSITS The average daily balances of deposits and of rates paid on such deposits is summarized for the periods indicated in the following table:
- ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------------------------- Noninterest bearing demand deposits $ 214,661 -% $ 176,423 -% $ 147,984 -% Regular savings deposits 308,808 2.63 308,626 2.71 321,100 2.83 NOW and money market deposits 359,410 2.12 376,175 2.11 394,408 2.35 Time deposits 984,071 5.61 849,926 5.57 741,772 5.30 ------------ ------------ ------------ Total $ 1,866,950 3.80% $ 1,711,150 3.72% $ 1,605,264 3.59% ============ ============ ============
Maturities of time certificates of deposit and other time deposits of $100,000 or more outstanding at December 31, 1997, are summarized as follows:
TIME OTHER CERTIFICATES TIME OF DEPOSITS(1) DEPOSITS TOTAL -------------- -------- ------ (IN THOUSANDS) 3 months or less $ 13,980 $ 62,532 $ 76,512 Over 3 through 6 months 5,035 30,389 55,424 Over 6 through 12 months 4,148 135,136 139,284 Over 12 months 4,461 78,622 83,083 ------------ ----------- ------------ Total $ 27,624 $ 326,679 $ 354,303 ============ =========== ============
- -------------------------------- (1) Time deposits with a minimum required balance of $100,000. 7 8 RETURN ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the Company for the periods indicated:
- ------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Return on: Average total assets 0.71% 1.04% 1.06% Average total shareholders' equity 7.63 10.03 9.77 Average common shareholders' equity 7.63 10.03 9.77 Average total shareholders' equity to average total assets ratio 9.25 10.36 10.88 Common dividend payout ratio 102.53 57.43 56.99
SHORT-TERM BORROWINGS Short-term borrowings are borrowed funds with an original maturity of one year or less. Securities sold under repurchase agreements generally mature within 9 months. The details of these borrowings for the years 1997 and 1996 are presented below:
- ------------------------------------------------------------------------------------------------- DECEMBER 31 (Dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements: Balance at year end $ 188,558 $ 104,427 Average amount outstanding 180,214 93,226 Maximum amount outstanding at any month end 208,981 133,726 Average interest rate for the year 4.54% 4.85% Average interest rate on year-end balance 5.26% 4.75% Advances from Federal Home Loan Bank of Boston: Balance at year end $ 221,000 $ 219,734 Average amount outstanding 194,333 197,312 Maximum amount outstanding at any month end 257,026 228,970 Average interest rate for the year 4.85% 5.67% Average interest rate on year-end balance 5.51% 5.80%
EMPLOYEES As of December 31, 1997, the Company and its subsidiaries had 838 full-time and 270 part-time employees. The employees of the Company and its subsidiaries are not represented by any collective bargaining unit. Relations between management and employees are considered good. RISK MANAGEMENT In the normal course of business, the Company is subject to various risks, the most significant of which are credit, liquidity and interest rate. Although it cannot eliminate these risks, the Company has risk management processes designed to provide for risk identification, measurement, monitoring and control. Credit Risk. Credit risk represents the possibility that a customer or counterparty may not perform in accordance with contractual terms. Credit risk results from extending credit to customers, purchasing securities and entering into certain off-balance-sheet financial derivative transactions. Risk associated with the extension of credit includes general risk, which is inherent in the lending business, and risk specific to individual borrowers. The Company seeks to manage credit risk through portfolio diversification, underwriting policies and procedures, and loan monitoring practices. Liquidity Risk. Liquidity represents an institution's ability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and demands of depositors and debtholders, and invest in strategic initiatives. Liquidity risk represents the likelihood the Company would be unable to generate cash or otherwise obtain funds at reasonable rates for such purposes. Liquidity is managed through the coordination of the relative maturities of assets, liabilities and off-balance-sheet positions and is enhanced by the ability to raise funds in capital markets through direct borrowing or securitization of assets, such as mortgage loans and lease receivables. 8 9 Interest Rate Risk. Interest rate risk arises primarily through the Company's normal business activities of extending loans and taking deposits. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the timing, magnitude and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of assets, liabilities, and off-balance-sheet positions. Interest rate risk also results from, among other factors, changes in the relationship or spread between interest rates. Many factors, including economic and financial conditions, general movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Financial derivatives, primarily interest rate swaps, caps and floors, are used to alter the interest rate characteristics of assets and liabilities. The Company uses a number of measures to monitor and manage interest rate risk, including income simulation and interest sensitivity ("gap") analyses. For additional information relating to the Company's risk management processes, see Management's Discussion and Analysis of Financial Condition and Results of Operations included in Exhibit 1 of this document. REGULATION AND SUPERVISION General Bank holding companies and banks are extensively regulated under both federal and state law. The following information describes certain aspects of that regulation applicable to the Company and the Banks, and does not purport to be complete. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular provisions. In addition to existing government regulation, federal and state statutes and regulations are subject to changes that may have significant impact on the way in which banks and bank holding companies may conduct business. The likelihood and potential effects of such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, savings banks, thrift institutions and nonbanking companies, including insurance companies, securities brokerage firms, mutual funds, investment banks and major retailers. Recent legislation also has broadened the regulatory powers of the federal banking agencies in a number of areas and has restricted the powers of state-chartered banks. The Company Bank Holding Company Regulation. As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and related federal statutes, and is subject to supervision, regulation and inspection by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Boston (collectively, the "Federal Reserve"). The Company is required to file with the Federal Reserve an annual report and any additional information as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve possesses cease and desist powers over bank holding companies and their non-bank subsidiaries if their actions represent unsafe or unsound practices. Bank Acquisitions. The BHC Act requires, among other things, the prior approval of the Federal Reserve in any case where the Company proposes to (i) acquire all or substantially all the assets of any bank, (ii) acquire direct or indirect ownership or control of more than 5 percent of the voting shares of any bank, or (iii) merge or consolidate with any other bank holding company. The BHC Act currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide and state-imposed concentration limits. The Company has the ability, subject to certain restrictions, including state opt-out provisions, to acquire by acquisition or merger branches outside its home state. The establishment of new interstate branches also is possible in those states with laws that expressly permit it. Interstate branches will be subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets. Non-Bank Acquisitions. The BHC Act also prohibits a bank holding company, with certain exceptions, from acquiring or retaining direct or indirect ownership or control or more than 5 percent of the voting shares of any company that is not a bank or bank holding company, and from engaging in any activities other than those of banking, managing or controlling banks, or activities which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. Restrictions on the Acquisition of the Company. The acquisition of 10 percent or more of the Company's outstanding shares by any person or group of persons may, in certain circumstances, be subject to the provisions of the Change in Bank Control Act of 1978, as amended, and the acquisition of control of the Company by another company would be subject to regulatory approval under the BHC Act. 9 10 Source of Strength Policy. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank. Consistent with its "source of strength" policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. Cross-Guarantee. As a result of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, any or all of the Company's subsidiary banks can be held liable under so-called "cross-guarantee" provisions for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of any other of the Company's subsidiary banks, or (ii) any assistance provided by the FDIC to any other of CFX's subsidiary banks in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur without regulatory assistance. Securities Regulation. The Company has registered its common stock with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of such registration, the proxy and tender offer rules, periodic reporting requirements and insider trading restrictions and reporting requirements, as well as certain other requirements of the Exchange Act, are applicable to the Company. Because the Company's stock is listed on the American Stock Exchange (the "AMEX"), the Company is also subject to the rules and regulations of the AMEX. The Company also may, from time to time, be subject to regulation by various state securities commissions with respect to the offer and sale of its securities. New Hampshire Corporation Law. As a New Hampshire corporation, the Company also must comply with the general corporation laws of the state of New Hampshire. The Banks Bank Regulation. As a New Hampshire state-chartered savings bank the deposits of which are insured by the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"), CFX Bank is subject to supervision, regulation and examination by the New Hampshire State Banking Department and the FDIC. As a Massachusetts state-chartered savings bank the deposits of which are insured by the BIF, Orange is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and the FDIC. As a national banking association, Safety Fund is subject to supervision, regulation and examination primarily by the Office of the Comptroller of the Currency (the "OCC"). Each of the Banks is subject to various requirements and restrictions under federal and, in the case of CFX Bank and Orange, state law, including (i) requirements to maintain reserves against deposits, (ii) restrictions on the types, amount and terms and conditions of loans that may be granted, (iii) limitations on the types of investments that may be made, the activities that may be engaged in, and the types of services that may be offered, and (iv) standards relating to asset quality, earnings, and employee compensation. The approval of a Bank's primary regulator is required prior to any merger or consolidation or the establishment or relocation of any office. Various consumer laws and regulations also affect the operations of the Banks. Affiliate Transactions. The Banks are subject to federal laws that limit the transactions by subsidiary banks to or on behalf of their parent company and to or on behalf of any nonbank subsidiaries. Such transactions by a subsidiary bank to its parent company or to any nonbank subsidiary are limited to 10 percent of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20 percent of such bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also prohibits banks from purchasing "low-quality" assets from affiliates. FDIC Assessment. The deposits of the Banks are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to deposit insurance assessments of the BIF. However, approximately 11% of the Company's deposits (attributable to the deposits of Milford Cooperative Bank acquired by CFX Bank as of July 1, 1996) are subject to deposit insurance assessments of the SAIF. Effective January 1, 1996, the FDIC reduced the assessment rates on bank deposits insured by the BIF, and effective January 1, 1997, the FDIC lowered the assessment rates for SAIF-insured deposits to the same levels applicable to BIF-insured deposits. Thus, for the semi-annual period beginning January 1, 1997, the effective rate of assessments imposed on all FDIC deposits for deposit insurance ranges from 0 - 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. Legislation enacted in 1996 requires all FDIC-insured institutions to bear the cost of bonds sold by the Financing Corporation from 1987 to 1989 in support of the former 10 11 Federal Savings and Loan Insurance Corporation. To cover such obligations, the FDIC assesses BIF-insured deposits an additional 1.26 basis points per $100 of deposits and assesses SAIF-insured deposits an additional 6.3 basis points per $100 of deposits, in each case on an annualized basis. Prompt Corrective Action. Federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends on whether the institution in question is considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". At December 31, 1997, each of the Banks exceeded the required ratios for classification as "well capitalized." The classification of depository institutions is primarily for the purpose of applying the federal banking agencies' prompt corrective action powers and is not intended to be, and should not be interpreted as, a representation of the overall financial condition or prospects of any financial institution. The agencies' prompt corrective action powers can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval and, ultimately, appointing a receiver for the institution. Among other things, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and only an "adequately capitalized" depository institution may accept brokered deposits with prior regulatory approval. Federal Home Loan Bank. Each of the Banks is a member of the Federal Home Loan Bank of Boston (the "FHLB"), which is one of twelve regional Federal Home Loan Banks. The FHLB serves as a reserve or central bank for its members and makes advances to its members in accordance with the FHLB's policies and procedures. As members of the FHLB, the Banks are required to purchase and hold stock in the FHLB. As of December 31, 1997, CFX Bank, Orange and Safety Fund held stock in the FHLB in the amount of $24,796,000, $993,000 and $634,000 respectively. Risk-Based Capital Requirements Under the risk-based capital guidelines applicable to the Company and the Banks, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities) is 8 percent. At least half of the total capital must be "Tier 1" capital, which primarily includes common shareholders' equity and qualifying preferred stock, less goodwill and other disallowed tangibles. "Tier 2" capital includes, among other items, certain cumulative and limited-life preferred stock, qualifying subordinated debt and the allowance for credit losses, subject to certain limitations, less required deductions as prescribed by regulation. In addition, the federal bank regulators established leverage ratio (Tier 1 capital to total adjusted average assets) guidelines providing for a minimum leverage ratio of 3 percent for bank holding companies and banks meeting certain specified criteria, including that such institutions have the highest regulatory examination rating and are not contemplating significant growth or expansion. Institutions not meeting these criteria are expected to maintain a ratio which exceeds the 3 percent minimum by at least 100 to 200 basis points. The federal bank regulatory agencies may, however, set higher capital requirements when particular circumstances warrant. Under the federal banking laws, failure to meet the minimum regulatory capital requirements could subject a bank to a variety of enforcement remedies available to federal bank regulatory agencies, including the termination of deposit insurance by the FDIC and seizure of the institution. At December 31, 1997, the total and Tier 1 risk-based capital ratios and leverage ratios of the Company and each of the Banks exceeded the minimum regulatory capital requirements. See Management's Discussion and Analysis of Financial Condition and Results of Operations. Community Reinvestment Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under the terms of the CRA, a bank's record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods, is generally annually assessed by the bank's primary federal regulator. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. At December 31, 1997, the Company and each of the Banks was rated "Satisfactory" or "Outstanding" with respect to CRA. 11 12 Dividend Restrictions Under the New Hampshire Business Corporation Act, a distribution, including dividends and the purchase or redemption of a corporation's own shares, must be authorized by the Board of Directors and may not be paid if the corporation, after the payment is made, would not be able to pay its debts as they become due in the usual course of business, or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. The principal source of the Company's revenue and cash flow is dividends from the Banks. The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends or otherwise make distributions or supply funds to the Company. In addition, bank regulators may have authority to prohibit a bank subsidiary from paying dividends, depending on the subsidiary's financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The Company is a legal entity separate and distinct from the Banks. Accordingly, the right of the Company, and consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of the Banks and its other subsidiaries is necessarily subject to the prior claims of creditors of the Banks and its other subsidiaries, except to the extent that claims of the Company in its capacity as creditor may be recognized. Earnings appropriated to bad debt reserves for losses and deducted for federal income tax purposes are not available for dividends without the payment of taxes at the current income tax rates on the amount used. Other Regulations The policies of regulatory authorities, including the Federal Reserve and the FDIC, have had a significant effect on the operating results of financial institutions in the past and are expected to do so in the future. An important function of the Federal Reserve is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on bank borrowings and changes in reserve requirements against bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government. Supervision, regulation or examination of the Company by these regulatory agencies is not intended for the protection of the Company's shareholders. The United States Congress has periodically considered and adopted legislation which has resulted in and could result in further deregulation of both banks and other financial institutions. Such legislation could place the Company in more direct competition with other financial institutions, including mutual funds, credit unions, insurance companies and securities brokerage firms. No assurance can be given as to whether any additional legislation will be enacted or as to the effect of such legislation on the business of the Company. COMPETITION Bank holding companies and their subsidiaries are subject to vigorous and intense competition from various financial institutions and other "nonbank" or non-regulated companies or firms that engage in similar activities. The Bank competes for deposits with other commercial banks, savings banks, savings and loan associations, insurance companies and credit unions, as well as issuers of commercial paper and other securities, including shares in mutual funds. In making loans, the Bank competes with other commercial banks, savings banks, savings and loan associations, consumer finance companies, credit unions, insurance companies, leasing companies and other nonbank lenders. The Company and the Bank compete not only with financial institutions based in New Hampshire and Massachusetts, but also with a number of large out-of-state and foreign banks, bank holding companies and other financial and nonbank institutions. Some of the financial and other institutions operating in the same markets are engaged in national and international operations and have more assets and personnel than the Company. Some of the Company's competitors are not subject to the extensive bank regulatory structure and restrictive policies which apply to the Company and the Banks. The principal factors in successfully competing for deposits are convenient office locations and remote service units, flexible hours, competitive interest rates and services, while those relating to loans are competitive interest rates, the range of lending services offered and lending fees. The Company believes that the local character of the Banks' businesses and their community bank management philosophy enabled them to compete successfully in their respective market areas. However, it is anticipated that competition will continue to increase in the years ahead. 12 13 ITEM 2. PROPERTIES The Company neither owns nor leases any real property but utilizes the premises and equipment of CFX Bank. CFX Bank owns its main office and two branch offices in Keene, New Hampshire. CFX Bank also owns branches in Allenstown, Amherst, Bedford, Concord, Exeter, Greenland, Greenville, Henniker, Hillsborough, Hooksett, Jaffrey, Manchester, Milford, New Boston, Nashua, New Ipswich, North Hampton, Peterborough, Portsmouth, Tilton, Troy, Weare and Wilton/Lyndeborough, New Hampshire while leasing other branches in Brookline, Gilford, Hinsdale, Laconia, Loudon, Manchester, Marlborough, Mont Vernon, North Swanzey, Rindge, Walpole, West Chesterfield and Winchester, New Hampshire. Included above are five "mini-branches" that are located at various retail establishments in its market area. In addition, CFX Bank and subsidiaries also own or lease several other properties used for administrative purposes. Orange Savings Bank owns its main office, located in Orange Massachusetts, and leases a branch facility in Athol, Massachusetts. Safety Fund owns its main office and leases a branch office in Fitchburg, Massachusetts. Additionally, Safety Fund owns branches in Gardner, Leominster and Worcester, while leasing other branches in Gardner, Leominster, Westborough and Worcester, Massachusetts. In addition, Prichard Plaza owns a real estate investment property in Fitchburg, Massachusetts. The Banks also owns 102 automated teller and remote service units located in New Hampshire and central Massachusetts. At December 31, 1997, the total net book value of the Company's premises and equipment was $38,761,000. ITEM 3. LEGAL PROCEEDINGS As previously reported, the Company entered into a settlement agreement with American Credit Indemnity Company ("ACI") in connection with the resolution of a dispute between the Company and ACI regarding the origination and servicing by CFX Funding of certain leases held in four lease pools insured by ACI. The settlement agreement provides mutual releases by ACI of the Company and CFX Funding, and by the Company and CFX Funding of ACI, of all claims and liabilities, other than those contained in the settlement agreement, relating to the four lease pool transactions. There are no pending legal proceedings to which the Company is a party or any of its property is the subject. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of banking, to which the Banks are a party or of which the Banks' property is subject. There are no material pending legal proceedings to which any director, officer or affiliate of the Company, any owner of record or beneficially 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 has a material interest adverse to the Company or the Banks. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting held on February 9, 1998, the Company's shareholders approved the previously reported proposed merger of the company with and into PHFG. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information relating to the market for the Company's common equity and related stockholder matters is found on page 65 of Exhibit 99.1 to this report. ITEM 6. SELECTED FINANCIAL DATA Information relating to selected financial data is found on page 1 of Exhibit 99.1 to this report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is found on pages 2 - 23 of Exhibit 99.1 to this report. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (a) Financial Statements Required by Regulation S-X Information relating to financial statements is found on pages 24 - 64 in Exhibit 99.1 of this report. The opinion of KPMG Peat Marwick, LLP pertaining to The Safety Fund Corporation: Independent Auditors' Report To the Board of Directors and Stockholders of The Safety Fund Corporation: We have audited the accompanying consolidated Statement of Operation of The Safety Fund Corporation and subsidiaries for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operation of The Safety Fund Corporation and subsidiaries for the year ended December 31, 1995, in conformity with generally accepted accounting principles. /S/ KPMG Peat Marwick LLP Boston, Massachusetts January 22, 1996 The opinion of KPMG Peat Marwick, LLP pertaining to Community Bankshares, Inc. follows: Independent Auditors' Report The Stockholders and Board of Directors Community Bankshares, Inc.: We have audited the accompanying consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of December 31, 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1996, the six months ended December 31, 1995 and the year ended June 30, 1995. These consolidated financial statements are the responsibility of Community's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 14 15 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Bankshares, Inc. and subsidiaries at December 31, 1996 and the results of their operations and their cash flows for the year ended December 31, 1996, the six months ended December 31, 1995 and the year ended June 30, 1995 in conformity with generally accepted accounting principles. /S/ KPMG Peat Marwick LLP Boston, Massachusetts January 22, 1997 The opinion of Shatswell, MacLeod & Company, P.C. pertaining to Portsmouth Bankshares, Inc. follows: Independent Auditors' Report The Board of Directors Portsmouth Bank Shares, Inc. Portsmouth, New Hampshire We have audited the accompanying consolidated balance sheets of Portsmouth Bank Shares, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Au audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Portsmouth Bank Shares, Inc. and Subsidiary as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company adopted the provision of the Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. /S/Shatswell, MacLeod & Company, P.C. West Peabody, Massachusetts January 13 1997, except for Note 20 as to which the date is February 13, 1997 (b) Supplementary Financial Information (1) Selected Quarterly Financial Data Information relating to selected quarterly financial data is found on page 63 of the Exhibit 99.1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 15 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10-K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. ITEM 11. EXECUTIVE COMPENSATION Pursuant to Instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10-K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to Instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10-K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to Instruction G, the information required by this item is incorporated herein by reference to the registrant's proxy statement for its 1998 annual meeting of shareholders to be filed within 120 days of the registrant's fiscal year ended December 31, 1997, or, if such proxy statement is not filed within such period, by reference to an amendment to this Form 10-K to be filed within 120 days of the registrant's fiscal year ended December 31, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents Filed as Part of This Report: (1) Financial Statements The financial statements listed below are included in exhibit 99.1 of this document.
