November 14, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 205419-1004
Attention: Filing Desk, Stop 1-4
Re: CFX CORPORATION File No. 01-15079/Quarterly Report on Form 10Q
Gentlemen:
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, we have
enclosed Form 10-Q for the quarter ended September 30, 1995.
Thank you.
Sincerely,
/s/
-----------------------
Mark A. Gavin
Chief Financial Officer
MAG:eg
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter period ended SEPTEMBER 30, 1995
------------------
Commission file number 0-15079
-------
CFX CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF NEW HAMPSHIRE 02-0402421
- ---------------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
- -------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(603) 352-2502
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
--- ----
The number of shares outstanding of each of the issuer's classes of common
stock, $0.66 2/3 par value per share, as of September 30, 1995 was 7,087,555.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,458 $ 22,750
Interest bearing deposits with other banks 11,641 3,250
Federal Home Loan Bank of Boston stock 7,388 7,388
Trading securities 22,758 236
Securities available for sale 15,952 8,234
Securities held to maturity 100,006 111,285
Mortgage loans held for sale 11,509 8,295
Loans and leases 640,010 641,121
Less allowance for loan and lease losses 7,796 7,558
-------- --------
NET LOANS AND LEASES 632,214 633,563
Premises and equipment 13,788 14,087
Mortgage servicing rights 4,232 4,207
Goodwill and deposit base intangibles 9,945 10,476
Foreclosed real estate 854 1,271
Other assets 22,674 14,162
-------- --------
$879,419 $839,204
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $617,668 $585,587
Noninterest bearing 50,100 39,842
-------- --------
TOTAL DEPOSITS 667,768 625,429
Short-term borrowed funds 30,341 27,316
Advances from Federal Home Loan Bank of Boston 76,701 92,201
Other liabilities 15,034 7,685
-------- --------
TOTAL LIABILITIES 789,844 752,631
SHAREHOLDERS' EQUITY
Preferred stock, 7.5% Series A Cumulative
Convertible, par value $1.00 per share-issued
and outstanding 192,769 shares at
December 31, 1994 - 193
Common stock, par value $.66 2/3 per
share-authorized 22,500,000 shares, issued
7,087,555 shares at September 30, 1995 and
7,582,259 shares at December 31, 1994 4,725 5,055
Paid-in capital 59,596 65,740
Retained earnings 25,617 23,289
Net unrealized losses on securities available
for sale, after tax effects (363) (506)
Cost of 865,898 shares of common stock in
treasury - (7,198)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 89,575 86,573
-------- --------
$879,419 $839,204
======== ========
Number of common shares outstanding (thousands) 7,088 6,716
======== ========
Common shareholders' equity per share $ 12.64 $ 12.36
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINEMONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $14,540 $11,493 $ 42,005 $33,118
Interest on investment securities:
Taxable 1,389 1,414 4,182 4,322
Tax-exempt 238 239 763 536
------ ------ ------ -----
1,627 1,653 4,945 4,858
Interest and dividends on trading
securities 1 475 6 1,722
Dividends on marketable equity securities 54 59 182 160
Other 177 214 592 596
------ ------ ------ ------
TOTAL INTEREST AND DIVIDEND INCOME 16,399 13,894 47,730 40,454
------ ------ ------ ------
Interest expense:
Interest on deposits 6,410 4,832 18,825 14,173
Interest on borrowings:
Short-term 1,727 1,313 4,629 3,252
Long-term 3 3 8 8
------ ------ ------ ------
TOTAL INTEREST EXPENSE 8,140 6,148 23,462 17,433
------ ------ ------ ------
NET INTEREST AND DIVIDEND INCOME 8,259 7,746 24,268 23,021
Provision for loan and lease losses 345 50 975 62
------ ------ ------ ------
NET INTEREST AND DIVIDEND INCOME
AFTER PROVISION FOR LOAN AND
LEASE LOSSES 7,914 7,696 23,293 22,959
------ ----- ------ ------
Other income:
Service charges on deposit accounts 562 414 1,654 1,197
Loan servicing fees 426 458 1,242 1,263
Net gains (losses) on trading securities 273 11 791 (381)
Net gains on investment securities 44 - 158 86
Net gains on sales of loans 178 12 392 444
Leasing activities 530 198 1,567 304
Other 477 377 1,326 1,175
------ ----- ------ ------
2,490 1,470 7,130 4,088
------ ----- ------ ------
Other expense:
Salaries and employee benefits 3,528 3,420 10,467 9,800
Occupancy expense 492 435 1,418 1,351
Equipment expense 501 471 1,513 1,394
Operation of foreclosed real estate 90 (70) 182 148
FDIC deposit insurance (38) 359 687 1,049
Goodwill and deposit base intangible
amortization 164 189 532 568
Other 2,204 1,967 6,669 5,698
------ ------ ------ ------
6,941 6,771 21,468 20,008