FINANCIAL STATEMENTS PAGE REFERENCES -------------------- --------------- Consolidated Balance Sheets......................................24 Consolidated Statements of Income................................25 Consolidated Statements of Shareholders' Equity..................27 Consolidated Statements of Cash Flows............................28 Notes to Consolidated Financial Statements......................30-63 Report of Independent Auditors...................................64
(2) Financial Statement Schedules See Item 14 (d) (3) Exhibits Required by Item 601 See Item 14 (c) 16 17 (b) Reports on Form 8-K On February 2, 1998, a Form 8-K was filed providing disclosure of material expense incurred as a result of settling potential litigation involving American Credit Indemnity Corporation and CFX Funding, L.L.C. On December 13, 1997, the Company filed in a Current Report on Form 8-K restated audited consolidated financial statements of the Company and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, giving effect to the Company's acquisitions of Community and Portsmouth. On November 4, 1997, the Company filed a Current Report on Form 8-K to report the proposed merger of CFX with and into PHFG and disclose the underlying transaction documents. (c) Exhibits The exhibits listed below are filed herewith or are incorporated herein by reference to other filings. EXHIBIT NUMBER DESCRIPTION 2.1 Agreement and Plan of Merger by and between CFX and PHFG dated as of October 27, 1997, incorporated by reference from the exhibits to the Current Report on Form 8-K filed by PHFG (Commission File No. 0-16947) on November 3, 1997. 3.1 Articles of Incorporation of CFX, as amended, incorporated herein by reference to from the Exhibits to the Current Report on Form 8-K by CFX filed on September 15, 1997. 10.1 1992 CFX Corporation Profit Sharing/Bonus Plan, incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of CFX for the year ended December 31, 1992. 10.2 1986 CFX Corporation Stock Option Plan, incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of CFX No. 33-17071 effective in 1987. 10.3 1995 CFX Corporation Stock Option Plan, incorporated herein by reference to the Exhibits 1.c to the Registration Statement on Form S-8 of CFX No. 33-61787 effective in 1995. 10.4 CFX Corporation 1997 Long-Term Incentive Plan, incorporated herein by reference to the Exhibits to the Current Form 8-K by CFX Corporation filed on November 14, 1997. 10.5 CFX Corporation 1992 Employee Stock Purchase Plan, incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of CFX No. 33-52598 effective in 1992. 10.6 Employment Agreement dated as of August 29,1997 by and between CFX and Douglas Crichfield, incorporated herein by reference to the Exhibits to the Current Report on Form 8-K by CFX filed on September 15, 1997. 10.7 Employment Agreement dated as of August 12,1997 by and between CFX and Peter J. Baxter, incorporated herein by reference to the Exhibits to the Current Report on Form 8-K by CFX filed on September 15, 1997. 10.8 Employment Agreement dated as of August 11,1997 by and between CFX and Mark A. Gavin, incorporated herein by reference to the Exhibits to the Current Report on Form 8-K by CFX filed on September 15, 1997. 10.9 Employment Agreement dated as of August 14,1997 by and between CFX and Christopher W. Bramley, incorporated herein by reference to the Exhibits to the Current Report on Form 8-K by CFX filed on September 15, 1997. 17 18 10.10 Change of Control Agreement by and between CFX Corporation and Gregg R. Tewksbury, incorporated herein by reference to the Exhibits to the Form 10-Q by CFX Corporation filed on November 14, 1997. 10.11 Change of Control Agreement by and between CFX Corporation and Edwin L. Herbert, incorporated herein by reference to the Exhibits to the Form 10-Q by CFX Corporation filed on November 14, 1997. 10.12 Change of Control Agreement by and between CFX Corporation and David N. Rasmussen, incorporated herein by reference to the Exhibits to the Form 10-Q by CFX Corporation filed on November 14, 1997. 10.13 Stock Option Agreement, dated as of October 27,1997, between CFX (as the issuer) and PHFG (as the grantee) incorporated by reference from the Exhibits to the Current Report on Form 8-K filed by PHFG (Commission file No. 0-16947) on November 3, 1997. 10.14 Stock Option Agreement, dated as of October 27,1997, between PHFG (as the issuer) and CFX (as the grantee) incorporated by reference from the Exhibits to the Current Report on Form 8-K filed by PHFG (Commission file No. 0-16947) on November 3, 1997. 10.15 The Safety Fund Corporation 1994 Incentive and Nonqualified Stock Option Plan, incorporated herein by reference to the Exhibits to the Annual Report on Form 10-KSB for the year ended December 31, 1994 of The Safety Fund Corporation. 10.16 The Safety Fund Corporation 1984 Incentive Stock Option Plan, incorporated herein by reference to the Exhibits to the Registration Statement on Form S-8 of The Safety Fund Corporation No. 33-19325 effective in 1984. 10.17 Community Bankshares, Inc. 1992 Stock Option Plan, incorporated herein by reference to the Exhibits to Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 of CFX No. 333-29243 effective in 1997. 10.18 Centerpoint Bank 1989 Stock Option Plan, incorporated herein by reference to the Exhibits to Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 of CFX No. 333-29243 effective in 1997. 10.19 Concord Savings Bank 1988 Stock Option Plan, incorporated by reference to the Exhibits to Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 of CFX No. 333-29243 effective in 1997. 10.20 Concord Savings Bank 1985 Employee Stock Option Plan, incorporated herein by reference to the Exhibits to Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 of CFX No. 333-29243 effective in 1997. 10.21 Portsmouth Bank Shares, Inc. Revised 1987 Stock Option and Stock Appreciation Rights Plan, incorporated herein by reference to the Exhibits to Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 of CFX No. 333-29229. 10.22 Employment and Change of Control Agreement between The Safety Fund Corporation and Stephen R. Shirley, dated June 1, 1994, assumed by the Company as of July 1, 1996 incorporated herein by reference to The Safety Fund Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1994. 21 Subsidiaries of the Company, filed herewith. 23.1 Consent of Wolf & Company, P.C. 23.2 Consent of KPMG Peat Marwick LLP (with respect to The Safety Fund Corporation and Community Bankshares, Inc.) 23.3 Consent of Shatswell, MacLeod & Company, P.C. (with respect to Portsmouth Bank Shares, Inc.) 18 19 27 Financial Data Schedule 27.1 Financial Data Schedule - Fiscal Year End 1997. 27.2 Financial Data Schedule - Fiscal Year Ends 1995, 1996 and Quarters 1, 2 and 3 of 1996. 27.3 Financial Data Schedule - Quarters 1, 2 and 3 of 1997. 99.1 Audited consolidated balance sheets of CFX Corporation and subsidiaries as of December 31, 1997 and 1996, and the consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the independent auditor's report thereon. (d) Financial Statement Schedules. Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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 Date: March 27, 1998 By: /s/ PETER J. BAXTER -------------------------- Peter J. Baxter, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ RICHARD F. ASTRELLA Director March 27, 1998 - ----------------------------------- Richard F. Astrella /s/ WILLIAM E. AUBUCHON, III Director March 27, 1998 - ----------------------------------- William E. Aubuchon, III /s/RICHARD B. BAYBUTT Director March 27, 1998 - ----------------------------------- Richard B. Baybutt /s/ PETER J. BAXTER President and Director March 27, 1998 - ----------------------------------- (Principal Executive Officer) Peter J. Baxter /s/ CHRISTOPHER V. BEAN Director March 27, 1998 - ----------------------------------- Christopher V. Bean /s/ CHRISTOPHER W. BRAMLEY Director March 27, 1998 - ----------------------------------- Christopher W. Bramley /s/ JOHN N. BUXTON Director March 27, 1998 - ----------------------------------- John N. Buxton /s/ P. KEVIN CONDRON Director March 27, 1998 - ----------------------------------- P. Kevin Condron /s/ TIMOTHY J. CONNORS Director March 27, 1998 - ----------------------------------- Timothy J. Connors /s/ DOUGLAS CRICHFIELD Director March 27, 1998 - ----------------------------------- Douglas Crichfield /s/ CALVIN L. FRINK Director March 27, 1998 - ----------------------------------- Calvin L. Frink /s/ EUGENE E. GAFFEY Director March 27, 1998 - ----------------------------------- Eugene E. Gaffey /s/ DAVID R. GRENON Director March 27, 1998 - ----------------------------------- David R. Grenon /s/ ELIZABETH SEARS HAGER Director March 27, 1998 - ----------------------------------- Elizabeth Sears Hager /s/ DOUGLAS S. HATFIELD, JR. Director March 27, 1998 - ----------------------------------- Douglas S. Hatfield, Jr.
20 21 /s/ PHILIP A. MASON Director March 27, 1998 - ----------------------------------- Philip A. Mason /s/ WALTER R. PETERSON Director March 27, 1998 - ----------------------------------- Walter R. Peterson /s/ SETH A. RESNICOFF, MD Director March 27, 1998 - ----------------------------------- Seth A. Resnicoff, MD /s/ MARK E. SIMPSON Director March 27, 1998 - ----------------------------------- Mark A Simpson /s/ ROBERT W. SIMPSON Director March 27, 1998 - ----------------------------------- Robert A. Simpson /s/ L. WILLIAM SLANETZ Director March 27, 1998 - ----------------------------------- L. William Slanetz /s/ GREGG R. TEWKSBURY Chief Financial Officer March 27, 1998 - ----------------------------------- (Principal Financial and Gregg R. Tewksbury Accounting Officer)
21 EX-23.1 2 CONSENT OF WOLF & COMPANY, P.C. 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this Form 10-K of our report dated January 30, 1998, except for Note W as to which the date is February 9, 1998, on the consolidated balance sheets of CFX Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. /s/ Wolf & Company, P.C. Boston, Massachusetts March 27, 1998 EX-23.2 3 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in CFX Corporation's December 31, 1997 Annual Report on Form 10-K of our report dated January 22, 1996, relating to the consolidated balance sheets of The Safety Fund Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended, which report appears in the December 31, 1995 annual report on Form 10-KSB of The Safety Fund Corporation. /s/ KPMG Peat Marwick LLP Boston, Massachusetts March 27, 1998 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in CFX Corporation's December 31, 1997 Annual Report on Form 10-K of our report dated January 22, 1997, relating to the consolidated balance sheets of Community Bankshares, Inc. and subsidiaries as of December 31, 1996 and June 30, 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1996, the six months ended December 31, 1995, and for each years in the three year period ended June 30, 1995, which report appears in the December 31, 1996 annual report on Form 10-K of Community Bankshares, Inc. /s/ KPMG Peat Marwick LLP Boston, Massachusetts March 27, 1998 EX-23.3 4 CONSENT OF SHATSWELL, MACLEOD & COMPANY, P.C. 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the use of our report January 13, 1997, except for Note 20 as to which the date is February 13, 1997, relating to Portsmouth Bank Shares, Inc. and Subsidiary for the year ended December 31, 1996 incorporated by reference in the Form 10-K filed by CFX Corporation on March 27, 1998. /s/ Shatswell, MacLeod & Company, P.C. West Peabody, Massachusetts March 25, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE - FISCAL YEAR END 1997
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 87,636 35 7,000 0 534,550 28,184 28,495 2,034,856 21,898 2,873,767 1,941,996 435,358 33,689 217,007 0 0 16,078 229,639 2,873,767 155,480 41,778 2,281 199,539 71,009 101,252 98,287 4,548 2,547 92,550 26,731 18,934 0 0 18,934 0.79 0.78 3.99 13,987 39,632 0 0 20,332 4,358 1,376 21,898 21,898 0 7,242
EX-27.2 6 FDS - FISCAL YEAR ENDS 95, 96, & QTRS 1,2&3 OF 96
9 1,000 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 69,085 77,123 65,517 76,465 76,549 25,442 287 82,656 78,063 67,177 57,958 53,983 11,300 7,100 0 0 0 24,153 0 0 376,386 414,896 378,168 393,592 441,598 164,733 104,682 172,516 185,475 101,309 165,865 104,783 172,516 185,475 101,309 1,331,622 1,594,399 1,372,009 1,447,868 1,513,817 19,843 20,332 19,775 19,722 20,203 2,110,155 2,369,257 2,199,772 2,311,359 2,338,055 1,637,831 1,751,141 1,705,935 1,720,543 1,749,320 196,117 324,161 196,431 288,576 289,693 22,987 26,937 28,640 32,033 30,027 21,645 27,182 36,468 34,465 33,438 0 0 0 0 0 0 0 0 0 0 15,030 15,670 11,177 11,228 11,260 216,545 224,166 221,121 224,514 224,317 2,110,155 2,369,257 2,199,772 2,311,359 2,338,055 109,601 128,533 30,177 61,716 94,330 35,994 35,842 8,584 17,605 26,598 3,213 3,930 1,120 2,216 3,194 148,808 168,305 39,881 81,537 124,122 57,674 63,634 15,854 31,367 47,277 67,865 79,583 18,789 38,319 58,394 80,943 88,722 21,092 43,218 65,728 3,814 4,285 1,180 2,230 3,210 2,383 2,780 918 1,450 1,823 63,251 71,270 16,258 32,485 54,012 31,616 35,429 8,938 18,986 24,609 21,554 23,553 6,170 13,020 16,034 0 0 0 0 0 0 0 0 0 0 21,465 23,553 6,170 13,020 16,034 0.93 1.01 0.27 0.56 0.69 0.89 0.99 0.27 0.55 0.68 4.33 4.25 4.36 4.30 4.25 1,301 10,783 12,651 11,549 10,712 30,299 31,075 28,092 21,902 23,702 0 0 0 0 0 0 0 0 0 0 18,940 19,843 19,843 19,843 19,843 4,482 4,757 1,482 2,841 3,598 1,428 961 234 490 748 19,843 20,332 19,775 19,772 20,203 19,843 20,332 19,775 19,772 20,203 0 0 0 0 0 6,975 6,257 6,975 6,975 6,975
EX-27.3 7 FDS - QUARTERS 1, 2 & 3 OF 1997
9 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 87,896 91,717 70,833 53,607 40,801 814 3,000 10,000 47,190 0 0 0 544,202 567,055 585,452 96,261 97,286 37,396 95,446 97,286 37,644 1,649,128 1,793,241 1,913,377 20,437 20,953 21,408 2,588,015 2,734,357 2,821,182 1,828,305 1,876,789 1,935,614 185,192 223,966 412,591 56,826 25,311 26,631 37,709 32,828 200,655 0 0 0 0 0 0 11,849 11,946 16,010 229,453 236,763 229,681 2,588,015 2,734,357 2,821,182 35,304 72,071 113,138 8,753 19,698 40,080 940 1,671 2,126 44,997 93,440 146,496 16,236 33,729 52,306 21,695 45,753 73,232 23,302 47,687 73,264 942 1,962 3,385 261 732 1,421 17,532 35,685 65,419 10,740 21,713 22,003 7,573 15,432 14,990 0 0 0 0 0 0 7,573 15,432 14,990 0.32 0.64 0.63 0.31 0.63 0.66 4.15 4.07 4.06 11,346 9,687 11,914 29,105 34,786 31,020 0 0 0 0 0 0 20,332 20,332 20,332 1,302 2,174 3,636 465 833 1,327 20,437 20,953 21,408 20,437 20,953 0 0 0 0 6,257 6,257 6,257
EX-99.1 8 AUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- FINANCIAL CONTENTS - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA................................................................. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS.................................................... 2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets........................................................... 24 Consolidated Statements of Income..................................................... 25 Consolidated Statements of Shareholders' Equity....................................... 27 Consolidated Statements of Cash Flows................................................. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Significant Accounting Policies.................................................... 30 B. Restrictions on Cash and Due From Bank Accounts.................................... 37 C. Investment Securities.............................................................. 37 D. Loans and Leases................................................................... 40 E. Allowance for Loan and Lease Losses................................................ 41 F. Premises and Equipment............................................................. 41 G. Foreclosed Assets.................................................................. 41 H. Deposits........................................................................... 42 I. Advances from Federal Home Loan Bank of Boston..................................... 43 J. Other Borrowed Funds............................................................... 44 K. Preferred Stock.................................................................... 44 L. Income Taxes....................................................................... 44 M. Charges Related to CFX Funding..................................................... 47 N. Employee Benefit Plans............................................................. 48 O. Stock Compensation Plans........................................................... 49 P. Commitments and Contingencies...................................................... 51 Q. Related Party Transactions......................................................... 53 R. Derivative Financial Instruments................................................... 53 S. Financial Instruments with Off-Balance-Sheet Lending Risk.......................... 54 T. Fair Value of Financial Instruments................................................ 55 U. Regulatory Capital Requirements and Other Restrictions............................. 58 V. Mortgage Loan Servicing............................................................ 60 W. Acquisition of the Company......................................................... 60 X. CFX Corporation (Parent-Company-Only) Condensed Financial Statements .............. 61 Y. Quarterly Results of Operations (Unaudited)........................................ 63 Report of Wolf & Company, P.C., Independent Auditors.................................. 64 Information on Common Stock........................................................... 65
2 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
At or for Years Ended December 31, 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- (Dollars in thousands, except per share data) BALANCE SHEET DATA Total assets $ 2,873,767 $ 2,369,257 $ 2,110,155 $ 1,935,530 $ 1,870,169 Debt and equity securities, net (1) 562,734 519,578 541,119 586,075 638,901 Total loans, net (2) 2,012,958 1,574,067 1,311,779 1,164,122 1,052,069 Goodwill and other intangibles 8,698 9,235 9,884 10,476 11,121 Deposits 1,941,996 1,751,141 1,637,831 1,541,002 1,517,393 Borrowings 652,365 351,343 217,762 165,482 90,702 Shareholders' equity 245,717 239,837 231,575 210,984 208,084 Nonperforming assets (3) 16,983 14,132 15,054 17,310 31,741 Book value per share 10.21 10.17 10.00 9.29 9.33 Tangible book value per share 9.85 9.78 9.58 8.83 8.83 OPERATIONS DATA: Interest and dividend income $ 199,539 $ 168,305 $ 148,808 $ 126,796 $ 125,936 Interest expense 101,252 79,583 67,865 51,654 53,001 ------------- ------------- ------------- ------------- ------------- Net interest income 98,287 88,722 80,943 75,142 72,935 Provision for loan losses 4,548 4,285 3,814 3,622 14,030 ------------- ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 93,739 84,437 77,129 71,520 58,905 Noninterest income 25,542 22,262 17,738 14,400 15,453 Noninterest expense (4) 92,550 71,270 63,251 61,709 58,980 ------------- ------------- ------------- ------------- ------------- Income before income tax expense 26,731 35,429 31,616 24,211 15,378 Income taxes 7,797 11,876 10,062 7,474 2,573 ------------- ------------- ------------- ------------- ------------- Net income 18,934 23,553 21,554 16,737 12,805 Preferred stock dividends - - 89 287 294 ------------- ------------- ------------- ------------- ------------- Net income available to common stock $ 18,934 $ 23,553 $ 21,465 $ 16,450 $ 12,511 ============= ============= ============= ============= ============= Earnings per common share $ 0.79 $ 1.01 $ 0.93 $ 0.73 $ 0.57 Earnings per common share - assuming dilution $ 0.78 $ 0.99 $ 0.89 $ 0.71 $ 0.56 Common dividends per share $ 0.81 $ 0.58 $ 0.53 $ 0.39 $ 0.37 OTHER DATA (5): Return on average assets 0.71% 1.04% 1.06% 0.86% 0.70% Return on average equity 7.63 10.03 9.77 7.80 6.12 Average equity to average assets 9.25 10.36 10.88 11.02 11.42 Net interest margin (6) 3.99 4.25 4.33 4.30 4.38 Tier 1 leverage capital ratio at end of period 8.32 9.74 10.83 10.72 10.98 Dividend payout ratio 102.53 57.43 56.99 53.42 64.91 Nonperforming assets as a percent of total assets at end of period (3) 0.59 0.60 0.71 0.89 1.70
(1) All securities were classified as available for sale at December 31, 1997, 1996 and 1995, except for $28.2 million, $104.7 million and $164.7 million of securities which were classified as held for investment at such dates, respectively. (2) Does not include loans held for sale. (3) Nonperforming assets consist of nonaccrual loans, other real estate owned and repossessed assets, net of related reserves where appropriate. (4) The 1997 period includes $11.0 million of one-time pre-tax reorganization and restructuring costs related to the acquisitions of Community Bankshares, Inc. and Portsmouth Bank Shares, Inc. On an after-tax basis, such costs amounted to $.35 per share of CFX Common Stock during the indicated period. (5) With the exception of end of period ratios, all ratios are based on average daily balances during the indicated period. (6) Net interest margin represents net interest income as a percent of average interest-earning assets, in each case calculated on a fully-taxable equivalent basis. 1 3 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE COMPANY - -------------------------------------------------------------------------------- CFX Corporation (the Company) is a bank holding company incorporated under the laws of the State of New Hampshire. Diversified financial services are provided to customers through its three wholly-owned subsidiaries: CFX Bank, headquartered in Keene, New Hampshire, Safety Fund National Bank, headquartered in Fitchburg, Massachusetts, and Orange Savings Bank (Orange), headquartered in Orange, Massachusetts. CFX Bank has one wholly-owned subsidiary: CFX Financial Services, Inc. (CFX Financial). CFX Financial owns 51% of CFX Funding L.L.C. (CFX Funding), which engages in the facilitation of lease financing and securitization. During the fourth quarter of 1997, the Company discontinued future operations of CFX Funding with respect to its securitization business. As a result of that decision, the Company recorded an after-tax charge of $4.4 million in the fourth quarter related to this business. See "Results of Operations - General". Also during the fourth quarter of 1997, CFX Bank dissolved its wholly-owned subsidiary, CFX Capital, which owned CFX Mortgage, Inc. CFX Mortgage, Inc. was also dissolved and its operations were combined with CFX Bank. The dissolutions had no significant impact on the Company's consolidated financial statements and were undertaken to streamline the organizational structure of the Company. The principal business of the Company consists of attracting deposits from the general public through its offices and using such deposits and other sources of funds to originate residential mortgage loans, commercial business loans and leases, commercial real estate loans and a variety of consumer loans and leases. The Company also invests in mortgage-backed securities and securities issued by the United States Government and agencies thereof as well as other investment securities. In addition, the Company engages in the sale of other financial products through its investment services function, provides trust services, and services residential loan and small-ticket lease loans for investors. The Company's goal has been to sustain profit, controlled growth by focusing on increased loan and deposit market share in New Hampshire and central and western Massachusetts, developing new financial products, services and delivery channels, closely monitoring yields on earning assets and rates on interest bearing liabilities, increasing non-interest income through expanded trust and investment advisory services and mortgage banking activities; all while controlling non-interest expenses. To supplement its internal growth, the Company's goals include the acquisitions of other financial institutions in its market areas and those bordering them. During 1997, the Company acquired two financial institutions in New Hampshire. More significantly, the Company entered into a definitive agreement to be acquired by Peoples Heritage Financial Group, Inc. See the "Mergers and Acquisition" discussion in this section. - -------------------------------------------------------------------------------- MERGERS AND ACQUISITIONS - -------------------------------------------------------------------------------- On August 29, 1997, the Company acquired Community Bankshares, Inc. ("Community"), a $616 million bank holding company and its subsidiary banks, Concord Savings Bank, a state-chartered savings bank headquartered in Concord, New Hampshire, and Centerpoint Bank, a commercial bank headquartered in Bedford, New Hampshire. In connection with the merger, Concord Savings Bank and Centerpoint Bank were merged into CFX Bank. A total of 5,304,293 shares of the Company's common stock was issued in exchange for all of the issued and outstanding shares of Community common stock. The transaction was accounted for as a pooling-of-interests and as such, the consolidated financial statements have been restated to include Community for all periods presented. The acquisition of Community provided an expanded presence in the central corridor of New Hampshire, the most attractive business section of the State. Also on August 29, 1997, the Company acquired Portsmouth Bank Shares, Inc. ("Portsmouth"), a $259 million bank holding company, and its subsidiary bank, Portsmouth Savings Bank, a state-chartered savings bank, headquartered in Portsmouth, New Hampshire. In connection with the Portsmouth acquisition, Portsmouth Savings Bank was merged into CFX Bank. A total of 5,502,005 shares of the Company's common stock was issued in exchange for all of the issued and outstanding shares of Portsmouth common stock. The transaction was accounted for as a pooling-of-interests and as such, the consolidated financial statements have been restated to include Portsmouth for all periods presented. The Portsmouth acquisition extended the franchise into the seacoast area of New Hampshire, completing the Company's statewide presence. 2 4 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MERGERS AND ACQUISITIONS - -------------------------------------------------------------------------------- As previously reported, on October 27, 1997, the Company entered into a definitive agreement to be acquired by Peoples Heritage Financial Group, Inc. ("PHFG"), a bank holding company headquartered in Portland, Maine. Pursuant to the agreement, each of the issued and outstanding shares of the Company's common stock (24,071,000 at December 31, 1997) will be converted into .667 shares of PHFG common stock. The PHFG transaction is expected to be a tax-free exchange to the owners of the Company and is subject to regulatory approval. On February 9, 1998, the shareholders of the Company and PHFG approved the transaction. It is anticipated that the transaction will be accounted for as a pooling-of interests. At December 31, 1997, PHFG reported total assets of $6.8 billion, deposits of $4.8 billion and shareholders' equity of $475 million. In connection with the acquisition, the Company's banking subsidiaries will be merged into PHFG's banking subsidiaries. Specifically, CFX Bank will be merged into Bank of New Hampshire, PHFG's New Hampshire subsidiary, and Safety Fund National Bank and Orange Savings Bank will both be merged into The Family Bank, FSB, PHFG's Massachusetts subsidiary. These transactions are anticipated to be consummated in the second quarter of 1998. In connection with the PHFG agreement, the Company and PHFG entered into Stock Option Agreements whereby the Company gave PHFG an option to purchase 19.9 percent of its outstanding common stock under certain circumstances and PHFG gave the Company an option to purchase 10.0 percent of its outstanding common stock under certain circumstances. - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- All information within this section should be read in conjunction with the consolidated financial statements and notes thereto included herein and the tables appearing throughout the discussion and analysis. All references in the discussion to financial condition and to results of operations are to the consolidated position and results of CFX Corporation and its subsidiaries taken as a whole. 3 5 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FINANCIAL CONDITION--LOANS AND LEASES - -------------------------------------------------------------------------------- The table below sets forth the composition of the Company's loan and lease portfolio at the dates indicated.
December 31, -------------------------------------------------------------------- 1997 1996 ------------------------------- ------------------------------ % of % of Balances Portfolio Balances Portfolio ------------- ----------- ------------- ----------- (Dollars in thousands) Real estate: Residential $ 1,153,612 56.41% $ 872,187 54.47% Construction 35,350 1.73 19,828 1.24 Commercial 265,848 13.00 247,517 15.46 Commercial, financial, and agricultural 209,492 10.24 169,880 10.61 Warehouse lines of credit to leasing companies 1,922 0.09 18,393 1.15 Consumer lease financing 134,293 6.57 76,343 4.77 Indirect and other consumer 244,635 11.96 197,014 12.30 ------------- ----------- ------------- ----------- 2,045,152 100.00% 1,601,162 100.00% Unearned income (17,303) =========== (10,733) ========== Deferred origination costs, net 7,007 3,970 ------------- ------------- Total loans and leases 2,034,856 1,594,399 Less: allowance for loan and lease losses 21,898 20,332 ------------- ------------- Net loans and leases $ 2,012,958 $ 1,574,067 ============= =============
Net loans and leases were $2.0 billion, or 70% of total assets, at December 31, 1997, compared with $1.6 billion, or 66% of totals assets, at December 31, 1996. Although primarily all categories of loans and leases have increased from 1996 to 1997, the majority of the $439 million increase in net loans and leases has been in the residential mortgage portfolio, increasing $281 million during this timeframe. In addition, the consumer lease financing portfolio had significant growth in 1997 of nearly $58 million. Residential loan production is primarily generated from three sources: originations in the Company's primary market area; purchases from correspondent banks within and outside of the Company's primary market area; and purchases of bulk loans from wholesale markets. As previously discussed, during the fourth quarter of 1997 the Company discontinued its operations in the CFX Funding small-ticket leasing program, and a significant portion of the warehouse lines of credit to leasing companies were sold to an unrelated third party at carrying value. The remaining balance at December 31, 1997 is expected to either amortize down or be sold. See "Results of Operations - General." During 1997, lower interest rates spawned higher refinancing activity generating significant volume in the residential loan portfolio. These lower rates, coupled with an improving economy, significantly impacted the Company's origination of residential loans during the year. In the first quarter of 1997, as part of the acquisition of Portsmouth, the Company commenced a leverage strategy to utilize the higher capital levels at Portsmouth. During 1997, the Company purchased or originated in excess of $300 million in investment securities and residential loans, which were funded by additional advances from the Federal Home Loan Bank of Boston and brokered deposits. The leverage strategy was designed to optimize the use of capital, enhance earnings and the return on equity. As traditional retail opportunities become available, it is the Company's intent that the leveraged assets, or wholesale assets, will be redeployed into higher yielding assets and wholesale funding will be replaced with core deposits. The growth in the consumer lease portfolio is the result of a maturing lease program targeted toward automobile dealerships throughout New Hampshire and central Massachusetts. This program began in December 1994 and continues to grow as consumers choose leasing as an acceptable alternative to purchasing. 4 6 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RISK ELEMENTS - -------------------------------------------------------------------------------- The Company operates principally in New Hampshire and central Massachusetts. Through acquisitions of banking franchises in new marketplaces, the opening of de novo branches in geographically dispersed markets, the purchase and origination of mortgages and leases throughout northern New England, the Company has diversified its credit risk in terms of both loan type and geographic concentrations. Asset quality remains strong as nonaccrual loans and leases were .69% of total loans and leases at December 31, 1997, compared to .68% a year earlier. All loans and leases past due 90 days or more as to principal or interest are generally placed on nonaccrual status. In addition, a loan, including a loan impaired under Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS No. 114) is generally classified as nonaccrual when management determines that significant doubt exists as to the collectibility of principal or interest. An impaired loan may remain on accrual status if it is less than 90 days past due and guaranteed or well secured. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized when received. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. The following table provides information with respect to the Company's nonperforming loans and assets at the dates indicated:
December 31, ----------------------------- 1997 1996 ---------- ---------- (In thousands) Nonaccrual loans $ 13,987 $ 10,783 Foreclosed assets 2,996 3,359 Valuation allowance on foreclosed assets - (10) ---------- ---------- Total nonperforming assets $ 16,983 $ 14,132 ========== ========== Nonaccrual loans as a percent of total loans 0.69% 0.68% ========== ========== Nonperforming assets as a percent of total loans and leases and foreclosed assets 0.83% 0.88% ========== ==========
5 7 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The following table provides the composition of the Company's nonperforming assets at the dates indicated:
December 31, --------------------------------------------------------------- 1997 1996 ----------------------------- -------------------------- % of % of Balances Total Balances Total ---------- -------- ---------- -------- (Dollars in thousands) Nonaccrual loans: Real estate: Residential $ 7,966 56.95% $ 6,944 64.40% Commercial 3,928 28.08 1,904 17.66 Commercial, financial, and agricultural 1,587 11.35 1,634 15.15 Consumer and other 506 3.62 301 2.79 ---------- -------- ---------- -------- 13,987 100.00% 10,783 100.00% ---------- ======== ---------- ======== Foreclosed assets: Residential 1,645 54.91% 2,108 62.95% Construction 387 12.92 467 13.94 Commercial 253 8.44 496 14.81 Repossessed assets (non-real estate) 711 23.73 288 8.60 Valuation allowance - - (10) (0.30) ---------- -------- ---------- -------- 2,996 100.00% 3,349 100.00% ---------- ======== ---------- ======== Total nonperforming assets $ 16,983 $ 14,132 ========== ==========
The following table provides a rollforward of the Company's foreclosed assets:
Years Ended December 31, --------------------------- 1997 1996 --------- --------- (In thousands) Balance at beginning of year, net $ 3,349 $ 2,753 Real estate additions 5,981 3,619 Real estate pay-offs/sales/other (6,658) (3,023) Net increase in other repossessed assets 324 - --------- --------- Balance at end of year, net $ 2,996 $ 3,349 ========= =========
- -------------------------------------------------------------------------------- ALLOWANCE FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- The allowance for loan and lease losses is maintained through charges to earnings. Loan and lease losses realized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loan and lease losses based on current economic conditions and historical experience. 6 8 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALLOWANCE FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- Changes in the allowance for loan and lease losses are as follows:
At or for the Years Ended December 31, ------------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands) Balance at beginning of year $ 20,332 $ 19,843 $ 18,940 Provision for loan and lease losses 4,548 4,285 3,814 Loans and leases charged-off (4,358) (4,757) (4,482) Recoveries of loans and leases previously charged-off 1,376 961 1,428 Change in fiscal year - Community - - 143 ---------- ---------- ---------- Balance at end of year $ 21,898 $ 20,332 $ 19,843 ========== ========== ========== Allowance for loan and lease losses as a percent of total loans and leases 1.08% 1.28% 1.49% ========== ========== ========== Allowance for loan and lease losses as a percent of total nonaccrual loans 156.56% 188.56% 161.31% ========== ========== ==========
For the six months ended December 31, 1995, Community recorded provisions for loan losses, recoveries and charge-offs of $498,000, $361,000 and $716,000, respectively. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation" of the Notes to Consolidated Financial Statements. 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, no assurance can be given that the provision for loan and lease losses will be adequate in the future; appropriate additional allowances may be required if there are significant changes to any of the foregoing factors. 7 9 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRADING SECURITIES AND INVESTMENT SECURITIES - -------------------------------------------------------------------------------- Investment securities consist of the following at the dates indicated:
December 31, ---------------------------- 1997 1996 ----------- ----------- (In thousands) Securities available for sale $ 534,550 $ 414,896 Securities held to maturity 28,184 104,682 ----------- ----------- Total $ 562,734 $ 519,578 =========== ===========
As a result of the Company's acquisitions of Portsmouth and Community on August 29, 1997 (see Note A to the consolidated financial statements) and to be consistent with the Company's current interest rate risk profile, certain securities held to maturity were transferred to securities available for sale. The table below describes those securities and the net unrealized losses associated with such securities which were transferred to securities available for sale from securities held to maturity as a result of the 1997 acquisitions of Portsmouth and Community:
Net Amortized Unrealized Cost Losses ---------- ---------- (In thousands) U.S. Treasury and agency obligations $ 42,985 $ 58 Federal agency mortgage pass-through securities 18,185 37 ---------- ---------- $ 61,170 $ 95 ========== ==========
During 1997 and 1996, the Company had activity in its trading portfolio, although no trading securities were held at the respective year-ends. Trading securities primarily related to investments in money market mutual funds that generated capital gains to offset capital loss carryforwards. The average balances in the trading portfolio for 1997 and 1996 were $95,000 and $15,220,000, respectively. 8 10 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DEPOSITS AND BORROWED FUNDS - -------------------------------------------------------------------------------- The following table shows the various components of deposits and borrowed funds at the dates indicated:
December 31, ----------------------------------------------------------------- 1997 1996 ------------------------------- ------------------------------ Amount % of Total Amount % of Total ------------- ---------- ------------- ---------- (Dollars in thousands) Deposits: Noninterest bearing demand deposits $ 227,508 11.72% $ 193,579 11.05% Regular savings deposits 337,203 17.36 299,411 17.10 NOW and money market deposits 349,849 18.01 367,266 20.97 Time deposits 778,461 40.09 820,925 46.88 ------------- -------- ------------- -------- Total retail deposits 1,693,021 87.18 1,681,181 96.00 Brokered time deposits 248,975 12.82 69,960 4.00 ------------- -------- ------------- -------- Total deposits $ 1,941,996 100.00% $ 1,751,141 100.00% ============= ======== ============= ======== Borrowed funds: Advances from Federal Home Loan Bank of Boston $ 453,755 69.56% $ 246,593 70.19% Other borrowed funds 198,610 30.44 104,750 29.81 ------------- -------- ------------- -------- Total borrowed funds $ 652,365 100.00% $ 351,343 100.00% ============= ======== ============= ========
The increase in total deposits of $191 million in 1997 primarily came in the higher cost brokered time deposits, and to a lesser extent, demand deposits. The decrease in retail time deposits resulted primarily from disintermediation as depositors moved maturing certificates to non-banking products. Demand deposit growth of $34 million, or 18%, is largely due to the increase in the commercial business loan portfolio as commercial borrowers often bring their entire banking relationship to one bank. The increase in Federal Home Loan Bank of Boston advances, brokered deposits and other borrowings funded asset growth and the leverage strategy. See "Financial Condition - Loans and Leases" section of this Management's Discussion and Analysis. Management customarily directs movement of funding between brokered deposits, advances from the Federal Home Loan Bank and repurchase agreements (included in other borrowed funds) in order to achieve a more favorable cost of funds. 9 11 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS--GENERAL - -------------------------------------------------------------------------------- CFX Corporation reported 1997 net income of $18,934,000, or $.79 ($.78 diluted) per share, compared to net income of $23,553,000, or $1.01 ($.99 diluted) per share, for the prior year. Return on assets and return on equity were .71% and 7.63%, respectively, for 1997 compared to 1.04% and 10.03%, respectively, for 1996. Excluding charges for mergers and other adjustments, net income and earnings per share were $31,729,000 and $1.33 per share, respectively, in 1997 and $27,275,000 and $1.17 per share, respectively, in 1996, representing an increase of $4,454,000, or 16%. Return on assets and return on equity, excluding merger charges and other adjustments, were 1.18% and 12.78%, respectively, for 1997, and 1.02% and 10.99%, respectively, for 1996.
Years Ended December 31, ---------------------------------- 1997 1996 ---------- ---------- (In thousands, except per share data) Net income available to common stock $ 18,934 $ 23,553 ---------- ---------- Add back after-tax charges: Merger costs 8,372 3,722 Charges related to CFX Funding 4,423 - ---------- ---------- 12,795 3,722 ---------- ---------- Net income available to common stock before merger and other charges $ 31,729 $ 27,275 ========== ========== Basic earnings per common share: Net income available to common stock $ 0.79 $ 1.01 Net income available to common stock exclusive of merger and other charges $ 1.33 $ 1.17
During 1997 and 1996, the Company incurred charges associated with the mergers of Portsmouth and Community, and The Safety Fund Corporation and Milford Co/operative Bank, respectively, totaling $8,372,000 and $3,722,000 (after tax), respectively. See the "Other Expense" section of this discussion. In 1997, the Company also incurred costs totaling $4,423,000 (after tax) applicable to the resolution of a dispute between the Company and American Credit Indemnity Company ("ACI"), a credit insurer, regarding the origination and servicing by CFX Funding of certain equipment leases held in four securitized lease pools insured by ACI, as well as the discontinuance of future operations of CFX Funding with respect to its securitization business. See the "Other Income" and "Other Expense" sections of this discussion. During 1997, net interest and dividend income increased $9,565,000 due primarily to leveraging the Company's balance sheet with loans and leases which increased $440 million, or 28%, during the year. The increase in non-interest income of $3,280,000 in 1997 over that in 1996 primarily came from mortgage banking activities, gains on the sales of investment securities, and the increase in the investment in bank-owned life insurance. Non-interest expense for 1997 totaled $92,550,000 and was $74,313,000 excluding merger-related charges and charges related to CFX Funding. The comparable amounts in 1996 totaled $71,270,000 and $66,748,000, respectively. 10 12 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMPARISON OF YEARS 1997 AND 1996--NET INTEREST AND DIVIDEND INCOME - -------------------------------------------------------------------------------- Taxable-equivalent net interest and dividend income was $99,297,000 in 1997, up 10.6% from $89,764,000 in 1996. The $9,533,000 increase in net interest and dividend income was due to an increase in average interest earning assets of $381 million in 1997, partially offset by a decline in the Company's net interest margin from 4.25% in 1996 to 3.99% in 1997. The increase in average interest earning assets resulted primarily from an increase in loans and leases. See "Financial Condition--Loans and Leases" of this "Management's Discussion and Analysis." The decrease in the net interest margin during 1997 of 26 basis points was primarily due to the increase in costs of interest-bearing liabilities outpacing the increase in yields on interest-earning assets, indicative of an increasingly competitive market for retail deposits and an increase in rates on advances from the Federal Home Loan Bank of Boston (FHLBB). Most of the interest earning assets were funded by higher cost products such as certificates of deposit or borrowings. The cost of advances from the FHLBB increased from 5.67% in 1996 to 5.85% in 1997. The Company continues to see a shift in its deposit mix from lower, variable-rate deposits (NOW, savings and money market accounts) to the higher-rate time deposits. Conversely, the net interest margin was positively impacted in 1997 by an increase in non-interest bearing demand deposits and a higher percentage of interest earning assets being represented by loans versus lower yielding investment securities. 11 13 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMPARISON OF YEARS 1997 AND 1996--NET INTEREST AND DIVIDEND INCOME - -------------------------------------------------------------------------------- The following table sets 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 investments in state and municipal securities and to present data on a comparative basis, the income from and yields on these loans 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 $386,000, $346,000, and $294,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The taxable-equivalent income adjustments for investment securities are $624,000, $696,000, and $776,000 for the years ended December 31, 1997, 1996, and 1995, respectively. These adjustments, however, are for comparison purposes only and have no impact on reported net income.
Years Ended December 31, ---------------------------------------------- 1997 ---------------------------------------------- Interest Average Income/ Yield/ Balance Expense Rate ------------ ---------- ----------- (Dollars in thousands) Assets Interest and dividend earning assets: Loan and leases (1) $ 1,814,156 $ 154,730 8.53% Tax-exempt loans and leases (2) 10,984 1,136 10.34 Taxable securities (3) 594,193 40,787 6.86 Tax-exempt securities (4) 21,791 1,615 7.41 Other 49,608 2,281 4.60 ------------- ----------- Total interest earning assets 2,490,732 200,549 8.05 Noninterest earning assets 194,390 ----------- ------------- Total $ 2,685,122 ============= Liabilities and Shareholders' Equity Interest-bearing liabilities: Savings deposits $ 668,218 15,758 2.36 Time deposits 984,071 55,251 5.61 Advances from FHLBB 374,620 21,915 5.85 Other borrowed funds 163,554 8,328 5.09 ------------- ----------- Total interest bearing liabilities 2,190,463 101,252 4.62 ----------- Noninterest bearing liabilities: Demand deposits 214,661 Other 31,740 Shareholders' equity 248,258 ------------- Total $ 2,685,122 ============= Net interest and dividend income $ 99,297 ========== Interest rate spread 3.43% Net interest margin 3.99%
Years Ended December 31, ---------------------------------------------- 1996 ---------------------------------------------- Interest Average Income/ Yield/ Balance Expense Rate -------------- ----------- ------- (Dollars in thousands) Assets Interest and dividend earning assets: Loan and leases (1) $ 1,458,970 $ 127,860 8.76% Tax-exempt loans and leases (2) 8,925 1,019 11.42 Taxable securities (3) 535,450 34,736 6.49 Tax-exempt securities (4) 30,228 1,802 5.96 Other 76,468 3,930 5.14 ------------- ----------- Total interest earning assets 2,110,041 169,347 8.02 ----------- Noninterest earning assets 156,998 ------------- Total $ 2,267,039 ============= Liabilities and Shareholders' Equity Interest-bearing liabilities: Savings deposits $ 684,801 16,323 2.38 Time deposits 849,926 47,311 5.57 Advances from FHLBB 197,312 11,196 5.67 Other borrowed funds 99,863 4,753 4.76 ------------- ----------- Total interest bearing liabilities 1,831,902 79,583 4.34 ----------- Noninterest bearing liabilities: Demand deposits 176,423 Other 23,952 Shareholders' equity 234,762 ------------- Total $ 2,267,039 ============= Net interest and dividend income $ 89,764 =========== Interest rate spread 3.68% Net interest margin 4.25%
Years Ended December 31, -------------------------------------------- 1995 -------------------------------------------- Interest Average Income/ Yield/ Balance Expense Rate ------------ ----------- ----------- (Dollars in thousands) Assets Interest and dividend earning assets: Loan and leases (1) $ 1,246,880 $ 109,030 8.74% Tax-exempt loans and leases (2) 7,332 865 11.80 Taxable securities (3) 550,217 34,761 6.32 Tax-exempt securities (4) 29,523 2,009 6.80 Other 56,383 3,213 5.70 ------------- ----------- Total interest earning assets 1,890,335 149,878 7.92 ----------- Noninterest earning assets 128,395 ------------ Total $ 2,018,730 ============= Liabilities and Shareholders' Equity Interest-bearing liabilities: Savings deposits $ 715,508 18,337 2.56 Time deposits 741,772 39,337 5.30 Advances from FHLBB 122,247 7,441 6.09 Other borrowed funds 52,138 2,750 5.27 ------------- ----------- Total interest bearing liabilities 1,631,665 67,865 4.16 ----------- Noninterest bearing liabilities: Demand deposits 147,984 Other 19,454 Shareholders' equity 219,627 ------------- Total $ 2,018,730 ============= Net interest and dividend income $ 82,013 =========== Interest rate spread 3.76% Net interest margin 4.33%
(1) For the purpose of these computations, nonaccrual loans and mortgage loans held for sale are included in loans and leases. (2) Tax-exempt loans are included within loans and leases. (3) Taxable securities include trading securities and investment securities. (4) Tax-exempt securities are included within investment securities. 12 14 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMPARISON OF YEARS 1997 AND 1996--NET INTEREST AND DIVIDEND INCOME - -------------------------------------------------------------------------------- The following table presents changes in interest and dividend income, interest expense, and net interest and dividend 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.