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 3,463 2,395 8,955 7,039
Income taxes 1,275 843 3,201 2,643
------ ------ ------ ------
NET INCOME 2,188 1,552 5,754 4,396
Preferred stock dividends - 66 89 201
------ ------ ------ ------
NET INCOME AVAILABLE TO
COMMON STOCK $2,188 $1,486 $5.665 $4,195
====== ====== ====== ======
Weighted average common shares
outstanding (thousands) 7,083 6,670 6,919 6,661
====== ====== ====== =====
Earnings per common share:
Primary $ .30 $ .22 $ .80 $ .63
====== ====== ====== =====
Fully diluted $ .30 $ .22 $ .79 $ .63
====== ====== ====== =====
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSSES ON
SECURITIES
PREFERRED COMMON PAID-IN RETAINED AVAILABLE TREASURY
STOCK STOCK CAPITAL EARNINGS FOR SALE STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
Dec. 31,
1995 $193 $ 5,055 $65,740 $23,289 $ (506) $(7,198) $86,573
Net income - - - 5,754 - - 5,754
Common cash
dividend
declared-
$.47 per
share - - - (3,337) - - (3,337)
Preferred cash
dividend
declared-$.4625
per share - - - (89) - - (89)
Issuance of
common stock under
stock option
plan - 23 282 - - - 305
Issuance of
common stock
under employee
stock purchase
plan - 3 32 - - - 35
Issuance of common
stock under
dividend reinvestment
plan - 10 199 - - - 209
Fractional shares
from 3 for 2
stock split - (1) (17) - - - (18)
Decrease in net
unrealized
losses on
securities
available
for sale - - - - 143 - 143
Preferred
stock
converted to
common stock (193) 212 (19) - - - -
Retirement of
treasury
shares - (577) (6,621) - - 7,198 -
------- -------- ------- ------- -------- -------- -------
$ - $ 4,725 $59,596 $25,617 $ (363) $ - $89,575
======= ======== ======= ======= ======== ======== ========
</TABLE>
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
(IN THOUSANDS) 1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,754 $4,396
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,230 2,188
Provision for loan and lease losses 975 62
Provision for foreclosed real estate losses - 188
Loans originated and acquired for sale (88,036) (105,882)
Principal balance of loans sold 84,822 114,120
Net gain on sale of foreclosed real estate (36) (220)
Net gain on investment securities (155) (86)
Net deferred income tax 1,840 7
Net decrease (increase) in trading securities (22,522) 13,049
Other (3,281) (2,217)
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (18,409) 25,605
------- -------
INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available for sale 2,724 24,284
Purchases of securities available for sale (10,281) (26,012)
Proceeds from maturities of securities held to maturity 19,070 15,956
Purchases of securities held to maturity (7,948) (22,271)
Proceeds from sales of, or payments on,
foreclosed real estate 477 801
Purchase of Federal Home Loan Bank of Boston stock - (2,881)
Net decrease (increase) in interest bearing deposits
with other banks (8,391) 8,664
Net decrease (increase) in loans and leases 310 (54,711)
Purchases of premises and equipment (1,073) (3,294)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (5,112) (59,464)
------- -------
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing
deposits and savings accounts (20,721) 3,963
Net increase (decrease)in time certificates of deposit 63,060 (11,233)
Net increase (decrease) in short-term borrowings 3,025 3,202
Net increase (decrease) in short-term advances from the
Federal Home Loan Bank of Boston (15,500) 42,136
Common cash dividends paid (3,077) (2,373)
Preferred cash dividends paid (89) (201)
Proceeds from issuance of common stock under
employee stock purchase plan 35 109
Proceeds from issuance of common stock under
dividend reinvestment plan 209 -
Proceeds from issuance of common stock under
stock option plan 305 163
Payments of fractional shares from 3 for 2 stock split (18) -
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,229 35,766
------ -------
DECREASE IN CASH AND DUE FROM BANKS 3,708 1,907
Cash and cash equivalents at beginning of period 22,750 20,852
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $26,458 $22,759
======= =======
SUPPLEMENTARY INFORMATION:
Interest paid on deposit accounts $18,433 $14,234
Interest paid on borrowed funds 4,271 3,142
Income taxes paid 3,086 1,510
Net decrease in due to broker - (699)
Net increase in due from broker - 13,207
Transfer from securities available for sale to securities
held to maturity - 16,575
Transfers from loans to foreclosed real estate 1,795 490
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1995 are not necessarily indicative of the results that may be expected for the
current fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the CFX CORPORATION (the
Company) annual report on Form 10-K for the year ended December 31, 1994.