1997 vs 1996 1996 vs 1995 ------------------------------------------ ----------------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------------------ ----------------------------------------- Volume Rate Net Volume Rate Net ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) Interest and dividends earned on: Loans and leases $ 30,312 $ (3,442) $ 26,870 $ 18,580 $ 250 $ 18,830 Tax-exempt loans and leases 219 (102) 117 183 (29) 154 Taxable securities 3,951 2,100 6,051 (941) 916 (25) Tax-exempt securities (563) 376 (187) 44 (251) (207) Other (1,269) (380) (1,649) 1,057 (340) 717 ---------- ---------- ---------- ---------- ---------- ---------- Total interest and dividend income 32,650 (1,448) 31,202 18,923 546 19,469 ---------- ---------- ---------- ---------- ---------- ---------- Interest paid on: Savings deposits (420) (145) (565) (764) (1,250) (2,014) Time deposits 7,594 346 7,940 5,909 2,065 7,974 FHLBB advances 10,353 366 10,719 4,299 (544) 3,755 Other borrowings 3,223 352 3,575 2,292 (289) 2,003 ---------- ---------- ---------- ---------- ---------- ---------- Total interest expense 20,750 919 21,669 11,736 (18) 11,718 ---------- ---------- ---------- ---------- ---------- ---------- Change in net interest and dividend income $ 11,900 $ (2,367) $ 9,533 $ 7,187 $ 564 $ 7,751 ========== ========== ========== ========== ========== ==========
- -------------------------------------------------------------------------------- PROVISION FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- The allowance for loan and lease losses is maintained primarily through charges to earnings. Loan and lease losses realized, and recoveries received, are charged or credited directly to the allowance. The Company's management determines the level of the allowance for loan and lease losses based upon a review of the Company's loan and lease portfolio. This review identifies specific problem loans and leases requiring allocations of the allowance and also estimates an allocation for potential loans and leases based on current economic conditions and historical experience. The provision for loan and lease losses in 1997 was $4,548,000, compared to $4,285,000 in 1996. Total net charge-offs amounted to $2,982,000 for 1997, compared to $3,796,000 for 1996. The higher net charge-offs in 1996 as compared to 1997 were primarily attributable to the resolution of certain long-term problem loan relationships during 1996. At December 31, 1997, nonaccrual loans stood at $13,987,000, or .69% of total loans and leases, compared to $10,783,000, or .68% of total loans and leases, as of December 31, 1996. The allowance for loan and lease losses as a percentage of nonaccrual loans as of December 31, 1997 and December 31, 1996 amounted to 156.56% and 188.56%, respectively. The 1997 coverage of allowance for loan losses to nonaccrual loans ratio returned to that of the 1995 level. The decrease in this coverage ratio from 1996 to 1997 is primarily due to two factors. First, there were two large commercial loan relationships put on nonaccrual status during 1997 totaling over $2 million representing the majority of the increase in nonperforming loans suggesting there is not an overall declining trend in asset quality. These loans are collateralized and no significant losses are anticipated. Secondly, most of the remaining increase in nonperforming loans appeared in the residential loan portfolio. Real estate prices have steadily increased over the past year in the Company's primary market areas providing additional protection for losses in the event of foreclosure proceedings. 13 15 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROVISION FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- The increase of $263,000 in the 1997 provision for loan and lease losses over 1996 was due to the continued growth in the loan and lease portfolio. - -------------------------------------------------------------------------------- OTHER INCOME - -------------------------------------------------------------------------------- Other income totaled $25,542,000 for 1997, up $3,280,000, or 15%, when compared to $22,262,000 for 1996. Excluding the pension settlement gain of $877,000 recognized in 1996, year-over-year increases in non-interest income totaled $4,157,000, or 19%. Although service charges on deposit accounts and trust fees were up 3% and 28%, respectively, the significant increases came in the areas of mortgage banking services and income earned on an investment in bank-owned life insurance. Income generated from leasing activities totaled $1,663,000 in 1997, down $824,000, or 33%, from 1996 levels. The decrease is the result of a reduction in the amortization of deferred credits relating to leasehold residuals as well as the reduced number of securitization transactions executed by CFX Funding during 1997 as compared to 1996. As previously discussed, the Company discontinued the operations of CFX Funding with respect to its securitization business during 1997. CFX Funding earned fee income from assimilating securitizations and structured lease sales as well as received fees from servicing the lease portfolios for investors. Both of these revenue sources were diminished in 1997 as a result of discontinuing this line of business and future revenues in the area are expected to be negligible. The reduction of this fee income is not expected to have a material impact on the financial position of the Company in future periods. Mortgage banking income includes servicing fees as well as net gains on sales of loans and servicing rights. Net gains on sales of loans totaled $3,252,000 in 1997 compared to $2,250,000 in 1996, a 45% increase. This is primarily due to the higher level of mortgage production in 1997 compared to 1996, resulting from a more favorable interest rate environment as well as an expanded correspondent network. Loans sold in 1997 totaled $255,620,000 as compared to $146,894,000 in 1996. Total loan servicing fees in 1997 were down $61,000, or 2% compared with 1996, as a result of the high level of refinancing activity and the accelerated amortization of related mortgage servicing rights, and a sale of servicing rights in 1997. Loans serviced for others amounted to $1.4 billion and $1.1 billion at December 31, 1997 and 1996, respectively. During 1996, the pension settlement gain of $877,000 resulted when the Company terminated certain pension plans and transferred the plans' assets and liabilities to a multi-employer benefit plan. See Note N - "Employee Benefit Plans" of the Notes to Consolidated Financial Statements for more detail on this transaction. During 1997 the Company earned $2,251,000 of income from the Company's investment in bank-owned life insurance (BOLI), an increase of $1,276,000 from 1996. As of December 31, 1997, the Company has $60 million invested in bank-owned life insurance 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 several insurance companies with a Standard & Poors rating of AA+ or better. The Company, not the employee or family, is the beneficiary of the insurance policies. The first source of income is from the growth of the cash value of the policy. The cash value increases each year as interest (rate is guaranteed each year and changes annually to reflect market rates) is added by the insurance company. The second source of income comes from the insurance proceeds paid to the bank upon the death of an employee. The payment of the insurance proceeds and the earnings from the cash value are income tax free (unless the policy is surrendered). - -------------------------------------------------------------------------------- OTHER EXPENSE - -------------------------------------------------------------------------------- Non-interest expenses for 1997 totaled $92,550,000, compared to $71,270,000 for 1996. During 1997, the Company incurred $11,031,000 in merger-related costs associated with the acquisition of Portsmouth and Community, and $7,206,000 in charges related to CFX Funding. Included in the 1996 totals are merger-related charges incurred with the acquisitions of Safety Fund and Milford for $4,522,000 and a one-time SAIF special assessment of $691,000. Excluding these charges, total non-interest expenses would be $74,313,000 and $66,057,000 for 1997 and 1996, respectively, an increase of $8,256,000, or 12% over 1996 totals. 14 16 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OTHER EXPENSE - -------------------------------------------------------------------------------- Salaries and employee benefits increased 14% in 1997 due to increases in wage rates and incentive compensation resulting from increased profitability (excluding merger - related charges and other adjustments), additional hires to staff new initiatives, and a full year of salary expense for new branches opened in 1996, partially offset by employee reductions resulting from efficiencies gained from the mergers. The increase in occupancy and equipment expenses resulted from the opening of an operations center in 1997, new branches, and the enhancement of data processing equipment to meet customer needs in several of the Company's subsidiary banks. Professional fees are down 9% from the prior year as a result of the mergers and the elimination of certain services required as separate institutions. In the fourth quarter of 1997, the Company made the decision to discontinue the operations of CFX Funding and to resolve a dispute between CFX Funding and a credit insurer regarding the origination and servicing by CFX Funding of certain equipment leases held in four securitized lease pools. In association with the aforementioned decision, the Company recorded a charge to earnings of $7.2 million. This charge consisted of charges of approximately $1.9 million relating to the discontinuance of the leasing operation, $2.5 million to settle the dispute with the credit insurer, and the establishment of a $2.8 million reserve for future losses relating to the four securitized lease pools. As part of the resolution of its dispute with the credit insurer, the Company has agreed to reimburse the credit insurer for payments made to investors in the four securitized lease pools on claims made after December 18, 1997, and the Company is entitled to all recoveries on defaulted leases held in such pools after such date. The $2.8 million reserve is an estimate based on historical and projected performance of the leases. Although management believes that the reserve is sufficient to cover estimated future losses, there can be no assurances that actual losses will not be greater than expected. The reserve for credit losses is included in other liabilities in the consolidated balance sheet. At December 31, 1997, lease balances aggregating $19.2 million were held in the four securitized base pools. In conjunction with the acquisitions of Portsmouth and Community in 1997 and Safety Fund and Milford in 1996, the Company incurred charges of $11,031,000 and $4,522,000, respectively. These charges were comprised of the following:
Year Ended December 31, ----------------------------- 1997 1996 ---------- --------- (In thousands) Personnel $ 3,205 $ 1,440 Data processing 2,464 118 Facilities - 157 Other 5,362 2,807 ---------- --------- $ 11,031 $ 4,522 ========== =========
Personnel charges relate primarily to the costs of employee severance and employment outplacement assistance. Data processing costs consist of consultant costs for systems conversion and write-offs due to duplication of computer hardware, software, and certain telecommunications equipment. Facilities charges are the result of the consolidation of certain back-office operations and consist of write-downs of properties owned. Other merger expenses include investment banking fees, legal and accounting fees, due diligence costs, proxy registration/filing fees and mailing costs. All costs were charged to earnings during the respective year, although not all cash had been paid out for such expenses. The following table presents a summary of activity with respect to the merger accruals, included in other liabilities in the consolidated balance sheets, for each acquisition:
Year Ended December 31, 1997 ---------------------------------------- Portsmouth/ Safety Fund/ Community Milford ------------ -------------- (In thousands) Balance at beginning of year $ - $ 1,040 Provision charged to earnings 11,031 - Cash outlays (7,670) (489) Noncash write-downs - (157) --------- --------- Balance at end of year $ 3,361 $ 394 ========= =========
15 17 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INCOME TAXES - -------------------------------------------------------------------------------- In 1997, the Company recognized income tax expense of $7,797,000, an effective tax rate of 29.2%, compared to $11,876,000 and an effective tax rate of 33.5% for 1996. The lower tax rate for 1997 is primarily due to higher tax credits pertaining to low income housing projects, the establishment of a Real Estate Investment Trust (REIT), which effectively reduces Massachusetts income taxes, and the non-taxable increase in cash surrender value of bank-owned life insurance. These benefits were partially offset in 1997 by non-deductible merger expenses. - -------------------------------------------------------------------------------- COMPARISON OF YEARS 1996 AND 1995 - -------------------------------------------------------------------------------- CFX Corporation reported 1996 earnings of $23,553,000, or $1.01 ($.99 diluted) per share, compared to earnings of $21,465,000, or $.93 ($.89 diluted) per share, for the prior year. Return on assets and return on equity were 1.04% and 10.03%, respectively, for 1996 compared to 1.06% and 9.77%, respectively, for 1995. Excluding charges for mergers, earnings and earnings per share were $27,275,000 and $1.17 per share, respectively, in 1996 representing an increase of $5,810,000, or 27% over prior year earnings. Return on assets and return on equity in 1996 were 1.20% and 11.62%, respectively, excluding merger charges. During 1996, the Company incurred charges associated with the mergers of Safety Fund and Milford totaling $3,722,000 (after tax). - -------------------------------------------------------------------------------- NET INTEREST AND DIVIDEND INCOME - -------------------------------------------------------------------------------- Taxable-equivalent net interest and dividend income was $89,764,000 in 1996, up 9.5% from $82,013,000 in 1995. The interest rate spread and net interest margin were 3.68% and 4.25%, respectively, for 1996 compared to 3.76% and 4.33%, respectively, for 1995. The decrease of 8 basis points in the interest rate spread was principally due to the rise in the cost of the funding sources outpacing the increase in yield on earning assets. The decrease of 8 basis points in the net interest margin was primarily the result of the increase in the cost of funds, despite the increase in average interest earning assets in 1996 over 1995 of $219,706,000. - -------------------------------------------------------------------------------- PROVISION FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- The provision for loan and lease losses in 1996 was $4,285,000, compared to $3,814,000 in 1995. The increase of $471,000 was due to the increase in net charge-offs in 1996 as well as the continued growth in the loan and lease portfolio. Total net charge-offs amounted to $3,796,000 for 1996, compared to $3,054,000 for 1995. The increase in net charge offs in 1996 as compared to 1995 was primarily attributable to the higher volume of loans in the residential loan portfolio as well as the resolution of certain long-term problem loan relationships. At December 31, 1996, nonaccrual loans stood at $10,783,000, or .68% of total loans and leases, compared to $12,301,000, or .92% of total loans and leases, as of December 31, 1995. The allowance for loan and lease losses as a percentage of nonaccrual loans as of December 31, 1996 and 1995 amounted to 188.56% and 161.31%, respectively. - -------------------------------------------------------------------------------- OTHER INCOME - -------------------------------------------------------------------------------- Other income totaled $22,262,000 for 1996, up $4,524,000, or 26%, when compared to $17,738,000 for 1995. Excluding the pension settlement gain of $877,000 recognized in 1996, year-over-year increases in non-interest income totaled $3,647,000, or 21%. Although service charges on deposit accounts and trust fees were up 11% and 5%, respectively, the significant increases came in the areas of mortgage banking services, leasing activities and income earned on an investment in bank-owned life insurance. 16 18 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Net gains on sales of loans totaled $2,250,000 in 1996 compared to $1,149,000 in 1995, a 96% increase in income. This is primarily due to the higher level of mortgage production in 1996 compared to 1995 resulting from a more favorable interest rate environment as well as a larger correspondent network. Total net loan servicing fees in 1996 were up $218,000 or 10% compared with 1995 totals despite higher amortization of mortgage servicing rights resulting from a high level of refinancing activity. Income generated from leasing activities totaled $2,487,000 in 1996, up $520,000, or 26%, from 1995 levels. The increase is due to more lease securitizations in 1996 than in 1995, and an increase in servicing income as a result of a larger servicing base. The pension settlement gain of $877,000 resulted when the Company terminated certain pension plans and transferred the plans' assets and liabilities to a multi-employer benefit plan. See Note N - "Employee Benefit Plans" of the Notes to Consolidated Financial Statements for more detail on this transaction. Also, included in other non-interest income is $975,000 of income resulting from the Company's investment in BOLI. - -------------------------------------------------------------------------------- OTHER EXPENSE - -------------------------------------------------------------------------------- Other expenses for 1996 totaled $71,270,000, compared to $63,251,000 for 1995. Included in the 1996 totals are merger-related charges incurred with the acquisitions of Safety Fund and Milford for $4,522,000 and a one-time SAIF special assessment of $691,000. Excluding these charges, total non-interest expenses would be $66,057,000, an increase of $2,806,000, or 4% over 1995 totals. Salaries and employee benefits increased 7% in 1996 due to increases in wage rates and incentive compensation resulting from increased profitability, additional hires to staff new initiatives, and a full year of salary expense for new branches opened in 1995, partially offset by employee reductions resulting from efficiencies gained from the mergers. The increase in occupancy and equipment expenses resulted from the opening of new branches in 1995 and the enhancement of data processing equipment to meet customer needs in several of the Company's subsidiary banks. Similarly, professional fees are down 4% from the prior year as a result of the mergers and the elimination of certain services required as separate institutions. The insurance premiums assessed by the Federal Deposit Insurance Corporation (FDIC) were $383,000 in 1996, down $2,060,000 from $2,443,000 in 1995. Effective June 1, 1995, the FDIC's Bank Insurance Fund was adequately reserved allowing the FDIC to charge significantly lower premiums for future periods. The reduction of expense in 1996 reflects the benefit of the lower premiums for an entire year. In 1996, Congress passed a bill which required savings institutions (i.e., Milford) which have deposits insured by the FDIC-Savings Association Insurance Fund (SAIF) be charged a special assessment in order to capitalize the insurance fund. This assessment totaled $691,000 and was paid to the SAIF during the fourth quarter of 1996. - -------------------------------------------------------------------------------- INCOME TAXES - -------------------------------------------------------------------------------- In 1996, the Company recognized income tax expense of $11,876,000, an effective tax rate of 33.5%, compared to $10,062,000 and an effective tax rate of 31.8% for 1995. The higher tax rate for 1996 is primarily due to nondeductible merger-related expenses, partially offset by income earned from the bank-owned life insurance investment which is exempt from income taxes, higher tax credits pertaining to low income housing projects, and the reversal of a valuation allowance established by Safety Fund for net operating loss carryforwards at one of their subsidiaries as a result of current and projected profits from that subsidiary. - -------------------------------------------------------------------------------- CAPITAL RESOURCES - -------------------------------------------------------------------------------- Total shareholders' equity at December 31, 1997 was $245,717,000, compared to $239,837,000 a year earlier. The increase is primarily due to the issuance of additional common shares through exercise of stock options and an increase in the net unrealized gains on securities available for sale. The Consolidated Statements of Shareholders' Equity provide details of changes in equity since December 31, 1994. The Company's capital position is an indication of financial performance and stability and provides protection against loss to depositors and creditors. The Company's objective is to maintain an optimum level of capital to provide maximum shareholder return while serving the needs of the depositor and creditor. 17 19 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Federal regulation requires the Company to maintain minimum capital standards. Tier 1 capital is composed primarily of common stock and retained earnings less certain intangibles. The minimum requirements include a 3% Tier 1 leverage capital ratio for the most highly-rated institutions; all other institutions are required to meet a minimum leverage ratio that is at least 1% to 2% above the 3% minimum. In addition, the Company is 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 Federal Deposit Insurance Corporation (FDIC), are applicable to bank holding companies and state chartered non-member banks, respectively. Under the "risk-based" capital rules, banks and bank holding companies are required to have a level of Tier 1 capital equal to 4% of total risk-weighted assets, as defined. Banks and bank holding companies are also required to have total capital composed of Tier 1 plus "supplemental" or Tier 2 capital, the latter being composed primarily of the allowances for loan and lease losses, equal to 8% of total risk-weighted assets. As of December 31, 1997, the Company's combined Tier 1 leverage capital ratio was 8.3%. In addition, the Company's combined Tier 1 risk-based capital ratio and total risk-based capital ratio were 13.0% and 14.3%, respectively. In an effort to optimize the capital level, the Company has leveraged its balance sheet by originating and purchasing loans and leases and funding these assets with deposits and borrowed funds. The combined Tier 1 leverage capital ratio of 8.3% is substantially above the minimum level of 6% to be considered well capitalized by the regulatory agencies. - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The goal of asset/liability management is the prudent control of market risk, liquidity, and capital. Asset/liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (the "Board"). The Board delegates responsibility for asset/liability management to the Company's Asset/Liability Management Committee ("ALCO"). ALCO sets strategic directives that guide the day-to-day asset/liability management activities of the Company. ALCO also reviews and approves all major market risk, liquidity, and capital management programs. - -------------------------------------------------------------------------------- MARKET RISK - -------------------------------------------------------------------------------- Market risk is the sensitivity of income to variations in interest rates and other market-driven rates or prices. The Company is exposed to market risk in both its trading and non-trading portfolios. Trading portfolios are used minimally at the Company and were zero at year-end 1997. Non-trading market risk is discussed below. Non-trading Market Risk The Company's earnings from non-trading operations are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses. Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-trading market risk to which the Company is exposed. Interest-rate risk is the sensitivity of income to variations in interest rates. This risk arises directly from the Company's core banking activities - lending, deposit gathering, and loan servicing. The primary goal of interest-rate risk management is to control the Company's exposure to interest-rate risk within limits approved by the Board. These limits and guidelines reflect the Company's tolerance for interest-rate risk over both short-term and long-term time horizons. The Company controls interest-rate risk by identifying, quantifying and hedging its exposures. The Company identifies and quantifies its interest-rate exposures using simulation and valuation models, as well as gap analyses, reflecting the known or assumed maturity, repricing and other cash flow characteristics of the Company's assets and liabilities. The Company manages the interest-rate risk inherent in its core banking operations using both on-balance sheet instruments, mainly fixed-rate portfolio securities, borrowed fund maturities, and a variety of off-balance sheet instruments. The most frequently used off-balance sheet instruments are interest-rate swaps and options. When appropriate, forward-rate agreements, options on swaps, and exchange-traded futures and options are also used. 18 20 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The major source of the Company's non-trading interest-rate risk is the difference in the repricing characteristics of the Company's core banking assets and liabilities - loans and deposits. This difference or mismatch is a risk to net interest income. Most significantly, the Company's core banking assets and liabilities are mismatched with respect to repricing frequency and/or maturity. Most of the Company's commercial loans, for example, reprice rapidly in response to changes in short-term interest rates (e.g., London Interbank Offered Rate (LIBOR) and Prime). In contrast, many of its consumer deposits reprice slowly, if at all, in response to changes in market interest rates. Additionally, the Company's core banking assets and liabilities are mismatched with respect to the repricing index. For example, many of the Company's commercial and consumer loans reprice in response to changes in the Prime rate, while few, if any, deposits reprice as Prime changes. As a result, the core bank is exposed to spread or "basis" risk. In managing net interest income, the Company uses fixed-rate portfolio securities, mortgage loans and interest-rate swaps to offset the general asset-sensitivity of the core bank. At December 31, 1997, interest-rate swaps totaling $20.0 million (notional amount) were being used to manage risk to net interest income. - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- A second major source of the Company's non-trading interest-rate risk is the sensitivity of its mortgage loans and mortgage servicing rights (MSRs) to prepayments. The mortgage borrower has the option to prepay the mortgage loan at any time without penalty. When mortgage interest rates decline, borrowers have a greater incentive to prepay mortgage loans through a refinancing; when mortgage interest rates rise, this incentive is reduced or eliminated. Since MSRs represent the right to service mortgage loans, a decline in interest rates and an actual (or probable) increase in mortgage prepayments shorten the expected life of the MSR asset and reduce its economic value. Correspondingly, an increase in interest rates and an actual (or probable) decline in mortgage prepayments lengthen the expected life of the MSR asset and enhance its economic value. The expected income from and, therefore, economic value of MSRs is sensitive to movements in interest rates due to this sensitivity to mortgage prepayments. To mitigate the risk of declining long-term interest rates, higher-than-expected mortgage prepayments, and the potential impairment of the MSRs, the Company uses a conservative valuation methodology (which reduces the risk of impairment) and a variety of risk management instruments. There can be no assurances, however, that such measures will be effective. Complicating management's efforts to control non-trading exposure to interest-rate risk is the fundamental uncertainty of the maturity, repricing, and/or runoff characteristics of some of the Company's core banking assets and liabilities. This uncertainty often reflects optional features contained in these financial instruments. The most important optional features are contained in consumer deposits and loans. For example, many of the Company's interest-bearing retail deposit products (e.g., interest checking, savings and money market deposits) have no contractual maturity. Customers have the right to withdraw funds from these deposit accounts freely. Deposit balances may therefore run off unexpectedly due to changes in competitive or market conditions. To forestall such runoff, rates on interest-bearing deposits may have to be increased more (or reduced less) than expected. Such repricing may not be highly correlated with the repricing of variable rate loans. Finally, balances that are lost may have to be replaced with other more expensive retail or wholesale funding. Given the uncertainties surrounding deposit runoff and repricing, the interest-rate sensitivity of core bank liabilities cannot be determined precisely. Similarly, customers have the right to prepay loans, particularly residential mortgage loans, without penalty. As a result, the Company's mortgage-based assets (including mortgage loans and securities as well as mortgage servicing rights) are subject to prepayment risk. This risk tends to increase when interest rates fall due to the benefits of refinancing. Since the future prepayment behavior of the Bank's customers is uncertain, the interest-rate sensitivity of mortgage assets cannot be determined exactly. 19 21 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- To cope with such uncertainties, management gives careful attention to its assumptions. Depending on the product or behavior in question, each assumption will reflect some combination of market data, research analysis, and business judgment. For example, assumptions for mortgage prepayments are derived from published dealer median prepayment estimates for comparable mortgage loans, adjusted for factors specific to the Company's portfolio, such as geography and credit quality. Assumptions for noncontractual deposits are based on a historical analysis of repricing and runoff trends heavily weighted to the recent past, modified by business judgment concerning prospective competitive market influences. To measure the sensitivity of its income to changes in interest rates, the Company use a variety of methods, including simulation, gap, and valuation analyses. Simulation analysis involves dynamically modeling interest income and expense from the Company's balance sheet and off-balance-sheet positions over a specified time period under various interest-rate scenarios and balance sheet structures. The Company uses simulation analysis to measure the sensitivity of net interest income and net income over relatively short (i.e., 1-2 year) time horizons. - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- Key assumptions in these simulation analyses (and in the gap and valuation analyses discussed below) relate to the behavior of interest rates and spread, the growth or shrinkage of product balances and the behavior of the Bank's deposit and loan customers. As indicated above, the most material assumptions relate to the prepayment of mortgage assets as well as the repricing and/or runoff of noncontractual deposits. As the future path of interest rates cannot be known in advance, management uses simulation analysis to project earnings under various interest-rate scenarios. Some scenarios are deliberately extreme, including immediate interest-rate "shocks", and yield curve "twists". Usually, each analysis incorporates what management believes to be the most appropriate assumptions about customer and competitor behavior in the specified interest-rate scenario. But in some analyses, assumptions are deliberately manipulated to test the Company's exposure to "assumption risk." The Company's Board limits on interest-rate risk specify that if interest rates were to shift immediately up or down 200 basis points, estimated net income for the subsequent 12 months should decline by less than 12%. The Company was in compliance with this limit at December 31, 1997. The following table reflects the estimated exposure of the Company's net income for the next 12 months, assuming an immediate shift in interest rates.
Estimated Exposure to Rate Change Net Income (Basis Points) (Dollars in Millions) +200 $ 0.8 -200 (3.1)
The results are dependent on material assumptions such as those discussed above. There can be no assurances that any particular result will occur. Management believes that the exposure of the Company's net interest income to gradual and/or modest changes in interest rates is relatively small. As indicated by the results of the simulation analyses, however, a sharp decline in interest rates will tend to reduce net income, but by amounts that are within corporate limits. This exposure is primarily related to two major risk factors discussed earlier - the anticipated slow repricing of noncontractual deposits and the assumed rapid prepayment of mortgage loans and securities. Gap analysis provides a static view of the maturity and repricing characteristics of the on- and off-balance sheet positions. The interest-rate gap is prepared by scheduling all assets, liabilities and off-balance sheet positions according to scheduled or anticipated repricing or maturity. Interest-rate gap analysis can be viewed as a complement to simulation analysis. 20 22 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The following table summarizes the timing of the Company's anticipated maturities or repricing of interest earning assets and interest bearing liabilities as of December 31, 1997. This table has been generated using certain assumptions which the Company believes fairly represent repricing volumes in a dynamic interest rate environment. Specifically, contractual maturities are used on all time deposits and investments other than asset-backed securities. For asset-backed securities and loans, contractual maturities, repricing and prepayment assumptions are used. The prepayment assumptions are based on current experience and industry statistics. The stratification of savings deposits (including NOW, savings, and money market accounts) is based on management's philosophy of repricing core deposits in reaction to changes in the interest rate environment. Repricing frequencies will vary at different points in the interest cycle and as supply and demand for credit change. Derivative financial instruments are reflected in the gap table. For further discussion on strategies for derivatives, see Note R - "Derivative Financial Instruments" in the Notes to Consolidated Financial Statements.
December 31, 1997 --------------------------------------------------------------------------------- 0-3 4-12 1-5 5-10 Over 10 Months Months Years Years Years Total ---------- ----------- ---------- ---------- ----------- ----------- (In thousands) Interest bearing assets: Interest bearing deposits with other banks $ 35 $ - $ - $ - $ - $ 35 Investment securities 188,770 44,695 178,029 84,143 67,097 562,734 Loans and leases 399,894 584,639 858,645 181,986 47,429 2,072,593 ---------- ----------- ----------- ---------- ----------- ----------- Total interest earning assets 588,699 629,334 1,036,674 266,129 114,526 2,635,362 ---------- ----------- ----------- ---------- ----------- ----------- Interest bearing liabilities: Savings and time deposits 268,129 583,464 599,596 198,096 65,203 1,714,488 Advances from Federal Home Loan Bank of Boston 93,030 153,892 204,443 1,127 1,263 453,755 Other borrowed funds 139,140 59,470 - - - 198,610 ---------- ----------- ----------- ---------- ----------- ----------- Total interest bearing liabilities 500,299 796,826 804,039 199,223 66,466 2,366,853 ---------- ----------- ----------- ---------- ----------- ----------- Periodic gap $ 88,400 $(167,492) $ 232,635 $ 66,906 $ 48,060 $ 268,509 ========== =========== =========== ========== =========== =========== Cumulative gap $ 88,400 $ (79,092) $ 153,543 $ 220,449 $ 268,509 $ 268,509 ========== =========== =========== ========== =========== ===========
The ability to assess interest rate risk using gap analysis is limited. Gap analysis does not capture the impact of cash flow or balance sheet mix changes over a forecasted future period and it does not measure the amount of price change expected to occur in the various asset and liability categories. Thus, management does not use gap analysis exclusively in its assessment of interest rate risk. The Company's interest rate risk exposure is also measured by the forecasted net income and discounted cash flow market value sensitivities referred to above. Valuation analysis involves projecting future cash flows from the Company's assets, liabilities and off-balance sheet positions over a very long-term horizon, discounting those cash flows at appropriate interest rates, and then summing the discounted cash flows. The Company's "economic value of equity" (EVE) is the estimated net present value of the discounted cash flows. The interest sensitivity of EVE is a measure of the sensitivity of long-term earnings to changes in interest rates. The Company uses valuation analysis (specifically, the sensitivity of EVE) to measure the exposure of earnings and equity to changes in interest rates over a relatively long (i.e, greater than 2-year) time horizon. Valuation analysis provides a more comprehensive measure of the Company's exposure to the interest-rate risk than simulation analysis. 21 23 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Company's Board limits on interest-rate risk specify that if interest rates were to shift immediately up or down 200 basis points, the estimated economic value of equity should decline by less than 25%. The Company was in compliance with this limit at December 31, 1997. The following table reflects the Company's estimated exposure to economic value assuming an immediate shift in interest rates. Exposures are reported for shifts of +/- 100 basis points as well as +/- 200 basis points because the sensitivity of EVE to changes in interest rates can be nonlinear:
Estimated Change in Rate Change Economic Value (Basis Points) (Dollars in Millions) +200 $ (14) -100 (5) -100 (2) -200 (8)
It should be emphasized that valuation analysis focuses on the long-term economic value of the Company's future cash flows, but it does not reflect accounting rules. For some financial instruments, the adverse impact of current movements in interest rates on expected future cash flows must be recognized immediately. For example, if interest rates decline, thereby reducing estimated future fee income from MSRs such that the estimated economic value of the MSRs fall below book value, an immediate impairment charge is required. In contrast, for other financial instruments, such as fixed-rate investment securities, the beneficial impact of a decline in interest rates on future income is unrecognized unless the instruments are sold. - -------------------------------------------------------------------------------- LIQUIDITY RISK - -------------------------------------------------------------------------------- Liquidity risk-management's objective is to assure the ability of the Company and its subsidiaries to meet their financial obligations. These obligations are the withdrawal of deposits on demand or at their contractual maturity. the repayment of borrowings as they mature, the ability to take advantage of new business opportunities. Liquidity is achieved by the maintenance of a strong base of core customer funds, maturing short-term assets, the ability to sell marketable securities or other assets, committed lines of credit and access to capital markets. At CFX Corporation, liquidity is measured in two ways. First, borrowing capacities are estimated. Policy guidelines require minimum levels of available liquidity, whether the source is asset sale or borrowing. Borrowing capacity estimates are augmented by regular communication between company management and primary borrowing sources, including the Federal Home Loan Bank of Boston, national market deposit brokers, and primary securities' dealers. Second, forecasts of liquidity utilization are reviewed monthly by ALCO. Trends toward lower liquidity levels can be observed and connective strategies developed, in advance of the actual occurrence of a policy violation. - -------------------------------------------------------------------------------- IMPACT OF INFLATION - -------------------------------------------------------------------------------- The consolidated financial statements and related consolidated financial data herein have been presented in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Inflation can affect the Company in a number of ways, including increased operating costs and interest rate volatility. Management attempts to minimize the effects of inflation by maintaining an approximate match between interest rate sensitive assets and interest rate sensitive liabilities and, where practical, by adjusting service fees to reflect changing costs. 22 24 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- See Note A - "Significant Accounting Policies - Recent Accounting Pronouncements," of the Notes to Consolidated Financial Statements for more detail. - -------------------------------------------------------------------------------- YEAR 2000 - -------------------------------------------------------------------------------- The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for the year 2000 compliance. A comprehensive Year 2000 compliance program has been written and if adhered to, will ensure that all major system applications will be Year 2000 compliant prior to January 1, 2000. To date, confirmations have been received from the Company's primary processing vendors that plans are being developed to address processing of transactions beginning in the Year 2000. Cost estimates have been made and are not deemed to be material in any one year for the Company. However, if primary processing vendors are not compliant with the Year 2000 coding requirements, there may be business interruptions which could have material adverse financial implications for the Company. As previously noted, the Company announced that it is being acquired with an expected closing in the second quarter of 1998. Several of the Year 2000 initiatives undertaken by the Company may not be compatible with the acquiring organization which has different primary processing systems. 23 25 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
December 31, ------------------------------- 1997 1996 ---------- ---------- (In thousands) ASSETS Cash and due from banks $ 87,636 $ 77,123 Federal funds sold and other overnight deposits 7,000 53,983 ------------- ------------- Cash and cash equivalents 94,636 131,106 Interest-bearing deposits with other banks 35 287 Securities available for sale 534,550 414,896 Securities held to maturity 28,184 104,682 Mortgage loans held for sale 37,737 16,967 Loans and leases 2,034,856 1,594,399 Less allowance for loan losses 21,898 20,332 ------------- ------------- Net loans and leases 2,012,958 1,574,067 ------------- ------------- Premises and equipment 38,761 38,195 Mortgage servicing rights 8,894 7,644 Goodwill and deposit base intangibles 8,698 9,235 Foreclosed assets 2,996 3,349 Bank-owned life insurance 63,226 30,975 Other assets 43,092 37,854 ------------- ------------- Total assets $ 2,873,767 $ 2,369,257 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest-bearing $ 1,714,488 $ 1,557,562 Noninterest bearing 227,508 193,579 ------------- ------------- Total deposits 1,941,996 1,751,141 Advances from Federal Home Loan Bank of Boston 453,755 246,593 Other borrowed funds 198,610 104,750 Other liabilities 33,689 26,936 ------------- ------------- Total liabilities 2,628,050 2,129,420 ------------- ------------- 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 50,000,000 shares, issued 24,116,000 shares in 1997 and 23,504,000 shares in 1996 16,078 15,671 Paid-in capital 149,106 142,898 Retained earnings 79,080 81,198 Net unrealized gains on securities available for sale, after tax effects 2,240 489 Cost of common stock in treasury - 45,109 shares in 1997 and 28,055 shares in 1996 (787) (419) ------------- ------------- Total shareholders' equity 245,717 239,837 ------------- ------------- Total liabilities and shareholders' equity $ 2,873,767 $ 2,369,257 ============= =============
See notes to consolidated financial statements and independent auditors' report. 24 26 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
Years Ended December 31, --------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (In thousands, except per share data) Interest and dividend income: Interest on loans and leases $ 155,480 $ 128,533 $ 109,601 Interest on investment securities: Taxable 39,089 33,287 33,185 Tax-exempt 991 1,106 1,233 ----------- ----------- ----------- 40,080 34,393 34,418 Interest and dividends on trading securities 7 - 6 Dividends on marketable equity securities 1,691 1,449 1,570 Other 2,281 3,930 3,213 ----------- ----------- ----------- Total interest and dividend income 199,539 168,305 148,808 ----------- ----------- ----------- Interest expense: Interest on deposits 71,009 63,634 57,674 Interest on borrowings: Short-term 20,604 11,971 7,251 Long-term 9,639 3,978 2,940 ----------- ----------- ----------- Total interest expense 101,252 79,583 67,865 ----------- ----------- ----------- Net interest and dividend income 98,287 88,722 80,943 Provision for loan and lease losses 4,548 4,285 3,814 ----------- ----------- ----------- Net interest and dividend income, after provision for loan and lease losses 93,739 84,437 77,129 ----------- ----------- ----------- Other income: Service charges on deposit accounts 5,113 4,952 4,474 Loan servicing fees 2,405 2,466 2,248 Net gain on trading securities 87 564 1,092 Net gain on sale of investment securities 2,460 2,216 1,291 Net gain on sale of loan servicing rights 1,339 - - Net gain on sale of mortgage loans 3,252 2,250 1,149 Leasing activities 1,663 2,487 1,967 Trust fees 3,015 2,351 2,246 Pension settlement gain - 877 - Bank-owned life insurance 2,251 975 - Other 3,957 3,124 3,271 ----------- ----------- ----------- Total other income 25,542 22,262 17,738 ----------- ----------- ----------- Other expense: Salaries and employee benefits 38,730 34,076 31,941 Occupancy and equipment 12,127 10,306 9,118 Professional fees 2,761 3,030 3,146 Advertising and marketing 2,322 2,366 1,972 Operation of foreclosed assets 648 508 607 FDIC deposit insurance 289 383 2,443 Goodwill and deposit base intangible amortization 623 653 714 Merger expenses 11,031 4,522 - Charges related to CFX Funding 7,206 - - SAIF special assessment - 691 - Other 16,813 14,735 13,310 ----------- ----------- ----------- Total other expense 92,550 71,270 63,251 ----------- ----------- -----------
(continued) See notes to consolidated financial statements and independent auditors' report. 25 27 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (concluded) CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
Years Ended December 31, -------------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands, except per share data) Income before income taxes 26,731 35,429 31,616 Income taxes 7,797 11,876 10,062 ---------- ---------- ---------- Net income 18,934 23,553 21,554 Preferred stock dividends - - 89 ---------- ---------- ---------- Net income available to common stock $ 18,934 $ 23,553 $ 21,465 ========== ========== ========== Weighted averages shares outstanding 23,866 23,383 23,180 ========== ========== ========== Weighted averages shares outstanding - assuming dilution 24,329 23,897 24,069 ========== ========== ========== Earnings per share $ 0.79 $ 1.01 $ 0.93 ========== ========== ========== Earnings per share - assuming dilution $ 0.78 $ 0.99 $ 0.89 ========== ========== ==========
See notes to consolidated financial statements and independent auditors' report. 26 28 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
Preferred Stock Common Stock ---------------------- ------------------------ Paid-In Shares Dollars Shares Dollars Capital --------- --------- ---------- ------------ ------------ (In thousands, except per share data) Balance at December 31, 1994 193 $ 193 22,347 $ 14,899 $ 129,377 Net income - - - - - Common cash dividends declared-$.53 per share - - - - - Preferred cash dividends declared-$.4625 per share - - - - - Issuance of common stock under stock option and purchase plans - - 198 132 1,114 Issuance of common stock under dividend reinvestment plan - - 22 15 312 Purchase and retirement of treasury stock - - (1,025) (683) (7,996) Preferred stock converted to common stock (193) (193) 318 212 (19) Decrease in unearned compensation - ESOP - - - - - Fractional shares paid out - - (1) (1) (17) Common stock dividends declared - - 460 307 6,756 Change in net unrealized gain (loss) on securities available for sale - - - - - Activity applicable to change in fiscal year - Community: Net income - - - - - Common cash dividends declared - - - - - Issuance of common stock under stock option plan - - 11 7 49 Decrease in unearned compensation - ESOP - - - - - Change in net unrealized gain (loss) on securities available for sale - - - - - ------ ------ -------- ---------- ----------- Balance at December 31, 1995 - - 22,330 14,888 129,576 Net income - - - - - Common cash dividends declared-$.58 per share - - - - - Issuance of common stock under stock option and purchase plans and related tax effects - - 494 329 2,963 Purchase and retirement of treasury stock - - (42) (28) (555) Decrease in unearned compensation - ESOP - - - - - Fractional shares paid out - - (2) (1) (25) Common stock dividends declared - - 724 483 10,939 Change in net unrealized gain (loss) on securities available for sale - - - - - ------ ------ -------- ---------- ----------- Balance at December 31, 1996 - - 23,504 15,671 142,898 Net income - - - - - Common cash dividends declared-$.81 per share - - - - - Issuance of common stock under stock option and purchase plans and related tax effects - - 488 325 4,092 Issuance of common stock under dividend reinvestment plan - - 22 14 422 Purchase of treasury stock - - - - - Common stock dividends declared - - 102 68 1,694 Change in net unrealized gain (loss) on securities available for sale - - - - - ------ ------ -------- ---------- ----------- Balance at December 31, 1997 - $ - 24,116 $ 16,078 $ 149,106 ====== ====== ======== ========== ===========
Net Unrealized Gain (Loss) on Unearned Securities Treasury Stock Retained Compensation - Available ---------------------- Earnings ESOP for Sale Shares Dollars Total ----------- -------------- --------------- -------- ----------- -------- (In thousands, except per share data) Balance at December 31, 1994 $ 78,562 $ (429) $ (4,420) (866) $ (7,198) $ 210,984 Net income 21,554 - - - - 21,554 Common cash dividends declared-$.53 per share (11,712) - - - - (11,712) Preferred cash dividends declared-$.4625 per share (89) - - - - (89) Issuance of common stock under stock option and purchase plans - - - - - 1,246 Issuance of common stock under dividend reinvestment plan - - - - - 327 Purchase and retirement of treasury stock - - - 866 7,198 (1,481) Preferred stock converted to common stock - - - - - - Decrease in unearned compensation - ESOP - 232 - - - 232 Fractional shares paid out - - - - - (18) Common stock dividends declared (7,063) - - - - - Change in net unrealized gain (loss) on securities available for sale - - 8,739 - - 8,739 Activity applicable to change in fiscal year - Community: Net income 1,774 - - - - 1,774 Common cash dividends declared (543) - - - - (543) Issuance of common stock under stock option plan - - - - - 56 Decrease in unearned compensation - ESOP - 79 - - - 79 Change in net unrealized gain (loss) on securities available for sale - - 427 - - 427 ---------- -------- ---------- ------ ---------- ----------- Balance at December 31, 1995 82,483 (118) 4,746 - - 231,575 Net income 23,553 - - - - 23,553 Common cash dividends declared-$.58 per share (13,416) - - - - (13,416) Issuance of common stock under stock option and purchase plans and related tax effects - - - - - 3,292 Purchase and retirement of treasury stock - - - (28) (419) (1,002) Decrease in unearned compensation - ESOP - 118 - - - 118 Fractional shares paid out - - - - - (26) Common stock dividends declared (11,422) - - - - - Change in net unrealized gain (loss) on securities available for sale - - (4,257) - - (4,257) ---------- -------- ---------- ------ ---------- ----------- Balance at December 31, 1996 81,198 - 489 (28) (419) 239,837 Net income 18,934 - - - - 18,934 Common cash dividends declared-$.81 per share (19,283) - - - - (19,283) Issuance of common stock under stock option and purchase plans and related tax effects - - - - - 4,417 Issuance of common stock under dividend reinvestment plan - - - - - 436 Purchase of treasury stock - - - (17) (368) (368) Common stock dividends declared (1,769) - - - - (7) Change in net unrealized gain (loss) on securities available for sale - - 1,751 - - 1,751 ---------- -------- ---------- ------ ---------- ----------- Balance at December 31, 1997 $ 79,080 $ - $ 2,240 (45) $ (787) $ 245,717 ========== ======== ========== ====== ========== ===========
See notes to consolidated financial statements and independent auditors' report. 27 29 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands) Cash flows from operating activities: Net income $ 18,934 $ 23,553 $ 21,554 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,191 5,123 6,722 Amortization of deferred credit on leasehold residual (774) (1,412) (1,347) Provision for loan and lease losses 4,548 4,285 3,814 Provision for foreclosed real estate losses 23 21 31 Loans originated and acquired for resale (202,531) (153,836) (120,897) Principal balance of loans sold 255,620 146,894 124,333 Net gain on sale of portfolio loans (241) (256) (14) Net (gain) loss on sale of foreclosed real estate 14 (76) (71) Net gain on sale of investment securities (2,460) (2,216) (1,291) Net decrease in trading securities - - 236 Deferred income tax provision 3,306 6,136 2,905 Increase in cash surrender value of bank-owned life insurance (2,251) (975) - Other (4,996) (270) (6,419) ---------- ---------- ---------- Net cash provided by operating activities 74,383 26,971 29,556 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sales of securities available for sale 236,584 77,663 60,635 Proceeds from maturities of securities available for sale 298,015 178,071 58,019 Purchase of securities available for sale (591,047) (210,357) (80,235) Proceeds from sales of securities held to maturity - 1,005 6,006 Proceeds from maturities of securities held to maturity 53,328 88,750 68,488 Purchase of securities held to maturity (34,193) (87,253) (85,810) Proceeds from the sale of, or payments on, foreclosed real estate 11,054 2,489 2,193 Proceeds from the sale of portfolio loans 36,358 16,356 10,027 Net decrease (increase) in interest-bearing deposits with other banks 252 25,155 (3,606) Net increase in loans and leases (563,660) (312,391) (162,951) Purchase of bank-owned life insurance (30,000) (30,000) - Purchase of premises and equipment (6,310) (7,748) (2,859) ---------- ---------- ---------- Net cash used in investing activities (589,619) (258,260) (130,093) ---------- ---------- ----------
(continued) See notes to consolidated financial statements and independent auditors' report. 28 30 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded) CFX CORPORATION AND SUBSIDIARIES - --------------------------------------------------------------------------------
Years Ended December 31, -------------------------------------------- 1997 1996 1995 --------- ----------- ----------- (In thousands) Cash flows from financing activities: Net increase (decrease) in noninterest bearing deposits and savings accounts 54,304 10,997 (51,887) Net increase in time certificates of deposit 136,551 102,313 142,290 Proceeds from borrowings with maturities in excess of three months 651,281 235,500 163,883 Payment of borrowings with maturities in excess of three months (286,000) (178,640) (57,803) Net increase (decrease) in borrowings with maturities of three months or less (64,259) 76,721 (32,716) Repayment of liability in connection with ESOP - (118) (232) Common cash dividends paid (16,754) (13,312) (10,041) Preferred cash dividends paid - - (89) Proceeds from issuance of common stock 4,018 2,919 1,509 Payments for fractional shares (7) (26) (18) Acquisition of treasury shares (368) (1,002) (1,481) --------- ----------- ----------- Net cash provided by financing activities 478,766 235,352 153,415 --------- ----------- ----------- Increase (decrease) in cash and cash equivalents (36,470) 4,063 52,878 Change in fiscal year - Community - - 1,858 Cash and cash equivalents at beginning of year 131,106 127,043 72,307 --------- ----------- ----------- Cash and cash equivalents at end of year $ 94,636 $ 131,106 $ 127,043 ========= =========== =========== Supplementary information: Interest paid on deposit accounts $ 67,104 $ 61,559 $ 56,730 Interest paid on borrowed funds 27,297 16,147 9,715 Income taxes paid 5,407 5,930 7,662 Transfers from loans to loans held for sale 73,859 - -
See notes to consolidated financial statements and independent auditors' report. 29 31 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE A--SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRINCIPLES OF PRESENTATION AND CONSOLIDATION - -------------------------------------------------------------------------------- The consolidated financial statements include the accounts of CFX Corporation and its wholly-owned subsidiaries (the Company), CFX Bank, Safety Fund National Bank and Orange Savings Bank (collectively referred to as Banks), and the Banks' subsidiaries which engage in investment activities, mortgage banking, and property management. One of the Bank's subsidiaries has a 51% ownership interest in CFX Funding, L.L.C., which engages in the facilitation of lease financing and securitization. All significant intercompany accounts and transactions are eliminated upon consolidation. The Company has entered into a definitive agreement to be acquired by Peoples Heritage Financial Group, Inc. See Note W - "Acquisition of the Company." The consolidated financial statements have been restated to reflect the Company's acquisition of Portsmouth Bank Shares, Inc. (Portsmouth) and Community Bankshares, Inc. (Community) on August 29, 1997. Upon acquisition, each of Portsmouth's 5,907,242 outstanding shares of common stock and Community's 2,510,314 outstanding shares of common stock were converted into 0.9314 shares and 2.113 shares, respectively, of the Company's common stock, resulting in the issuance of 5,502,005 shares and 5,304,293 shares, respectively, of the Company's common stock to Portsmouth and Community shareholders. Outstanding stock options were similarly exchanged for CFX stock options. Portsmouth was a New Hampshire corporation and its subsidiary, Portsmouth Savings Bank, was a New Hampshire state-chartered savings bank headquartered in Portsmouth, New Hampshire. Portsmouth Savings Bank was merged into CFX Bank as part of the transaction. Community was a New Hampshire corporation and its bank subsidiaries, Concord Savings Bank, a New Hampshire state-chartered savings bank, and Centerpoint Bank, a New Hampshire state-chartered commercial bank, were merged into CFX Bank as part of the transaction. Both the Portsmouth and Community mergers were accounted for by the pooling-of-interests method of accounting, and, accordingly, the financial information for all 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. Expenses directly attributable to the mergers amounted to $11,031,000 and were charged to earnings at the date of combination. Separate financial information of CFX Corporation, Portsmouth and Community is as follows:
Six Months Ended June 30, ------------------------------------------- 1997 ------------------------------------------- CFX Portsmouth Community ---------- ------------ ------------- (In thousands) Net interest and dividend income $ 30,784 $ 5,185 $ 11,718 Provision for loan and lease losses (1,404) - (558) Other income 8,578 509 2,586 Other expense (24,771) (1,703) (9,211) Income taxes (3,638) (955) (1,688) ---------- --------- ---------- Net income 9,549 3,036 2,847 Preferred dividends - - - ---------- --------- ---------- Net income available to common stock $ 9,549 $ 3,036 $ 2,847 ========== ========= ==========
Years Ended December 31, ----------------------------------------------------------------------------- 1996 1995 ----------------------------------------------------------------------------- CFX Portsmouth Community CFX Portsmouth Community ------------ ------------ ----------- ----------- ------------ ----------- Net interest and dividend income $ 56,859 $ 10,043 $ 21,820 $ 52,026 $ 10,862 $ 18,055 Provision for loan and lease losses (2,935) - (1,350) (3,037) - (777) Other income 16,827 1,888 3,547 14,311 1,226 2,201 Other expense (51,370) (3,527) (16,373) (46,202) (3,608) (13,441) Income taxes (6,740) (2,447) (2,689) (5,760) (2,439) (1,863) ---------- ---------- ---------- ---------- ---------- ---------- Net income 12,641 5,957 4,955 11,338 6,041 4,175 Preferred dividends - - - (89) - - ---------- ---------- ---------- ---------- ---------- ---------- Net income available to common stock $ 12,641 $ 5,957 $ 4,955 $ 11,249 $ 6,041 $ 4,175 ========== ========== ========== ========== ========== ==========
Effective December 31, 1995, Community changed its fiscal year end from June 30 to December 31. Accordingly, the financial information presented above for the year ended December 31, 1995 includes financial information for Community for the year ended June 30, 1995. 30 32 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The financial information (in thousands) pertaining to Community for the six months ended December 31, 1995, is as follows: Net interest and dividend income $ 9,748 Provision for loan and lease losses (498) Other income 1,807 Other expense (8,019) Income taxes (1,264) --------- Net income $ 1,774 =========
For the six months ended December 31, 1995, cash flow information (in thousands) pertaining to Community was as follows: Net cash provided by operating activities $ 3,917 Net cash provided by investing activities 8,348 Net cash used by financing activities (10,407) --------- Net increase in cash and cash equivalents $ 1,858 =========
On July 1, 1996, the Company acquired The Safety Fund Corporation and Milford Co/operative Bank. The acquisitions were accounted for as poolings-of-interest. Expenses directly attributable to the mergers amounted to $4,522,000 and were charged to earnings at the date of combination. - -------------------------------------------------------------------------------- USE OF ESTIMATES - -------------------------------------------------------------------------------- The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses for the period. Actual results could differ significantly from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of valuation allowances applicable to loans and leases, foreclosed real estate and deferred tax assets, to prepayment speeds used to value mortgage servicing rights, and to credit losses applicable to lease securitizations. See Note M - "Charges Related to CFX Funding." - -------------------------------------------------------------------------------- BUSINESS - -------------------------------------------------------------------------------- The Company, through its bank subsidiaries, serves as a financial intermediary, attracting deposits from, and making loans to, consumers and small to mid-sized businesses through its 58 full service offices and three loan production offices in New Hampshire and central Massachusetts. The Company's Trust Division furnishes trust and investment services to individuals, corporations, municipalities and charitable organizations. - -------------------------------------------------------------------------------- RECLASSIFICATIONS - -------------------------------------------------------------------------------- Certain amounts have been reclassified in the 1996 and 1995 consolidated financial statements to conform to the 1997 presentation. - -------------------------------------------------------------------------------- CASH FLOW INFORMATION - -------------------------------------------------------------------------------- Cash equivalents include amounts due from banks and federal funds sold and other overnight deposits. Generally, federal funds are sold for one-day periods. 31 33 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TRADING AND INVESTMENT SECURITIES - -------------------------------------------------------------------------------- Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. Investments that are purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and reflected on the consolidated balance sheet at fair value, with unrealized gains and losses included in earnings. Investments not classified as either of the above are classified as "available for sale" and reflected on the consolidated balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of related tax effects. Purchase premiums and discounts are amortized to earnings by a method which approximates the interest method over the terms of the investments. Declines in the value of investments that are deemed to be other than temporary are reflected in earnings when identified. Gains and losses on disposition of investments are recorded on the trade date and are computed by the specific identification method. The carrying values of Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock are reflected at cost. - -------------------------------------------------------------------------------- DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- INTEREST RATE SWAP AGREEMENTS: Interest rate swap agreements are designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities, and are accounted for on the same basis as the underlying asset or liability. Accordingly, interest rate swaps designated as hedges against floating rate loan portfolios (carried at historical cost) are reflected at cost. Interest rate swaps which hedge the Company's trading securities portfolio (carried at fair value) are marked to fair value through net gains (losses) on trading securities included in the consolidated statements of income. The net interest paid or received under swap agreements is recorded in the interest income or expense account related to the asset or liability being hedged. INTEREST RATE FLOOR AGREEMENTS: Interest rate floor agreements are used to manage exposure to interest rate risk. The amounts paid on the floors are accounted for as adjustments to the yield on the hedged assets. The Company applies hedge accounting as the asset being hedged exposes the Company to interest rate risk, and the floor is designated and effective as a hedge of a specific pool of assets. The Company receives an interest payment if the three-month London Interbank Offered Rate (LIBOR) declines below a predetermined rate. This payment would be based upon the rate difference between current LIBOR and the predetermined rate accrued on the notional value of the instrument. The transaction fee paid is amortized over the life of the contract. FINANCIAL OPTION CONTRACTS: Option premiums paid or received, and designated as hedges against future fluctuations in the interest rates of specifically identified assets or liabilities, are accounted for on the same basis as the underlying asset or liability. Accordingly, option contracts designated as hedges against mortgage loans held for sale are carried at the lower of cost or estimated fair value in the aggregate. Option contracts which hedge the Company's available-for-sale securities are marked to fair value and changes in fair value are reflected in shareholders' equity, net of related tax effects. - -------------------------------------------------------------------------------- MORTGAGE LOANS HELD FOR SALE - -------------------------------------------------------------------------------- Mortgage loans originated or purchased and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to earnings when applicable. 