NOTE B-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 balance sheet at fair value, with unrealized gains and
losses included in earnings (see Note C). Investments not classified as either
of the above are classified as "available for sale" and reflected on the balance
sheet at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity.
For all periods presented, 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 computed by the specific identification
method.
The carrying value and estimated fair value of investment securities at
September 30, 1995 and December 31, 1994, follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Securities available for sale,
at fair value $ 15,952 $15,952 $ 8,234 $ 8,234
Securities held to maturity, at
amortized cost 100,006 99,094 111,285 104,594
-------- ------- -------- -------
$115,598 $115,046 $119,519 $112,828
======== ======== ======== ========
</TABLE>
NOTE C-TRADING SECURITIES
Trading securities consist of marketable equity securities and debt securities
which the Company intends to trade in the near future. Trading positions are
taken to benefit from short-term movements in market prices. Trading securities
are stated at fair value. Changes in fair value are reflected in trading gains
and losses within the consolidated statement of income. Gains and losses on
trading securities sold are computed by the specific identification method.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
SEPTEMBER 30, 1995
NOTE D-FINANCIAL INSTRUMENTS
The Company uses certain financial instruments in managing the interest rate
risk included in the consolidated balance sheet. Futures and options contracts
are used explicitly for hedge purposes and are not undertaken for speculation.
The Company's intent and general practice is to liquidate (offset) futures and
options 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 its futures and options contracts,
but may execute delivery or receipt if it is financially prudent to do so. The
specific financial instruments used are described below:
. INTEREST RATE EXCHANGE AGREEMENTS:
Interest rate exchange agreements (swaps) 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, 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 the
consolidated statement of income.
. FINANCIAL FUTURES CONTRACTS:
Interest rate futures contracts are entered into by the Company as hedges
against interest rate risk in its trading securities portfolio. These
instruments are marked to fair value with changes in value recorded through
the consolidated statement of income.
. FINANCIAL OPTIONS CONTRACTS:
Options 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. Options contracts which hedge the Company's trading securities
portfolio (carried at fair value) are marked to fair value through the
consolidated statement of income.
The detail on the specific financial instruments used is as follows:
INTEREST RATE EXCHANGE AGREEMENTS
Commencing in 1993, the Company entered into agreements to exchange
interest rate cash flows with approved counterparties. Swap agreements
outstanding at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
ASSETS INTEREST INTEREST NOTIONAL MATURITY UNREALIZED
HEDGED RECEIVED PAID AMOUNT DATE LOSS
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans Fixed - 5.50% Variable - $25,000 11/23/96 $(125)
held in portfolio 6 mo. LIBOR
(Rate: 6.1875%)
</TABLE>
The effect of this swap agreement is to lengthen the repricing period of
certain variable-rate mortgage loans.
FINANCIAL OPTIONS CONTRACTS
The Company uses financial options to hedge interest rate exposure
generally on secondary mortgage market operations mortgage loans held for
sale. At September 30, 1995, the Company held put options (the option to
sell securities at a stated price within a specified term) on 30-year
Treasuries totaling $9 million (unrealized loss of $123,250) extending
through December 1995 for mortgage loans held for sale.
Net gains (losses) on trading securities, included separately in the
consolidated statements of income, are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 (IN THOUSANDS) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Mortgage-backed securities $ - $ 80 $ - $(2,973)
Other debt securities - 1 - 3
Equity securities 273 162 791 206
Futures, options and swaps - (232) - 2,383
------ ------ ------- ------
$ 273 $ 11 $ 791 (381)
====== ====== ======== ======
</TABLE>
The following table provides a rollforward of the notional amounts on each type
of financial instrument used by the Company to manage interest rate risk for
the periods indicated:
<TABLE>
<CAPTION>
INTEREST FINANCIAL
RATE OPTIONS
EXCHANGE CONTRACTS
(IN THOUSANDS) AGREEMENTS (LONG POSITION)
<S> <C> <C>
Balance at December 31, 1994 $25,000 $ 6,000
Contracts:
New - 39,000
Terminated - (14,000)
Expired - (22,000)
------- -------
Balance at September 30, 1995 $25,000 $ 9,000
======= =======
</TABLE>
Derivative instruments are monitored continually to assess market price changes.
On an at least 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 expectable changes in earnings
and market values. Volatility in these analyses is maintained within policy
guidelines.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
SEPTEMBER 30, 1995
NOTE E-ACCOUNTING CHANGE AND RECLASSIFICATION
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (`SFAS'') No. 114, ``Accounting by Creditors for Impairment of a
Loan'. The Statement defines an impaired loan as a loan for which it is
probable that the lender will not be able to collect all amounts due according
to the contractual terms of the loan agreement. An impaired loan is required to
be measured 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 loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. Substantially all of the Company's loans which have been
identified as impaired loans are maintained on nonaccrual status whereby
interest income is recognized only when received.
The Statement is applicable to all creditors and to all loans, except large
groups of smaller balance homogeneous loans that are collectively evaluated for
impairment and loans that are measured at fair value. Accordingly, the Company
has not applied SFAS No. 114 to its consumer loans and residential real estate
which are collectively evaluated for impairment.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. Accordingly, on January 1, 1995, the Company
transferred $798,000 in loans previously classified as in-substance foreclosures
and $131,000 of the valuation allowance for foreclosed real estate losses to
nonperforming loans. These amounts were also retroactively reclassified in the
December 31, 1994 balance sheet to conform with the current presentation.
The adoption of SFAS No. 114 had no significant effect on the Company's
assessment of the overall adequacy of the allowance for loan and lease losses.
At September 30, 1995, the recorded investment in impaired loans and leases
totaled $10,049,000, of which $3,028,000 related to loans with no valuation
allowance and $7,021,000 related to loans and leases with a corresponding
valuation allowance of $3,684,000.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
On May 12, 1995, the Financial Accounting Standards Board (`FASB'') issued SFAS
No. 122, Accounting for Mortgage Servicing Rights. SFAS No. 122 is an amendment
of SFAS No. 65, Accounting for Certain Mortgage Banking Activities. SFAS No. 122
applies prospectively in fiscal years beginning after December 15, 1995, to
transactions in which a mortgage banking enterprise sells or securitizes
mortgage loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those purchased
before the adoption of SFAS No. 122. Earlier application is encouraged.
Retroactive capitalization of mortgage servicing rights retained in transactions
in which a mortgage banking enterprise originates mortgage loans and sells or
securitizes those loans before the adoption of SFAS No. 122 is prohibited.
In the second quarter of 1995, the Company adopted SFAS No. 122 as of January 1,
1995, which resulted in a $152,000 increase in gains on the sales of loans. Of
the total recognized in the second quarter of 1995 from the adoption of SFAS No.
122, $43,000 was related to mortgage servicing rights generated in the first
quarter of 1995.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
SEPTEMBER 30, 1995
NOTE F-ACQUISITIONS
On April 28, 1995, the Company acquired Orange Savings Bank, a Massachusetts-
chartered savings bank, headquartered in Orange, Massachusetts. Each of Orange's
724,412 outstanding shares of common stock was converted into .8075 shares of
the Company's common stock, resulting in the issuance of 584,963 shares of the
Company's common stock to Orange shareholders. In addition, the holders of the
outstanding Orange stock options (representing the right to purchase 81,049
shares of Orange common stock) received options to purchase 65,447 shares of CFX
common stock in exchange.