32 34 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LOANS AND LEASES - -------------------------------------------------------------------------------- All loans past due 90 days or more as to principal or interest are placed on nonaccrual status. In addition, a loan (including an impaired loan) is generally classified as nonaccrual when management determines that significant doubt exists as to the collectibility of principal or interest. An impaired loan may remain on accrual status if it is less than 90 days past due and guaranteed or well secured. Interest accrued but not received on loans placed on nonaccrual status is reversed and charged against current income. Interest on nonaccrual loans is recognized when received. Cash received on impaired loans is generally allocated to principal and interest based on the contractual terms of the note, unless management believes such receipt should be applied directly to principal based on collection concerns. Loans are restored to accrual status when the borrower has demonstrated the ability to make future payments of principal and interest, as scheduled. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield using the interest method over the contractual life of the related loans. Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify consumer and residential mortgage loans for impairment. The Company measures impairment on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Collateralized loans are generally measured by the fair value of existing collateral, unless market prices or discounted cash flow information is deemed to be more current and reflective of the economies of the lending relationship. At December 31, 1997, the Company had $6,364,000 in impaired loans, all of which were measured by the fair value of collateral. Loan losses, including those applicable to impaired loans, are charged against the allowance for loan and lease losses when management believes the collectibility of the loan balance is unlikely. The allowance is an estimate and is increased by charges to current income in amounts sufficient to maintain the adequacy of the allowance. The adequacy is determined by management's evaluation of the extent of existing risk in the loan portfolio, prevailing economic conditions and historical loss experience. ----------------------------------------------------------------------------- BANK-OWNED LIFE INSURANCE ----------------------------------------------------------------------------- During 1996 and 1997, the Company invested an aggregate of $60 million in bank-owned life insurance (BOLI) to help finance the cost of certain employee benefit plan expenses. BOLI represents life insurance on the lives of certain employees through insurance companies with a Standard & Poors rating of AA+ or better. The Company is the beneficiary of the insurance policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other income, and are not subject to income taxes. 33 35 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- PREMISES AND EQUIPMENT ----------------------------------------------------------------------------- Premises and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to income as incurred, and the costs of major additions and improvements are capitalized. The provision for depreciation and amortization is computed on the straight-line method based on the estimated useful lives of the assets or the terms of the leases, if shorter. ----------------------------------------------------------------------------- MORTGAGE SERVICING RIGHTS ----------------------------------------------------------------------------- Capitalized mortgage servicing rights are amortized to servicing revenue in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. For purposes of measuring impairment, the rights are stratified based on the following predominant risk characteristics of the underlying loans: loan type (fixed rate, variable rate or state housing programs) and note rate. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. No such impairment was recognized during the three years ended December 31, 1997. ----------------------------------------------------------------------------- INVESTMENTS IN LEASEHOLD RESIDUALS AND LIMITED PARTNERSHIPS ----------------------------------------------------------------------------- Assets acquired in connection with leasehold residual positions have been accounted for using the purchase method of accounting. Resultant deferred credits are amortized to leasing activities income over the period of, and in proportion to, the related tax benefits expected to be realized. At December 31, 1997 and 1996, the leasehold residual positions of $510,000 and $1,906,000, respectively, are included in other assets and deferred credits of $1,105,000 and $3,184,000, respectively, are included in other liabilities in the consolidated balance sheets. Investments in real estate development limited partnerships are accounted for using the equity method. ----------------------------------------------------------------------------- INTANGIBLE ASSETS ----------------------------------------------------------------------------- Deposit base intangibles, which represent the value attributable to the capacity of deposit accounts of purchased bank subsidiaries to generate future income, are included in other assets and are being amortized on a straight-line basis over a period of five years. The excess of the cost of purchased subsidiaries over the fair value of tangible and intangible net assets acquired has been allocated to goodwill and is being amortized on a straight-line basis over 25 years for banking operations and 15 years for mortgage banking operations. The accumulated amortizations of deposit base intangibles and goodwill were $1,633,000 and $4,683,000, respectively, as of December 31, 1997. ----------------------------------------------------------------------------- FORECLOSED ASSETS ----------------------------------------------------------------------------- Foreclosed assets consist of assets that the Company has formally received title to, or has taken possession of, in partial or total satisfaction of loans. Loan losses arising from the write-down of foreclosed assets to fair value at the time of acquisition are charged against the allowance for loan and lease losses. Valuations are periodically performed by management, and an allowance for losses is established through a charge to earnings if the carrying value of foreclosed assets exceeds its fair value less estimated costs to sell. Operating expenses of foreclosed real estate and gains and losses upon disposition are reported in earnings. 34 36 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- PENSION AND 401(K) PLANS ----------------------------------------------------------------------------- The Company and its subsidiaries have defined benefit and defined contribution pension plans which cover substantially all full-time employees. The benefits are based on years of service and the employee's compensation during the years immediately preceding retirement. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company maintains Section 401(k) savings plans for employees of the Company, Safety Fund National Bank, CFX Bank (excluding former employees of Portsmouth) and CFX Bank's subsidiaries. Under the plans, the Company makes a matching contribution of one-half to one-third of the amount contributed by each participating employee, up to 6% of the employee's annual salary. The plans allow for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. ----------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLANS (ESOP) ----------------------------------------------------------------------------- Compensation expense is recognized based on cash contributions paid or committed to be paid to the ESOPs. The Company does not intend to make future contributions to the ESOP. All shares held by the ESOPs are deemed outstanding for purposes of earnings per share calculations. Dividends declared on all shares held by the ESOP are charged to retained earnings. The value of unearned compensation to be contributed to the ESOPs for future services not yet performed is reflected as a reduction of stockholders' equity. ----------------------------------------------------------------------------- STOCK COMPENSATION PLANS ----------------------------------------------------------------------------- In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This Statement encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. See Note N - "Stock Compensation Plans." ----------------------------------------------------------------------------- INCOME TAXES ----------------------------------------------------------------------------- The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes. 35 37 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- PARENT-COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS ----------------------------------------------------------------------------- In the parent-company-only condensed financial statements, the investment in bank subsidiaries is stated at cost plus equity in the undistributed earnings of the subsidiaries. ----------------------------------------------------------------------------- EARNINGS PER SHARE ----------------------------------------------------------------------------- In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which requires that earnings per share be calculated on a basic and a dilutive basis. Basic earnings per share represents income available to common stock divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the issuance. Potential common shares related to outstanding stock options have been determined using the treasury stock method. The Statement is effective for interim and annual periods ending after December 15, 1997, and requires the restatement of all prior-period earnings per share data presented. Accordingly, the Company has restated all earnings per share data presented herein. A reconciliation of the components of basic and diluted earnings per share is as follows:
Years Ended December 31, ----------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands, except per share data) Net income available to common stock - basic earnings per share $ 18,934 $ 23,553 $ 21,465 Add: Preferred stock dividends - - 89 ---------- ---------- ---------- Net income - diluted earnings per share $ 18,934 $ 23,553 $ 21,554 ========== ========== ========== Weighted average shares outstanding - basic earnings per share 23,866 23,383 23,180 Effect of dilutive securities: Options 463 514 783 Convertible preferred stock - - 106 ---------- ---------- ---------- Weighted average shares outstanding - diluted earnings per share 24,329 23,897 24,069 ========== ========== ==========
For the years ended December 31, 1997, 1996 and 1995, options applicable to 65,000 shares, 170,000 shares and 141,000 shares, respectively, were anti-dilutive and excluded from the diluted earnings per share computations. ----------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS ----------------------------------------------------------------------------- In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain FASB statements, however, require entities to report specific changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. SFAS No. 130 requires that all items of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, SFAS No. 130 requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company will adopt these disclosure requirements beginning in the first quarter of 1998. 36 38 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Statement also requires descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used by the enterprise in its general-purpose financial statements, and changes in the measurement of segment amounts from period to period. Management has not yet determined how the adoption of SFAS No. 131 will impact the Company's financial reporting. - -------------------------------------------------------------------------------- NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS - -------------------------------------------------------------------------------- The Federal Reserve Bank requires the Banks to maintain average reserve balances. The average amounts of these reserve balances for the years ended December 31, 1997 and 1996 were approximately $36,527,000 and $30,389,000, respectively. - -------------------------------------------------------------------------------- NOTE C--INVESTMENT SECURITIES - -------------------------------------------------------------------------------- The amortized cost and estimated fair value of investment securities at December 31, 1997, with gross unrealized gains and losses, follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value - ------------------------------------------------- ----------- ---------- --------- ---------- (In thousands) Securities Available for Sale - ----------------------------- Debt securities: U.S. Treasury and agency obligations $ 115,436 $ 487 $ 450 $ 115,473 State and municipal 439 8 - 447 Federal agency mortgage pass-through securities 164,494 1,155 312 165,337 Other collateralized mortgage obligations (CMO's) 188,735 1,169 54 189,850 Other asset-backed securities 12,766 - - 12,766 ----------- ---------- --------- ----------- Total debt securities 481,870 2,819 816 483,873 Marketable equity securities 22,426 1,551 4 23,973 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 26,704 - - 26,704 ----------- ---------- --------- ----------- Total securities available for sale $ 531,000 $ 4,370 $ 820 $ 534,550 =========== ========== ========= =========== Securities Held to Maturity - --------------------------- Debt securities: U.S. Treasury and agency obligations $ 7,721 $ 76 $ 6 $ 7,791 State and municipal 13,470 177 1 13,646 Federal agency mortgage pass-through securities 6,234 75 9 6,300 Other collateralized mortgage obligations (CMO's) 359 - 1 358 Other 400 - - 400 ----------- ---------- --------- ----------- Total securities held to maturity $ 28,184 $ 328 $ 17 $ 28,495 =========== ========== ========= ===========
37 39 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- At December 31, 1997, the Company pledged debt securities with an amortized cost of $263,393,000, and a fair value of $281,076,000, as collateral to secure public funds and repurchase agreements. See Note J - "Other Borrowed Funds." The amortized cost and estimated fair value of debt securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity ---------------------------- ----------------------------- Amortized Fair Amortized Fair December 31, 1997 Cost Value Cost Value - ----------------------------------------- ---------- ---------- --------- --------- (In thousands) Within one year $ 13,007 $ 13,038 $ 2,415 $ 2,418 After one year through five years 39,579 39,564 16,402 16,578 After five years through ten years 33,479 33,365 2,774 2,841 After ten years through twenty years 29,810 29,953 - ----------- ----------- ---------- --------- 115,875 115,920 21,591 21,837 Pass-through securities, CMO's and other asset-backed securities 365,995 367,953 6,593 6,658 ----------- ----------- ---------- --------- $ 481,870 $ 483,873 $ 28,184 $ 28,495 =========== =========== ========== =========
Proceeds from the sale of securities available for sale during the years ended December 31, 1997, 1996 and 1995 were $236,584,000, $77,663,000 and $60,635,000, respectively. Gross gains of $5,086,000, $1,748,000 and $777,000, respectively, and gross losses of $2,626,000, $83,000 and $122,000, respectively, were realized on such sales. In the third quarter of 1997, the acquisitions of Community and Portsmouth necessitated a transfer of securities classified as held to maturity with an amortized cost of $61,170,000 and a net unrealized loss of $95,000 to securities available for sale in order to maintain the Company's existing interest rate risk profile. In the third quarter of 1996, the acquisitions of The Safety Fund Corporation and Milford Co/operative Bank necessitated a transfer of securities classified as held to maturity with an amortized cost of $76,849,000 and a net unrealized loss of $2,522,000 to securities available for sale in order to maintain the Company's existing interest rate risk profile. In November 1995, the FASB issued guidance allowing a one-time reassessment of an entity's investment classifications during the period November 15, 1995 to December 31, 1995. As a result, securities held to maturity with an amortized cost of $111,386,000 and a net unrealized loss of $864,000 were transferred to securities available for sale and securities held to maturity with an amortized cost of $6,000,000 were sold at a net realized gain of $6,000. 38 40 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The amortized cost and estimated fair value of investment securities at December 31, 1996, with gross unrealized gains and losses, follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value - ------------------------------------------------- ----------- ---------- ---------- ------------ (In thousands) Securities Available for Sale - ----------------------------- Debt securities: U.S. Treasury and agency obligations $ 225,708 $ 2,087 $ 1,669 $ 226,126 State and municipal 2,003 2 - 2,005 Corporate bonds 14,071 217 4 14,284 Federal agency mortgage pass-through securities 106,479 434 1,389 105,524 Other collateralized mortgage obligations (CMO's) 19,799 15 206 19,608 Other asset-backed securities 3,407 - - 3,407 Other 4,749 132 12 4,869 ----------- --------- --------- ----------- Total debt securities 376,216 2,887 3,280 375,823 Marketable equity securities 20,336 1,371 214 21,493 Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock 17,580 - - 17,580 ----------- --------- --------- ----------- Total securities available for sale $ 414,132 $ 4,258 $ 3,494 $ 414,896 =========== ========= ========= =========== Securities Held to Maturity - --------------------------- Debt securities: U.S. Treasury and agency obligations $ 45,883 $ 70 $ 193 $ 45,760 State and municipal 13,986 118 21 14,083 Corporate bonds 2,013 2 8 2,007 Federal agency mortgage pass-through securities 28,338 206 74 28,470 Other collateralized mortgage obligations (CMO's) 1,184 1 - 1,185 Other 13,278 - - 13,278 ----------- --------- --------- ----------- Total securities held to maturity $ 104,682 $ 397 $ 296 $ 104,783 =========== ========= ========= ===========
39 41 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE D--LOANS AND LEASES - -------------------------------------------------------------------------------- Loans and leases consist of the following:
December 31, ------------------------------------ 1997 1996 ------------- ------------- (In thousands) Real estate: Residential $ 1,153,612 $ 872,187 Construction 35,350 19,828 Commercial 265,848 247,517 Commercial, financial and agricultural 209,492 169,880 Warehouse lines of credit to leasing companies 1,922 18,393 Consumer lease financing 134,293 76,343 Indirect and other consumer 244,635 197,014 ------------- ------------- 2,045,152 1,601,162 Unearned income (17,303) (10,733) Deferred origination costs, net 7,007 3,970 ------------- ------------- Loans and leases, net $ 2,034,856 $ 1,594,399 ============= =============
The following is a summary of information pertaining to impaired and nonaccrual loans:
December 31, -------------------------------- 1997 1996 ----------- ---------- (In thousands) Impaired loans with a valuation allowance $ 2,221 $ 2,816 Impaired loans without a valuation allowance 4,143 3,090 ----------- ---------- Total impaired loans $ 6,364 $ 5,906 =========== ========== Valuation allowance allocated to impaired loans $ 1,111 $ 934 =========== ========== Nonaccrual loans $ 13,987 $ 10,783 =========== ==========
December 31, -------------------------------- 1997 1996 --------- ---------- (In thousands) Average investment in impaired loans $ 5,461 $ 7,931 ========= ========== Interest income recognized on impaired loans $ 199 $ 620 ========= ========== Interest income recognized on cash basis $ 184 $ 500 ========= ==========
The Company is not committed to lend additional funds to borrowers whose loans have been classified as impaired. The primary geographic concentration of credit risk for loans originated by the Company is the State of New Hampshire and central Massachusetts. The remainder of the portfolio is distributed principally throughout the other New England states. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic sectors in this area. 40 42 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE E--ALLOWANCE FOR LOAN AND LEASE LOSSES - -------------------------------------------------------------------------------- Changes in the allowance for loan and lease losses are as follows:
Years Ended December 31, -------------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands) Balance at beginning of year $ 20,332 $ 19,843 $ 18,940 Provision for loan and lease losses 4,548 4,285 3,814 Loans and leases charged-off (4,358) (4,757) (4,482) Recoveries of loans and leases previously charged-off 1,376 961 1,428 Change in fiscal year - Community - - 143 ---------- ---------- ---------- Balance at end of year $ 21,898 $ 20,332 $ 19,843 ========== ========== ==========
For the six months ended December 31, 1995, Community recorded provisions for loan losses, recoveries and charge-offs of $498,000, $361,000 and $716,000, respectively. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." - -------------------------------------------------------------------------------- NOTE F--PREMISES AND EQUIPMENT - -------------------------------------------------------------------------------- The following is a summary of premises and equipment:
December 31, ------------------------------- 1997 1996 --------- --------- (In thousands) Land $ 5,493 $ 5,401 Buildings and leasehold improvements 37,917 35,878 Furniture and equipment 30,890 26,771 --------- --------- 74,300 68,050 Less accumulated depreciation (35,539) (29,855) --------- --------- $ 38,761 $ 38,195 ========= =========
Depreciation and amortization expense was $5,744,000, $4,609,000 and $4,306,000, for the years ended December 31, 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- NOTE G--FORECLOSED ASSETS - -------------------------------------------------------------------------------- Foreclosed assets are presented net of a valuation allowance as follows:
December 31, -------------------------- 1997 1996 --------- --------- (In thousands) Foreclosed real estate $ 2,285 $ 3,071 Non-real estate repossessions 711 288 Less allowance for losses - (10) --------- --------- $ 2,996 $ 3,349 ========= =========
41 43 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- An analysis of the allowance for losses on foreclosed assets follows:
Years Ended December 31, -------------------------------- 1997 1996 1995 ------ ------ ------- (In thousands) Balance at beginning of year $ 10 $ 50 $ 367 Reclassification to non-performing loans upon adoption of SFAS No. 114 - - (131) Provision for losses 23 21 31 Charge-offs, net of recoveries (33) (61) (217) ------ ------ ------- Balance at end of year $ - $ 10 $ 50 ====== ====== =======
For the six months ended December 31, 1995, Community recorded a provision for losses of $100,000 and charge-offs of $100,000. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." The following table presents the components of the operation of foreclosed assets:
Years Ended December 31, --------------------------------- 1997 1996 1995 ------- ------- ------- (In thousands) Operating expenses, net of rental income $ 611 $ 563 $ 647 Provision for losses 23 21 31 Net loss (gain) on sales of foreclosed assets 14 (76) (71) ------- ------- ------- $ 648 $ 508 $ 607 ======= ======= =======
- -------------------------------------------------------------------------------- NOTE H--DEPOSITS - -------------------------------------------------------------------------------- Total deposits consist of the following:
December 31, ------------------------------- 1997 1996 ------------- ------------- (In thousands) Noninterest bearing $ 227,508 $ 193,579 Savings: Regular savings 337,203 299,411 NOW accounts 197,493 193,274 Money market deposits 152,356 173,992 ------------- ------------- Total savings 687,052 666,677 Time certificates of deposit 1,027,436 890,885 ------------- ------------- Total deposits $ 1,941,996 $ 1,751,141 ============= =============
Time deposits with a minimum balance of $100,000 at December 31, 1997 and 1996 totaled $354,303,000 and $181,597,000, respectively. Brokered certificates of deposit at December 31, 1997 and 1996 amounted to $248,975,000 and $69,960,000, respectively. 42 44 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- A summary of time certificates, by maturity, is as follows:
December 31, 1997 December 31, 1996 ----------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------- -------- ----------- -------- (Dollars in thousands) Within one year $ 752,391 5.61% $ 702,744 5.51% After one year through three years 262,803 5.87 160,604 5.71 After three years through five years 12,242 5.80 27,537 6.19 ------------- ----------- $ 1,027,436 5.68% $ 890,885 5.57% ============= ===========
- -------------------------------------------------------------------------------- NOTE I--ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON - -------------------------------------------------------------------------------- A summary of advances from the Federal Home Loan Bank of Boston (FHLBB), by maturity, follows:
December 31, 1997 December 31, 1996 ------------------------- ------------------------- Weighted Weighted Average Average Maturity Amount Rate Amount Rate - -------- ----------- -------- ----------- -------- (Dollars in thousands) Within one year $ 246,800 5.80% $ 219,734 5.83% After one year through three years 203,772 6.14 25,875 5.57 After three years 3,183 4.89 984 6.01 ----------- ----------- $ 453,755 5.95% $ 246,593 5.80% =========== ===========
The Banks also have available lines of credit with the FHLBB at an interest rate that adjusts daily. Borrowings under the lines are limited to $58,630,000 as of December 31, 1997. Additional credit may be available upon written request to the FHLBB. All borrowings from the FHLBB are secured by a blanket lien on certain qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property and 90% of the fair value of U.S. Government and federal agency securities. 43 45 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE J--OTHER BORROWED FUNDS - -------------------------------------------------------------------------------- The following summarizes other borrowed funds:
December 31, ---------------------------- 1997 1996 ----------- ----------- (In thousands) Securities sold under agreements to repurchase: Retail $ 114,239 $ 81,267 Wholesale: Short-term 74,319 23,160 Long-term 9,905 - Other 147 323 ----------- ----------- Total borrowed funds $ 198,610 $ 104,750 =========== ===========
Retail securities sold under agreements to repurchase at December 31, 1997 and 1996 mature within three months at a weighted average interest rate of 4.69% and 4.49%, respectively. Short-term wholesale repurchase agreements mature within nine months at a weighted average interest rate of 6.13% and 5.50% at December 31, 1997 and 1996, respectively. The long-term wholesale repurchase agreement matures June 26, 2000 and bears interest at 6.39%. Other borrowed funds are secured by investment securities. See Note C - "Investment Securities." - -------------------------------------------------------------------------------- NOTE K--PREFERRED STOCK - -------------------------------------------------------------------------------- The Company's preferred stock was converted to common stock on April 30, 1995, the mandatory conversion date. - -------------------------------------------------------------------------------- NOTE L--INCOME TAXES - -------------------------------------------------------------------------------- The components of the provision for income taxes are as follows:
Years Ended December 31, ---------------------------------------- 1997 1996 1995 --------- ---------- ---------- (In thousands) Current tax provision (benefit): Federal $ 6,082 $ 5,618 $ 6,868 State (565) 561 466 Federal tax credits (1,026) (439) (177) --------- ---------- ---------- Total current 4,491 5,740 7,157 --------- ---------- ---------- Deferred tax provision (benefit): Federal 2,319 5,767 2,926 State 987 992 547 Effect of tax law change - - 10 Effect of change in valuation allowance - (623) (578) --------- ---------- ---------- Total deferred 3,306 6,136 2,905 --------- ---------- ---------- Provision for income taxes $ 7,797 $ 11,876 $ 10,062 ========= ========== ==========
44 46 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The components of the net deferred tax asset (liability) are as follows:
December 31, ------------------------- 1997 1996 ---------- ---------- (In thousands) Deferred tax assets: Federal $ 12,961 $ 12,595 State 2,925 1,929 ---------- ---------- Total deferred tax assets 15,886 14,524 ---------- ---------- Deferred tax liabilities: Federal (13,983) (9,931) State (2,875) (1,145) ---------- ---------- Total deferred tax liabilities (16,858) (11,076) ---------- ---------- Net deferred tax asset (liability) $ (972) $ 3,448 ========== ==========
A summary of the change in the net deferred tax asset (liability) is as follows:
Years Ended December 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Balance at beginning of year $ 3,448 $ 6,909 $ 7,810 Deferred tax provision (3,306) (6,136) (2,905) Purchase accounting effects of leasehold residual acquisition - - 6,907 Tax effects of net unrealized gains/losses on investment securities reflected in shareholders' equity (1,114) 2,675 (4,669) Change in fiscal year - Community - - (234) --------- --------- --------- Balance at end of year $ (972) $ 3,448 $ 6,909 ========= ========= =========
For the six months ended December 31, 1995, Community recorded a deferred tax provision of $10,000 and a $224,000 increase in the tax effects of the net unrealized gain on investment securities reflected in shareholders' equity. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." 45 47 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The tax effects of each type of income and expense item that give rise to deferred tax assets and liabilities are as follows:
December 31, -------------------------- 1997 1996 --------- --------- (In thousands) Deferred tax assets: Allowance for loan and lease losses $ 7,961 $ 6,889 Investment in leasehold residual 3,266 4,354 Alternative minimum tax credit carryforward 1,079 1,079 State net operating loss carryforward 40 40 Deferred compensation 2,136 368 Book reserves 1,298 1,016 Other, net 106 192 --------- --------- Total deferred tax assets 15,886 13,938 --------- --------- Deferred tax liabilities: Depreciation 480 701 Deferred point income (163) 1,217 Mortgage loan origination fees 844 1,125 Consumer lease financing 12,903 5,986 Net unrealized gains on investment securities available for sale 1,417 303 Other, net 1,377 1,158 --------- --------- Total deferred tax liabilities 16,858 10,490 --------- --------- Net deferred tax asset (liability) $ (972) $ 3,448 ========= =========
The change in the valuation allowance applicable to deferred tax assets is as follows:
Years Ended December 31, ------------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Balance at beginning of year $ - $ 623 $ 1,335 Benefits generated by current year's operations - (623) (578) Benefits lost - - (79) Change in fiscal year - Community - - (55) --------- --------- --------- Balance at end of year $ - $ - $ 623 ========= ========= =========