The acquisition was accounted for as a pooling-of-interest and, accordingly, the
consolidated financial statements have been restated to include the consolidated
accounts of Orange Savings Bank for all periods presented. Previously reported
information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1994 CFX ORANGE
(IN THOUSANDS, EXCEPT PER SHARE DATA) CORPORATION SAVINGS BANK
<S> <C> <C>
Net interest and dividend income $6,903 $ 843
Provision for loan and lease losses 50 -
Other income 1,397 73
Other expense 6,156 615
Income taxes 724 119
Net income 1,370 182
Preferred dividends 66 -
Net income available to common stock 1,304 182
Earnings per common share .22 .23
Cash dividends declared .15 .04
NINE MONTHS ENDED SEPTEMBER 30, 1994 CFX ORANGE
(IN THOUSANDS, EXCEPT PER SHARE DATA) CORPORATION SAVINGS BANK
Net interest and dividend income $20,615 $2,406
Provision for loan and lease losses 50 12
Other income 3,862 226
Other expense 18,254 1,754
Income taxes 2,298 345
Net income 3,875 521
Preferred dividends 201 -
Net income available to common stock 3,674 521
Earnings per common share .63 .68
Cash dividends declared .41 .12
</TABLE>
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONT'D.
SEPTEMBER 30, 1995
NOTE G-RECLASSIFICATIONS AND RESTATEMENTS
Certain amounts have been reclassified in the 1994 unaudited consolidated
financial statements to conform to the 1995 presentation.
Prior period common per share data has been restated to reflect the Company's 3
for 2 stock split declared on June 13, 1995 to shareholders of record on June
23, 1995. The effective date of the stock split was July 24, 1995.
NOTE H-EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per common share are computed by dividing net
income by the weighted average number of common shares outstanding and common
share equivalents with a dilutive effect. Common share equivalents are shares
which may be issuable to employees and non-employee directors upon exercise of
outstanding stock options.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
GENERAL
All information within this section should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this Form 10-
Q. All references in the discussion to financial condition and results of
operations are to the consolidated position of the Company and its subsidiaries
taken as a whole.
CFX CORPORATION is a bank holding company incorporated under the laws of the
State of New Hampshire. The Company's wholly-owned subsidiaries are CFX BANK,
headquartered in Keene, New Hampshire and Orange Savings Bank, headquartered in
Orange, Massachusetts.
CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX CAPITAL
SYSTEMS, INC. (CFX CAPITAL) and CFX FINANCIAL SERVICES, INC. (CFX FINANCIAL).
CFX CAPITAL's wholly-owned subsidiary is CFX MORTGAGE, INC. which engages in
mortgage banking. CFX FINANCIAL owns 51% of CFX FUNDING L.L.C. (CFX FUNDING),
which engages in the facilitation of lease financing and securitization.
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 and benefits.
FINANCIAL CONDITION
LOANS AND LEASES
The table below sets forth the composition of the Company's loan and lease
portfolio at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1995 1994
% OF % OF
BALANCES PORTFOLIO BALANCES PORTFOLIO
<S> <C> <C> <C> <C>
Real estate:
Residential $436,910 68.27% $447,940 69.87%
Construction 5,312 .83 7,636 1.19
Commercial 85,779 13.40 82,825 12.92
Commercial, financial, and
agricultural 52,110 8.14 48,020 7.49
Warehouse lines of credit to
leasing companies 5,348 .84 15,339 2.39
Consumer and other 54,551 8.52 39,361 6.14
------- ------- ------- ------
640,010 100.00% 641,121 100.00%
====== ======
Less allowance for loan and
lease losses 7,796 7,558
------- --------
Net loans $632,214 $633,563
======== ========
</TABLE>
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1995
LOANS AND LEASES - Cont'd.
Total loans and leases were $640,010,000, or 73% of total assets, at September
30, 1995, compared with $641,121,000, or 76% of total assets, at December 31,
1994.
The increase in commercial and consumer lending was offset by a decline in
residential and construction real estate loans, along with a decline of
warehouse lines of credit to leasing companies. In January and September of
1995, CFX FUNDING completed the facilitation of its two lease portfolio
securitizations. Leases securitized in 1995 totaled approximately $36,019,000
with outstanding loan balances of approximately $28,013,000. In addition to the
two lease securitizations in 1995, the Company sold lease portfolios that
totaled approximately $ 12,957,000 with outstanding loan balances of
approximately $10,328,000.
RISK ELEMENTS
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying value of the assets is
reasonable and in accordance with generally accepted accounting principles,
regulatory requirements, and the Company's policies. Loans are placed on
nonaccrual status when management determines that significant doubt exists as to
the collectibility of principal or interest on a loan. Moreover, loans past due
90 days or more as to principal or interest are placed on nonaccrual status.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1995 1994 (1)
Nonaccrual (nonperforming) loans $8,937 $ 7,801
Foreclosed real estate 903 1,465
Valuation allowance on foreclosed
real estate (49) (194)
Total nonperforming assets $9,791 $ 9,072
====== =======
Nonperforming loans as a percent of total
loans and leases 1.40% 1.22%
======= =======
Nonperforming assets as a percent
of total assets 1.11% 1.08%
======== =======
(1) As reclassified to conform with the adoption of SFAS No. 114,
`Accounting by Creditors for Impairment of a Loan'', on January 1, 1995. See
Note E to the unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1995
RISK ELEMENTS - Cont'd.
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1995 1994
% OF % OF
BALANCES PORTFOLIO BALANCES PORTFOLIO
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $ 4,943 55.3% $ 4,977 63.8%
Commercial 2,010 22.5 1,799 23.1
Commercial, financial, and
agricultural 1,885 21.1 1,007 12.9
Consumer and other 99 1.1 18 .2
------- ------ ------- ------
8,937 100.0% 7,801 100.0%
------- ====== ------- =====
Foreclosed real estate:
Residential 485 56.8% 783 61.6%
Construction 178 20.8 330 26.0
Commercial 240 28.1 352 27.7
Valuation allowance (49) (5.7) (194) (15.3)
-------- ------- ------ ------
854 100.0% 1,271 100.0%
------- ====== ------- ======
Total nonperforming assets $ 9,791 $ 9,072
======= =======
</TABLE>
The following table provides a rollforward of the Company's foreclosed real
estate for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1995 1994
Balance at beginning of period $1,985 $3,810
Reclassification, net, to nonperforming loans
to reflect adoption of SFAS No. 114 (714) (2,068)
----- -------
Balance at beginning of period, as reclassified 1,271 1,742
Additions 1,795 490
Provision for losses - (188)
Sales and other (2,212) (773)
------ -----
Balance at end of period $ 854 $1,271
====== ======
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1995
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses recognized, and recoveries received, are charged
or credited directly to the allowance. The Company's management determines the
level of the allowance for loan and lease losses based upon a review of the
Company's loan and lease portfolio. This review identifies specific problem
loans and leases requiring allocations of the allowance and also estimates an
allocation for potential loan and lease losses based on current economic
conditions and historical experience.
Changes in the allowance for loan and lease losses are as follows:
NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS) 1995 1994
Balance at beginning of period $7,558 $7,952
Provision for loan and lease losses 975 62
Loans charged-off (962) (828)
Recoveries of loans previously charged-off 225 325
------ ------
Balance at end of period $7,796 $7,511
====== ======
Allowance for loan and lease losses
as a percent of total loans and leases 1.22% 1.27%
====== ======
Allowance for loan and lease losses as a
percent of total nonperforming loans 87.23% 87.98%
====== ======
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.
TRADING AND INVESTMENT SECURITIES
Included in the trading portfolio for 1994 was the Company's wholesale leverage
program. The Company began this program in October 1993 and authorized $100
million to be invested in the program. The objective of this program was to
enhance the Company's earnings and return on equity through leveraging the
balance sheet. However, as a result of significant loan growth experienced in
1994, and anticipated loan growth in the future, the wholesale leverage program
was completely liquidated as of October 31, 1994. In addition, management does
not anticipate using this program in the foreseeable future.