For the six months ended December 31, 1995, Community recorded benefits generated by the current year's operations of $55,000. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In prior years, the Company believed that uncertainty existed with respect to future realization of a portion of its capital loss carryforwards and with respect to deferred Massachusetts state tax assets. Therefore, the Company had established a valuation allowance relating to net operating and capital loss carryforwards. The valuation allowance was reversed to the extent that capital gains and ordinary income for state tax purposes in certain subsidiaries were realized. 46 48 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- For CFX Bank and Orange Savings Bank, the base amounts of federal income tax reserves for loan losses are permanent differences for which there is no recognition of deferred tax liabilities. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable. At December 31, 1997, retained earnings include tax loan loss reserves of approximately $19,620,000 at the base year for which no provision for income taxes has been made. If, in the future, such amounts are used for any purpose other than to absorb loan losses, the Company will incur a tax liability at the current applicable income tax rates. The Company anticipates that the $19,620,000 of retained earnings will not be used for any purpose that would result in the payment of income taxes. The unrecognized deferred tax liability on such amount at December 31, 1997 is approximately $7,605,000. The following is a reconciliation of the statutory federal income tax rate applied to pre-tax accounting income, with the effective income tax rate provided in the consolidated statements of income:
1997 1996 1995 ----------------------- -------------------------- ------------------------ Years Ended December 31, Amount Percent Amount Percent Amount Percent - --------------------------------- --------- --------- ----------- ---------- ------------ --------- (Dollars in thousands) Income tax expense at the statutory rate $ 9,089 34% $ 12,046 34% $ 10,749 34% Increase (decrease) resulting from: Tax-exempt interest income (515) (2) (528) (1) (556) (2) Goodwill and deposit base intangible amortization 199 1 199 1 212 1 Nondeductible merger expenses 1,409 5 872 2 75 1 State income taxes, net of federal income tax benefit 287 1 990 3 679 2 Cash surrender value (765) (3) (349) (1) (86) - Low income housing tax credits (1,026) (4) (439) (1) (177) (1) Change in valuation allowance - - (623) (2) (578) (2) Other, net (881) (3) (292) (1) (256) (1) --------- ---- ---------- ---- ---------- ---- Income tax expense $ 7,797 29% $ 11,876 34% $ 10,062 32% ========= ==== ========== ==== ========== ====
- -------------------------------------------------------------------------------- NOTE M--CHARGES RELATED TO CFX FUNDING - -------------------------------------------------------------------------------- In the fourth quarter of 1997, the Company recorded a $7,206,000 charge to earnings related to the resolution of a dispute between the Company and a credit insurer regarding the origination and servicing by CFX Funding of certain equipment leases held in four securitized leased pools, and the decision to discontinue future operations of CFX Funding with respect to its lease securitization business. The charge of $7,206,000 includes $1,207,000 of advances on third-party letters of credit that were guaranteed by the Company, $2,500,000 to settle a dispute with a credit insurer, and $2,800,000 applicable to a loss reserve established by the Company for future credit losses in the insured lease pools. In conjunction with the settlement with the credit insurer, the Company has agreed to reimburse the credit insurer for payments made to investors in four securitized lease pools on claims made after December 18, 1997, and the Company is entitled to all recoveries on defaulted leases held in such pools after such date. The reserve, included in other liabilities in the consolidated balance sheet, is an estimate based on historical and projected performance of the leases. Future changes in the estimate, if any, will be reflected in earnings as identified. At December 31, 1997, lease balances aggregating $19,200,000 were held in the four securitized lease pools. 47 49 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE N--EMPLOYEE BENEFIT PLANS - -------------------------------------------------------------------------------- The Company's employee benefit plans are summarized below: ----------------------------------------------------------------------------- MULTI-EMPLOYER PENSION PLAN ----------------------------------------------------------------------------- During 1996, CFX Corporation and certain subsidiaries terminated their defined benefit pension plans, and transferred plan assets to a multi-employer plan in amounts that would effectively settle the plans' accumulated benefit obligations as of January 1, 1996. As a result, the Company recognized settlement and curtailment gains totaling $877,000 in 1996. The multi-employer plan is a defined benefit pension plan that covers all eligible employees of CFX Corporation, CFX Bank (excluding former employees of Community and Portsmouth) and Safety Fund National Bank. Pension expense attributable to the plan for the years ended December 31, 1997 and 1996 was $396,000 and $479,000, respectively. ----------------------------------------------------------------------------- SINGLE-EMPLOYER PENSION PLANS ----------------------------------------------------------------------------- The following table sets forth the funded status of the Company's single-employer defined benefit plans and amounts recognized in the Company's consolidated balance sheets:
December 31, ------------------------ 1997 1996 ---------- ---------- (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,905,000 in 1997 and $2,619,000 in 1996 $ (3,081) $ (2,759) ========== ========== Projected benefit obligation for service rendered to date $ (4,353) $ (4,668) Plan assets at fair value 6,678 5,817 ---------- ---------- Excess of plan assets over projected benefit obligation 2,325 1,149 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (2,169) (570) Prior service cost not yet recognized in net periodic pension cost 396 28 Unrecognized net assets at end of year (634) (704) ---------- ---------- Accrued pension cost included in other liabilities $ (82) $ (97) ========== ==========
Net pension expense attributable to these plans includes the following components:
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 ------- ------- -------- (In thousands) Service cost - benefits earned during the period $ 431 $ 387 $ 850 Interest cost on projected benefit obligation 298 307 694 Actual return on plan assets (889) (648) (225) Net amortization and deferral 318 164 (584) ------- ------- -------- $ 158 $ 210 $ 735 ======= ======= ========
48 50 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- SINGLE-EMPLOYER PENSION PLANS (CONCLUDED) ----------------------------------------------------------------------------- Assumptions used in determining the actuarial present value of the projected benefit obligation under these plans, and the expected long-term rate of return on plan assets, are as follows:
Years Ended December 31, -------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Weighted average discount rates 7.0%-7.5% 7.5% 7.25%-8.0% Annual salary increases 5.0%-6.0% 5.0%-6.0% 5.0%-6.0% Expected return on plan assets 7.5%-8.0% 7.5%-8.0% 7.5%-8.0%
----------------------------------------------------------------------------- 401(K) PLAN ----------------------------------------------------------------------------- The Company's 401(k) plan expense for the years ended December 31, 1997, 1996 and 1995 amounted to $1,009,000, $838,000 and $739,000, respectively. ----------------------------------------------------------------------------- SUPPLEMENTAL PENSION AND DEFERRED COMPENSATION PLANS ----------------------------------------------------------------------------- The Company makes payments to certain current and retired officers with supplemental retirement and deferred compensation agreements. The cost of these agreements is accrued but not funded. The Company purchased corporate-owned life insurance policies on the lives of the retirees. The death benefits are payable to the Company and will assist in the funding of the deferred compensation liability. The Company will recover the costs of premium payments from the cash value of these policies. - -------------------------------------------------------------------------------- NOTE O--STOCK COMPENSATION PLANS - -------------------------------------------------------------------------------- At December 31, 1997, the Company has stock-based compensation plans as described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for the plans. Accordingly, no compensation cost has been recognized for the option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Years Ended December 31, --------------------------------------------------- 1997 1996 1995 -------- -------- ---------- (In thousands, except per share data) Net income available to common stock: As reported $ 18,934 $ 23,553 $ 21,465 Pro forma 17,754 23,370 20,835 Earnings per share: As reported $ 0.79 $ 1.01 $ 0.93 Pro forma 0.74 1.00 0.90 Earnings per share, assuming dilution: As reported $ 0.78 $ 0.99 $ 0.89 Pro forma 0.73 0.98 0.86
49 51 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- FIXED STOCK OPTION PLANS ----------------------------------------------------------------------------- The Company has stock option plans whereby options may be granted to certain key employees and directors of the Company and its subsidiaries to purchase shares of common stock of the Company at a price not less than fair value at the date of grant. Both incentive stock options and nonqualified stock options may be granted pursuant to the option plans. A total of 658,000 shares of authorized but unissued common stock of the Company has been reserved for issuance pursuant to incentive stock options granted under the option plans, and 443,000 shares of authorized but unissued common stock have been reserved for issuance pursuant to nonqualified stock options granted. The options are exercisable over a period not to exceed ten years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Years Ended December 31, ------------------------------------------- 1997 1996 1995 -------------- --------------- ------------ Dividend yield 4.0% 5.5% 5.2% Expected life 9.8 years 6.9 years 6.9 years Expected volatility 32.0% 29.0% 29.0% Risk-free interest rate 6.2% 5.8% 5.4%
Changes in the status of options are summarized as follows:
December 31, 1997 1996 1995 - --------------------------------- ---------------------------- ----------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- --------- ------- -------- ------- -------- (Options in Thousands) Outstanding at beginning of year 1,321 $ 8.57 1,713 $ 7.40 1,549 $ 5.93 Granted 266 20.37 101 13.32 373 12.66 Excercised (471) 7.12 (488) 5.60 (199) 5.56 Cancelled (19) 12.08 (5) 10.26 (6) 5.39 Change in fiscal year - Community - - - - (4) - ------- --------- ------- -------- ------- -------- Outstanding at end of year 1,097 $ 11.96 1,321 $ 8.57 1,713 $ 7.40 ======= ========= ======= ======== ======= ======== Exercisable at end of year 1,089 $ 12.00 1,287 $ 8.64 1,645 $ 7.44 ======= ========= ======= ======== ======= ======== Weighted average fair value of options granted during the year $ 27.12 $ 17.20 $ 16.22
For the six months ended December 31, 1995, option activity relating to Community was as follows: 2,000 options granted, 5,000 options exercised and 1,000 options cancelled at weighted average exercise prices of $7.93, $4.44 and $4.73, respectively. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." 50 52 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- FIXED STOCK OPTION PLANS (CONCLUDED) ----------------------------------------------------------------------------- Information pertaining to options outstanding at December 31, 1997 is as follows:
Options Outstanding Options Exercisable ------------------------------------------------------- ----------------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Range of Exercise Prices Number Life Price Number Price - ------------------------ --------- ----------- ---------- -------- ---------- (Options in thousands) $ 0.47 - $7.78 386 1.75 years $ 5.71 378 $ 5.69 7.88 - 14.29 449 6.61 12.27 449 12.27 15.38 - 20.88 262 9.71 20.64 262 20.64 ------- ------- 1,097 5.64 years $ 11.96 1,089 $ 12.00 ======= =======
----------------------------------------------------------------------------- EMPLOYEE STOCK PURCHASE PLAN ----------------------------------------------------------------------------- The Company has an employee stock purchase plan (the Stock Purchase Plan) that generally permits any employee who has completed at least six months of service with the Company or any of its subsidiaries to purchase shares of CFX common stock by means of regular payroll deductions. The Stock Purchase Plan was originally adopted by the Company's board of directors on March 2, 1992, was approved by the Company's shareholders on June 24, 1992, and became effective on September 15, 1992. The Company's board of directors approved an Amended and Restated Stock Purchase Plan on December 10, 1996, and the Company's shareholders approved the amended plan at the annual shareholders' meeting held on July 30, 1997. Under the Stock Purchase Plan, as amended, the Company may make any number of stock offerings, each of which may not exceed one year in duration. There is no limit on the number of shares that can be offered in any stock offering. Each offering affords eligible participating employees the right to purchase shares of the Company's common stock at a price determined by the Company's board of directors prior to each offering, provided that the price must be no less than 85% and no more than 100% of the fair market value of the Company's common stock on the date an offering is commenced or the date an offering is terminated, whichever is less. Purchases under the Stock Purchase Plan are made by means of payroll deductions during the offering period; the amount deducted must be a whole number percentage of a participating employee's base pay from 1% to 7%. If an offering is oversubscribed, the Company makes a pro rata allocation of the shares offered. Purchase discounts have not been material to date and, accordingly, no compensation cost has been recognized. ----------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLANS ----------------------------------------------------------------------------- In connection with the acquisitions of Community and Portsmouth, the Company assumed their respective Employee Stock Ownership Plans (Plans). Employees were generally eligible to participate in the Plans after reaching age twenty-one and completing one year of service. Certain shares previously acquired by the Plans had been acquired with proceeds of loans from unrelated third parties. Community and Portsmouth had made contributions to the Plans in amounts sufficient to satisfy the debt service requirements of the Plans, and as debt was paid down, shares were allocated to participants. At December 31, 1997, all shares held by the Plans were fully allocated to participants. Contribution expense applicable to the Plans amounted to $122,000 and $168,000 for the years ended December 31, 1996 and 1995, respectively. The Company does not expect to make future contributions to the Plans. - -------------------------------------------------------------------------------- NOTE P--COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- In the ordinary course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements. 51 53 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS ----------------------------------------------------------------------------- The Company has entered into employment agreements with four senior executives. The agreements provide for automatic one-year extensions unless either party elects to limit the agreement to its then existing term, and generally provide for a specified minimum annual compensation and the continuation of benefits currently received, including provisions following a "Change of Control." However, such employment may be terminated for cause, as defined, without incurring any continuing obligations. In addition to the above agreements, the Company has entered into special termination agreements with certain additional senior executives. The agreements generally provide for certain lump sum or periodic severance payments following a "Change in Control" as defined in the agreements. The impending acquisition of the Company by Peoples Heritage Financial Group, Inc. constitutes a "change in control" for certain senior executives. See Note W - "Acquisition of the Company". ----------------------------------------------------------------------------- INVESTMENTS IN LIMITED PARTNERSHIPS ----------------------------------------------------------------------------- At December 31, 1997, the Company was committed to invest $4,202,000 in eight real estate development limited partnerships. At December 31, 1997 and 1996, the Company had $8,013,000 and $3,011,000, respectively, invested in such partnerships, which are included in other assets. ----------------------------------------------------------------------------- LEASE SECURITIZATION ----------------------------------------------------------------------------- In connection with the lease securitization transactions completed by CFX Funding, the Company had guaranteed a portion of the loss reserve accounts by executing letters of credit arrangements with third party lenders. During 1997, the letters of credit were advanced and paid by the Company in the amount of $1,217,000. See Note M - "Charges Related to CFX Funding." ----------------------------------------------------------------------------- OPERATING LEASE COMMITMENTS ----------------------------------------------------------------------------- Pursuant to the terms of noncancelable lease agreements in effect at December 31, 1997, pertaining to banking premises and equipment, future minimum rent commitments are as follows:
Years Ending December 31, (In thousands) - ------------------------- 1998 $ 1,238 1999 1,113 2000 960 2001 700 2002 340 Thereafter 2,058 --------- $ 6,409 =========
Certain of the leases include options to renew for periods ranging from 5 to 15 years. The cost of such rentals is not included above. Total rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to $936,000, $1,017,000 and $817,000, respectively. ----------------------------------------------------------------------------- OTHER CONTINGENCIES ----------------------------------------------------------------------------- Various legal claims also arise from time to time in the ordinary course of business which, in the opinion of management, will have no material effect on the Company's consolidated financial statements. 52 54 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE Q--RELATED PARTY TRANSACTIONS - -------------------------------------------------------------------------------- In the ordinary course of business, the Company makes loans to directors, officers and their associates and affiliated companies (related parties) at substantially the same terms, including interest rates and collateral, as those prevailing at the time of origination for comparable transactions with other borrowers. The total amounts due from directors, officers and their associates were $6,210,000 and $6,822,000 at December 31, 1997 and 1996, respectively. During the year ended December 31, 1997, new loans totaling $3,259,000 were made, and reductions were made to outstanding loan balances totalling $3,871,000, of which $870,000 was from repayments and $3,001,000 was attributable to directors no longer being affiliated with the Company. During the years ended December 31, 1997 and 1996, payments amounting to $477,000 and $695,000, respectively, were made by the Company to a construction company in which a director holds a 100% ownership interest, for renovations to banking facilities of the Company. Prior to January 1, 1996, Community from time to time originated automobile consumer finance contracts through an automobile dealership owned and operated by one of its directors, subject to Community's credit approval, on terms comparable to those accorded other dealers. The Director currently has no continuing relationships with the dealership. Contracts amounting to $319,000 during the six months ended December 31, 1995 and $1,003,000 during the fiscal year ended June 30, 1995 were originated through the dealership. - -------------------------------------------------------------------------------- NOTE R--DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The Company uses certain derivative financial instruments in managing the interest rate risk included in the consolidated balance sheet. Derivative instruments are monitored regularly to assess market price changes. On at least a monthly basis, rate change analyses are done in order to assess potential market risk in changing interest rate environments. When the price volatility of derivative instruments varies from the price volatility of assets being hedged, positions are adjusted to maintain an appropriate match. The Company includes all off-balance sheet and derivative positions in its analysis of interest rate risk. Increases and decreases of both 100 and 200 basis points are analyzed in order to determine anticipated changes in earnings and market values. The detail on the specific financial instruments used is as follows: ----------------------------------------------------------------------------- INTEREST RATE AGREEMENTS ----------------------------------------------------------------------------- Interest-rate swaps generally involve the exchange of fixed and floating-rate interest obligations without the exchange of the underlying principal amounts. The Company typically becomes a principal in the exchange of interest payments between the parties and, therefore, is exposed to loss should one of the parties default. The Company minimizes this risk by performing normal credit reviews on its swap counterparties. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Interest rate floor agreements provide for the receipt of interest to the extent that the three-month LIBOR is less than the specified rate. 53 55 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ----------------------------------------------------------------------------- INTEREST RATE AGREEMENTS (CONCLUDED) ----------------------------------------------------------------------------- At December 31, 1997 and 1996, interest rate agreements were comprised of the following:
Assets Interest Interest Notional Maturity Unrealized Hedged Received Paid Amount Date Gain - --------------------- -------------------- ---------- ---------- ---------- ------------ (Dollars in thousands) DECEMBER 31, 1997: Variable rate Variable - N/A $ 10,000 02/15/00 $ 113 commercial loans LIBOR floor (6.25%) Variable rate Variable - N/A $ 10,000 06/03/99 $ 22 commercial loans LIBOR floor (5.75%) DECEMBER 31, 1996: Variable rate Fixed - 7.95% Variable - $ 5,000 12/16/97 $ 99 commercial loans 3 mo. LIBOR Variable rate Variable - N/A $ 10,000 02/15/00 $ 174 commercial loans LIBOR floor (6.25%) Variable rate Variable - N/A $ 10,000 06/03/99 $ 74 commercial loans LIBOR floor (5.75%)
----------------------------------------------------------------------------- FINANCIAL OPTION CONTRACTS ----------------------------------------------------------------------------- The Company periodically uses financial options to hedge interest rate exposure generally on secondary mortgage market operations. Options are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price within a specified period of time. For most options transactions, the Company uses recognized and centralized exchanges for execution. These exchanges act as the counterparty to all transactions, thereby minimizing the credit risk of market participants. Option contracts are used explicitly for hedge purposes and are not undertaken for speculation. The Company's intent and general practice is to liquidate option contract obligations before stated exercise or delivery dates through established market transactions. The Company does not generally intend to deliver or receive the securities underlying option contracts, but may execute delivery or receipt if it is financially prudent to do so. At December 31, 1996, to hedge mortgage loans held for sale, the Company held put options (the option to sell securities at a stated price within a specified term) on 30-year treasury obligations totaling $4,000,000 and covered call options on 5-year treasury obligations totaling $10,000,000 extending through March 1997. The unrealized gain on the option contracts at December 31, 1996 was $189,000. There were no options outstanding at December 31, 1997. - -------------------------------------------------------------------------------- NOTE S--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET LENDING RISK - -------------------------------------------------------------------------------- In addition to using derivative financial instruments to manage interest rate risk (see Note R), the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and forward delivery contracts. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss for commitments to extend credit and standby letters of credit is represented by the contractual amount of these specific instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance sheet instruments. 54 56 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- At December 31, 1997 and 1996, the following financial instruments were outstanding:
Contract or Notional Amount ---------------------------- December 31, ---------------------------- 1997 1996 ---------- ---------- (In thousands) Financial instruments for which contract amounts represent credit risk: Commitments to originate and purchase loans $ 79,750 $ 70,267 Unadvanced funds on lines of credit 210,547 177,312 Standby letters of credit 6,840 4,259 Loans sold with credit enhancements 8,713 17,147 Leases serviced with credit enhancements 19,200 - Financial instruments for which contract amounts exceed credit risk: Outstanding forward delivery contracts 56,827 99,371
A commitment to extend credit is an agreement to provide financing to a customer contingent upon compliance with all conditions established in the contract. A commitment generally has a fixed expiration date or other termination clause and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on an individual basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's evaluation of the counterparty. The collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and residential real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These commitments are primarily issued to support private borrowing arrangements on a short-term basis. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company has periodically sold automobile loans with credit enhancements that obligate the Company to assume a certain portion of credit losses should they occur. In connection with CFX Funding, the Company has agreed to reimburse a credit insurer for payments made to investors in four securitized lease pools on claims made after December 18, 1997. See Note M - "Charges Related to CFX Funding." Forward delivery contracts are contracts for delayed delivery of mortgage loans or mortgage- backed securities in which the Company agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Credit risk to the Company arises from the possible inability of counterparties to meet the terms of their contracts. In the event of nonacceptance by the counterparty, the Company would be subject to the credit risk of the loans retained. These loans would have been originated in the ordinary course of business complying with the Company's standard credit evaluation and collateral requirements. Failure to fulfill delivery requirements for these contracts may result in payment of fees to certain investors. - -------------------------------------------------------------------------------- NOTE T--FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 55 57 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amounts of cash and short-term instruments approximate fair values. INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying values of interest bearing deposits with other banks approximate fair values. RESTRICTED SECURITIES: The carrying values of Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston stock approximate fair value, based on redemption provisions. INVESTMENT SECURITIES: Fair values of all other investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on market prices of comparable instruments. MORTGAGE LOANS HELD FOR SALE: Fair values of mortgage loans held for sale are determined taking into consideration commitments on hand from investors and prevailing market prices. LOANS AND LEASES (LOANS): Fair values of variable-rate loans that reprice frequently and have no significant change in credit risk, are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses which use interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. DEPOSITS: Fair values disclosed for demand deposits (non-interest bearing deposits, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF BOSTON: The carrying amounts of advances from the Federal Home Loan Bank of Boston maturing within 90 days approximate their fair values. The fair values of other advances are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of advances. OTHER BORROWED FUNDS: The fair values of other borrowed funds are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. ACCRUED INTEREST: The carrying amounts of accrued interest approximate fair value. OFF-BALANCE-SHEET INSTRUMENTS: Fair values for options, swaps and interest rate agreements are based on quoted market prices. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. 56 58 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The estimated fair values, and related carrying amounts or notional amounts, of the Company's financial instruments are as follows:
December 31, ------------------------------------------------------------------ 1997 1996 ---------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ----------- ----------- ----------- (In thousands) Financial assets: Cash and cash equivalents $ 94,636 $ 94,636 $ 131,106 $ 131,106 Interest bearing deposits with other banks 35 35 287 287 Securities available for sale 534,550 534,550 414,896 414,896 Securities held to maturity 28,184 28,495 104,682 104,783 Mortgage loans held for sale 37,737 37,966 16,967 17,078 Loans and leases, net 2,012,958 2,006,592 1,574,067 1,570,046 Accrued interest receivable 16,800 16,800 15,384 15,384 Financial liabilities: Deposits 1,941,996 1,946,654 1,751,141 1,754,594 Advances from Federal Home Loan Bank of Boston 453,755 453,669 246,593 246,568 Other borrowed funds 198,610 198,610 104,750 104,750 Accrued interest payable 12,148 12,148 5,297 5,297
December 31, ---------------------------------------------------------------- 1997 1996 ------------------------- -------------------------- Notional Fair Notional Fair Amount Value Amount Value ---------- -------- ---------- -------- (In thousands) Unrecognized financial instruments: Commitments to originate and purchase loans $ 79,750 $ (266) $ 70,267 $ (212) Standby letters of credit 6,840 (69) 4,259 (2) Unadvanced funds on lines of credit 210,547 (1,320) 177,312 (558) Interest-rate swap agreements - - 5,000 99 Financial option contracts (long position) - - 4,000 37 Financial option contracts (short position) - - 10,000 152 Interest-rate floor agreements 20,000 135 20,000 248
57 59 - -------------------------------------------------------------------------------- NOTE U--REGULATORY CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS - -------------------------------------------------------------------------------- The Company (on a consolidated basis) and each Bank (on a consolidated basis) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Banks' consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Holding companies are not subject to the prompt corrective action standards. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997 and 1996, that the Company and the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notifications from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, they must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that management believes have changed these categories. The entities' actual capital amounts and ratios are also presented in the tables.