The program involved the purchasing of federal agency mortgage pass-through
securities, investment grade asset-backed securities, and investment grade
short-term commercial paper. The funding of these purchases was from short-term
repurchase agreements and Federal Home Loan Bank of Boston advances.
The intent of this program was to take advantage of market mispricing, primarily
based on option adjusted spread differentials. Fundamental to the conduct of the
activities was the minimization of credit risk and interest rate risk. Credit
risk was controlled by purchasing federal agency mortgage pass-through
securities, investment grade asset-backed securities, and investment grade
short-term commercial paper. Interest rate risk was controlled through the use
of hedging instruments.
The leverage program activities, along with the related hedging instruments,
were considered trading, and therefore, all securities were carried at fair
value. As a result, both gains or losses on sales and adjustments to fair value
were recorded in the consolidated statements of income as a net gain (loss) on
trading activities.
To determine the success of these activities, the Company calculated a total
return consisting of interest income and fair value changes of the investments
and hedge instruments net of interest expense incurred in funding the
activities. Hedge instruments, primarily including futures and options contracts
and interest rate swap agreements, were used to produce a net asset duration of
nine months or less. Settled positions were funded with borrowings of similar
duration to the net asset duration.
The following table illustrates the results of this program for the periods
indicated:
THREE MONTHS NINE MONTHS
SEPTEMBER 30, 1994 (DOLLARS IN THOUSANDS) ENDED ENDED
Interest income $ 472 $ 1,719
Interest expense 378 1,149
-------- --------
Net interest income 94 570
Fair value change (151) (587)
--------- ---------
Total return $ (57) (17)
======== ========
Average investment $ 46,294 $ 63,956
======== ========
Percentage return on average investment
(annualized) (.49%) (.04%)
======= ========
DEPOSITS AND BORROWED FUNDS
The following table shows the various components of average deposits and the
respective rates paid on such deposits for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30, 1995 1994
(DOLLARS IN THOUSANDS) AMOUNT RATES AMOUNT RATES
Noninterest bearing demand deposits $47,497 - $ 34,855 -
Regular savings deposits 121,663 3.01% 134,654 2.55%
NOW & money market deposits 178,697 2.22 209,525 2.36
Time deposits 288,362 5.37 236,368 4.46
------- --------
Total retail deposits 636,219 3.64 615,402 3.07
Brokered time deposits 32,375 6.28 672 4.58
------- ----- ------- ----
Total deposits $668,594 3.76% $616,074 3.08%
======== ===== ======== ====
Over the past twelve months, the Company has increased average demand deposits
by $12,642,000 and average interest bearing rental deposits by $8,175,000. The
majority of the increase in overall deposits is the result of two de-novo New
Hampshire branches opened in Gilford (December, 1994) and Manchester (June,
1995). In addition, as a result of fixed rate deposits (time deposits) becoming
more attractive to our customers, the Company has experienced a shift in
deposits from shorter-term variable rate deposits (savings, NOW, and money
market accounts) to longer-term fixed rate deposits.
The increase in brokered deposits funded asset growth and offset a decline in
advances from the Federal Home Loan Bank of Boston.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
SEPTEMBER 30, 1995
SHAREHOLDERS' EQUITY
The following table summarizes shareholders' equity at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994
AMOUNT SHARES AMOUNT SHARES(1)
<S> <C> <C> <C> <C>
Common shareholders' equity $89,575 7,088 $83,007 6,716
Preferred shareholders' equity - - 3,566 213
------- ----- ------ ----
Total shareholders' equity $89,575 7,088 $86,573 6,929
======= ===== ======= =====
Common shareholders' equity per share $ 12.64 $12.36
======= ======
Preferred shareholders' equity
per share $ - $16.74
------- ------
Shareholders' equity per share,
assuming conversion of all
preferred shares to common $ 12.64 $12.49
======= ======
</TABLE>
Shareholders' equity increased by $3,002,000 as of September 30, 1995 from
$86,573,000 at December 31, 1994 to $89,575,000 at September 30, 1995. The
increase was due to $5,754,000 in net income, issuance of $35,000 in common
stock under the employee stock purchase plan, issuance of $305,000 in common
stock under the stock option plan, issuance of $209,000 in common stock under
the dividend reinvestment program, a $143,000 decrease in net unrealized losses
on securities available for sale; offset by $18,000 paid for fractional shares
on a 3 for 2 stock split, and $3,337,000 and $89,000 in common and preferred
cash dividends, respectively.