Minimum To Be Well Minimum Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------- ------------------------- --------------------- DECEMBER 31, 1997 Amount Ratio Amount Ratio Amount Ratio ---------- --------- ------------ ------- -------- ------- (Dollars in thousands) Total Capital to Risk Weighted Assets: Consolidated CFX Corporation $ 256,677 14.3% $ 143,939 8.0% N/A N/A CFX Bank 181,695 11.6 125,083 8.0 $ 156,354 10.0% Safety Fund National Bank 25,582 12.8 16,081 8.0 20,102 10.0 Orange Savings Bank 10,336 21.3 3,842 8.0 4,803 10.0 Tier 1 Capital to Risk Weighted Assets: Consolidated CFX Corporation 234,779 13.0 71,970 4.0 N/A N/A CFX Bank 167,033 10.7 62,541 4.0 93,812 6.0 Safety Fund National Bank 23,032 11.5 8,041 4.0 12,061 6.0 Orange Savings Bank 9,730 20.1 1,921 4.0 2,882 6.0 Tier 1 Capital to Average Assets: Consolidated CFX Corporation 234,779 8.3 113,892 - 4.0- N/A N/A 142,365 5.0 CFX Bank 167,033 6.8 97,882 - 4.0- 122,352 5.0 122,352 5.0 Safety Fund National Bank 23,032 6.8 13,567 - 4.0- 16,959 5.0 16,959 5.0 Orange Savings Bank 9,730 11.1 3,512 - 4.0- 4,391 5.0 4,391 5.0
58 60 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
Minimum To Be Well Minimum Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------- -------------------------- ------------------------- DECEMBER 31, 1996 Amount Ratio Amount Ratio Amount Ratio ----------- -------- ------------- -------- ---------- -------- (Dollars in thousands) Total Capital to Risk Weighted Assets: Consolidated CFX Corporation $ 136,210 14.8% $ 73,875 8.0% N/A N/A CFX Bank 86,845 12.2 57,110 8.0 $ 71,388 10.0% Safety Fund National Bank 24,345 13.9 14,048 8.0 17,560 10.0 Orange Savings Bank 10,108 20.9 3,859 8.0 4,823 10.0 Consolidated Community Bankshares, Inc. 44,322 11.3 31,528 8.0 N/A N/A Concord Savings Bank 33,998 10.8 25,090 8.0 31,362 10.0 Centerpoint Bank 8,418 10.4 6,506 8.0 8,133 10.0 Consolidated Portsmouth Bank Shares, Inc. 65,493 57.1 9,175 8.0 N/A N/A Portsmouth Savings Bank 46,547 40.6 9,175 8.0 11,468 10.0 Tier 1 Capital to Risk Weighted Assets: Consolidated CFX Corporation 124,615 13.5 36,938 4.0 N/A N/A CFX Bank 78,912 11.0 28,555 4.0 42,833 6.0 Safety Fund National Bank 22,090 12.6 7,024 4.0 10,536 6.0 Orange Savings Bank 9,503 19.7 1,929 4.0 2,894 6.0 Consolidated Community Bankshares, Inc. 40,417 10.3 15,764 4.0 N/A N/A Concord Savings Bank 30,974 9.9 12,545 4.0 18,817 6.0 Centerpoint Bank 7,537 9.3 3,253 4.0 4,880 6.0 Consolidated Portsmouth Bank Shares, Inc. 64,806 56.5 4,588 4.0 N/A N/A Portsmouth Savings Bank 45,860 40.0 4,587 4.0 6,881 6.0 Tier 1 Capital to Average Assets: Consolidated CFX Corporation 124,615 8.0 62,323 - 4.0 - N/A N/A 77,903 5.0 CFX Bank 78,912 6.8 46,406 - 4.0 - 58,008 5.0 58,008 5.0 Safety Fund National Bank 22,090 7.0 12,568 - 4.0 - 15,710 5.0 15,710 5.0 Orange Savings Bank 9,503 9.8 3,870 - 4.0 - 4,837 5.0 4,837 5.0 Consolidated Community Bankshares, Inc. 40,417 7.4 21,814 - 4.0 - N/A N/A 27,268 5.0 Concord Savings Bank 30,974 7.0 17,605 - 4.0 - 22,006 5.0 22,006 5.0 Centerpoint Bank 7,537 6.8 4,461 - 4.0 - 5,577 5.0 5,577 5.0 Consolidated Portsmouth Bank Shares, Inc. 64,806 24.8 10,436 - 4.0 - N/A N/A 13,045 5.0 Portsmouth Savings Bank 45,860 17.6 10,435 - 4.0 - 13,043 5.0 13,043 5.0
59 61 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Certain restrictions exist regarding the ability of the Banks to transfer funds to the Company in the form of cash dividends, loans and advances. Applicable rules prohibit the payment of a cash dividend by the Banks if the effect thereof would cause the net worth of the Banks to be reduced below applicable net worth requirements. Accordingly, approximately $146,000,000 of the Company's equity in the net assets of the Banks was restricted at December 31, 1997. Under Federal Reserve regulations, the Banks are also limited as to the amount they may loan to the Company, unless such loans are collateralized by specified obligations. At December 31, 1997, the maximum amount available for transfer from the Banks to the Company in the form of loans approximated $22,169,000. - -------------------------------------------------------------------------------- NOTE V-- MORTGAGE LOAN SERVICING - -------------------------------------------------------------------------------- Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $1,355,000,000 and $1,116,000,000 at December 31, 1997 and 1996, respectively. Substantially all loans serviced for others were sold without recourse provisions. The following is an analysis of the changes in the carrying values of mortgage servicing rights:
Years Ended December 31, -------------------------------------- 1997 1996 1995 --------- ---------- ---------- (In thousands) Balance at beginning of year $ 7,644 $ 6,886 $ 4,207 Additions 5,033 2,321 3,255 Sales (1,993) - - Amortization (1,790) (1,563) (525) Change in fiscal year - Community - - (51) --------- ---------- ---------- Balance at end of year $ 8,894 $ 7,644 $ 6,886 ========= ========== ==========
For the six months ended December 31, 1995, Community recorded additions to mortgage servicing rights of $150,000 and amortization of $201,000. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." At December 31, 1997 and 1996, the fair value of capitalized mortgage servicing rights was $16,384,000 and $10,179,000, respectively. There were no valuation allowances for mortgage servicing rights for the years ended December 31, 1997, 1996 and 1995. - -------------------------------------------------------------------------------- NOTE W-- ACQUISITION OF THE COMPANY - -------------------------------------------------------------------------------- On October 27, 1997, the Company announced that it entered into a definitive agreement to be acquired by Peoples Heritage Financial Group, Inc. (Peoples Heritage), a multi-bank and financial services holding company headquartered in Portland, Maine. Under the terms of the agreement, each of CFX's outstanding shares of common stock will be converted into .667 shares of Peoples Heritage common stock. The agreement was subject to approval by shareholders of both companies, which was obtained on February 9, 1998, and to approval by regulatory authorities. The transaction is anticipated to be a tax-free reorganization to the shareholders of the Company (other than cash received in lieu of any fractional shares) and is anticipated to be accounted for as a pooling-of-interests. In connection with the agreement, CFX has granted to Peoples Heritage an option to acquire up to 19.9 percent of the outstanding shares of CFX common stock under certain circumstances. Additionally, Peoples Heritage has granted CFX an option to acquire up to 10.0 percent of the outstanding shares of Peoples Heritage common stock under certain circumstances. 60 62 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE X--CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- BALANCE SHEETS
December 31, ---------------------------- 1997 1996 ------------ ----------- (In thousands) Assets: Cash and due from banks $ 325 $ 1,800 Interest-bearing deposits with bank subsidiaries 31,227 21,409 Securities held to maturity - 320 Securities available for sale 29 130 Receivables from subsidiaries 1,907 7,992 Investment in bank subsidiaries 210,661 204,963 Other assets 7,207 5,856 ------------ ----------- $ 251,356 $ 242,470 ============ =========== Liabilities $ 5,639 $ 2,633 Shareholders' equity 245,717 239,837 ------------ ----------- $ 251,356 $ 242,470 ============ ===========
STATEMENTS OF INCOME
Years Ended December 31, -------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands) Interest and dividend income $ 850 $ 951 $ 1,042 Dividends from subsidiaries 20,025 17,163 9,848 Management fee from subsidiaries - 308 131 Gain on sale of investment securities 113 1 28 ---------- ---------- ---------- 20,988 18,423 11,049 General and administrative expenses 6,735 2,597 1,253 ---------- ---------- ---------- Income before income taxes and equity in undistributed net income of subsidiaries 14,253 15,826 9,796 Income tax expense (benefit) (735) 110 (27) ---------- ---------- ---------- Income before equity in undistributed net income of subsidiaries 14,988 15,716 9,823 Equity in undistributed net income of subsidiaries 3,946 7,837 11,731 ---------- ---------- ---------- Net income $ 18,934 $ 23,553 $ 21,554 ========== ========== ==========
61 63 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands) Cash flows from operating activities: Net income $ 18,934 $ 23,553 $ 21,554 Adjustments to reconcile net income to net cash provided by operating activities: Net deferred income tax provision (benefit) (24) 1 9 Gain on sale of investment securities (113) (1) (28) Equity in undistributed net income of subsidiaries (3,946) (7,837) (11,731) Net change in other assets and other liabilities 513 (1,984) (2,122) ---------- ---------- ---------- Net cash provided by operating activities 15,364 13,732 7,682 ---------- ---------- ---------- Cash flows from investing activities: Capital contribution to subsidiary - (200) (200) Net decrease (increase) in interest bearing deposits with bank subsidiaries (9,818) 223 8,740 Decrease (increase) in receivables from subsidiaries 6,085 241 (7,940) Purchases of securities available for sale - - (55) Proceeds from sales of securities available for sale 185 2 1,075 Purchases of securities held to maturity (4,017) (16,601) (6,002) Proceeds from maturities of securities held to maturity 4,337 16,857 6,483 Purchase of bank-owned life insurance (500) (3,250) - ---------- ---------- ---------- Net cash provided (used) by investing activities (3,728) (2,728) 2,101 ---------- ---------- ---------- Cash flows from financing activities: Common cash dividends paid (16,754) (13,312) (10,041) Preferred cash dividends paid - - (89) Proceeds from issuance of common stock 4,018 2,693 1,509 Payments on fractional shares (7) (26) (18) Acquisition of treasury shares (368) (1,002) (1,481) ---------- ---------- ---------- Net cash used by financing activities (13,111) (11,647) (10,120) ---------- ---------- ---------- Decrease in cash and cash equivalents (1,475) (643) (337) Change in fiscal year - Community - - (338) Cash and cash equivalents at beginning of year 1,800 2,443 3,118 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 325 $ 1,800 $ 2,443 ========== ========== ==========
For the six months ended December 31, 1995, cash flow activity relating to Community consisted of cash provided by operating activities of $158,000 and cash used in financing activities of $496,000. See Note A - "Significant Accounting Policies - Principles of Presentation and Consolidation." 62 64 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE Y--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - -------------------------------------------------------------------------------- The following is a summary of the consolidated quarterly results of operations for the years ended December 31, 1997 and 1996:
1997 Three Months Ended March 31 June 30 September 30 December 31 - ----------------------------------------- ------------ ----------- -------------- ------------- (In thousands, except per share data) Interest and dividend income $ 45,033 $ 48,429 $ 53,034 $ 53,043 Interest expense 21,645 23,925 27,662 28,020 ---------- ---------- ---------- ---------- Net interest and dividend income 23,388 24,504 25,372 25,023 Provision for loan and lease losses 942 1,020 1,423 1,163 Other income 5,731 5,559 6,253 7,999 Other expenses (1 & 2) 17,438 18,069 29,912 27,131 ---------- ---------- ---------- ---------- Income before income taxes 10,739 10,974 290 4,728 Income taxes 3,240 3,310 463 784 ---------- ---------- ---------- ---------- Net income (loss) $ 7,499 $ 7,664 $ (173) $ 3,944 ========== ========== ========== ========== Earnings (loss) per share $ 0.32 $ 0.32 $ (0.01) $ 0.16 ========== ========== ========== ========== Earnings (loss) per share- assuming dilution $ 0.31 $ 0.32 $ (0.01) $ 0.16 ========== ========== ========== ==========
1996 Three Months Ended March 31 June 30 September 30 December 31 - ----------------------------------------- ------------ ----------- -------------- -------------- (In thousands, except per share data) Interest and dividend income $ 39,881 $ 41,654 $ 42,587 $ 44,183 Interest expense 18,789 19,530 20,075 21,189 ---------- ---------- ---------- ---------- Net interest and dividend income 21,092 22,124 22,512 22,994 Provision for loan and lease losses 1,180 1,050 980 1,075 Other income (4&5) 5,284 5,198 5,619 6,161 Other expenses (3) 16,258 16,226 21,526 17,260 ---------- ---------- ---------- ---------- Income before income taxes 8,938 10,046 5,625 10,820 Income taxes 2,768 3,348 2,459 3,301 ---------- ---------- ---------- ---------- Net income $ 6,170 $ 6,698 $ 3,166 $ 7,519 ========== ========== ========== ========== Earnings per share $ 0.27 $ 0.29 $ 0.13 $ 0.32 ========== ========== ========== ========== Earnings per share- assuming dilution $ 0.27 $ 0.28 $ 0.13 $ 0.31 ========== ========== ========== ==========
(1) For the quarter ended September 30, 1997, the Company recorded costs related to the mergers of Community and Portsmouth totaling $11,031,000. (2) For the quarter ended December 31, 1997, the Company recorded charges relating to CFX Funding of $7,206,000. (3) For the quarter ended September 30, 1996, the Company recorded costs related to the mergers of Safety Fund and Milford totaling $4,522,000, and costs associated with a SAIF special assessment of $691,000. (4) For the quarter ended September 30, 1996, the Company terminated CFX Corporation's and Safety Fund's pension plans and transferred the assets and liabilities to a multi-employer pension plan. A gain from the settlement of the pension plan was recorded totaling $877,000. (5) For the quarter ended December 31, 1996, the Company recorded $411,000 in gains on trading securities on an investment purchased and sold during the same quarter. 63 65 - -------------------------------------------------------------------------------- REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of CFX Corporation: We have audited the accompanying consolidated balance sheets of CFX Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements referred to above have been restated to reflect the pooling of interests with Portsmouth Bank Shares, Inc. and Community Bankshares, Inc., as described in Note A to the consolidated financial statements. We did not audit the consolidated financial statements of Portsmouth Bank Shares, Inc. as of December 31, 1996 and for the years ended December 31, 1996 and 1995, which statements reflect total assets of $271,569,000 as of December 31, 1996, and net interest and dividend income of $10,043,000 and $10,862,000 for the years ended December 31, 1996 and 1995, respectively. We did not audit the consolidated financial statements of Community Bankshares, Inc. as of December 31, 1996 and for the year ended December 31, 1996, the six months ended December 31, 1995, and each of the years in the two-year period ended June 30, 1995, which statements reflect total assets of $550,596,000 as of December 31, 1996, and net interest and dividend income of $21,821,000, $9,748,000, $18,055,000 and $15,436,00 for the year ended December 31, 1996, the six months ended December 31, 1995 and each of the years in the two-year period ended June 30, 1995, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Portsmouth Bank Shares, Inc. and Community Bankshares, Inc. as of December 31, 1996 and for the years ended December 31, 1996 and 1995 is based solely on the reports of other auditors. The consolidated financial statements for the year ended December 31, 1995 reflect the pooling of interests with The Safety Fund Corporation. We did not audit the 1995 consolidated financial statements of The Safety Fund Corporation, which statements reflect net interest and dividend income of $13,816,000 for the year ended December 31, 1995. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for The Safety Fund Corporation for the year ended December 31, 1995 is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CFX Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. WOLF & COMPANY, P.C. Boston, Massachusetts January 30, 1998, except for Note W as to which the date is February 9, 1998 64 66 - -------------------------------------------------------------------------------- INFORMATION ON COMMON STOCK - -------------------------------------------------------------------------------- At December 31, 1997, there were approximately 5,719 holders of record of CFX Corporation's common stock. The stock is traded on the American Stock Exchange (AMEX) under the symbol "CFX." The following table sets forth cash dividends declared on the Company's common stock and the high and low sale prices as reported by AMEX for the appropriate periods.
1997 First Second Third Fourth CALENDAR QUARTERS Quarter Quarter Quarter Quarter --------- --------- --------- --------- Dividends declared per share $ 0.22 $ 0.22 $ 0.22 $ 0.22 Stock price: High 18 5/8 21 21 3/4 31 1/8 Low 15 1/8 15 1/2 18 5/8 20 5/8 Last sale 16 7/8 21 21 7/16 30 5/8 1996 CALENDAR QUARTERS Dividends declared per share (1) $ 0.1714 $ - $ 0.1905 $ 0.2095 Stock price: High 15 3/8 14 3/8 15 1/4 16 5/8 Low 12 7/8 12 1/4 11 5/8 13 5/8 Last sale 14 12 3/8 14 1/8 15 1/2
(1) The dividend for the second quarter of 1996 was omitted in order for CFX's acquisitions of The Safety Fund Corporation and Milford Cooperative Bank to be accounted for as poolings-of-interests under generally accepted accounting principles. 65 -----END PRIVACY-ENHANCED MESSAGE-----