(1) Reflects 192,769 preferred shares outstanding, as adjusted for the
conversion factor of 1.1025.
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS - GENERAL
The following tables set forth comparisons of average interest earning assets
and interest bearing liabilities, and interest income and interest expense
expressed as a percentage of the related asset or liability. In order to reflect
the economic impact of the Company's investments in state and municipal
securities and to present data on a comparative basis, the income from and
yields on these securities have been restated to a taxable-equivalent basis
(using a 38.62% tax rate). The taxable-equivalent income adjustments are
$150,000 for the three months ended September 30, 1995 and 1994, and $480,000
and $337,000 for the nine months ended September 30, 1995 and 1994,
respectively. These adjustments, however, are for comparison purposes only and
have no impact on reported net income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1995 1994
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest and dividend
earning assets:
Loans and leases $668,355 $14,541 8.63% $594,487 $11,493 7.67%
Taxable securities 114,230 1,443 5.01 146,471 1,948 5.28
Tax-exempt securities 21,019 388 7.32 24,025 389 6.42
Other 10,197 177 6.89 14,076 214 6.03
-------- ------ ------- -------
Total interest earning
assets 813,801 16,549 8.07 779,059 14,044 7.15
------ -------
Noninterest earning assets 65,553 77,471
-------- --------
Total $879,354 $856,530
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $291,844 1,834 2.49 $345,239 2,112 2.43
Time deposits 321,009 4,576 5.66 235,118 2,648 4.47
Advances from Federal
Home Loan Bank of Boston 80,477 1,267 6.25 107,038 1,306 4.84
Other borrowed funds 33,444 463 5.49 10,073 82 3.23
------ ------ ------- -------
Total interest bearing
liabilities 726,774 8,140 4.44 697,468 6,148 3.50
------ -------
Noninterest bearing liabilities:
Demand deposits 48,481 45,489
Other 14,053 27,114
Shareholders' equity 90,046 86,459
-------- --------
Total $879,354 $856,530
======== ========
Net interest and
dividend income $8,409 $ 7,896
====== =======
Interest rate spread 3.63% 3.65%
Net interest margin 4.10% 4.02%
</TABLE>
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995 1994
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest and dividend earning assets:
Loans and leases $659,879 $42,005 8.51% $576,953 $33,118 7.67%
Taxable securities 111,205 4,370 5.25 154,658 6,204 5.36
Tax-exempt securities 23,138 1,243 7.18 18,163 873 6.43
Other 11,820 592 6.70 13,977 596 5.70
------ ------ ------- -------
Total interest earning
assets 806,042 48,210 8.00 763,751 40,791 7.14
------ -------
Noninterest earning assets 66,599 90,055
-------- --------
Total $872,641 $853,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $300,360 5,715 2.54 $344,179 6,272 2.44
Time deposits 320,737 13,110 5.46 237,040 7,901 4.46
Advances from Federal
Home Loan Bank of Boston 70,516 3,324 6.30 94,828 3,008 4.24
Other borrowed funds 31,282 1,313 5.61 11,833 252 2.85
------ ------ ------- -------
Total interest bearing
liabilities 722,895 23,462 4.34 687,880 17,433 3.39
------ -------
Noninterest bearing liabilities:
Demand deposits 47,497 34,855
Other 13,365 45,972
Shareholders' equity 88,884 85,099
------ -------
Total $872,641 $853,806
======== ========
Net interest and
dividend income $24,748 $23,358
======= =======
Interest rate spread 3.66% 3.75%
Net interest margin 4.10% 4.09%
</TABLE>
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
The following table presents changes in interest and dividend income, interest
expense, and net interest income which are attributable to changes in the
average amounts of interest earning assets and interest bearing liabilities
and/or changes in rates earned or paid thereon. The net changes attributable to
both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1995 VS. 1994 1995 VS. 1994
INCREASE (DECREASE)DUE TO INCREASE (DECREASE) DUE TO
(IN THOUSANDS) VOLUME RATE NET VOLUME RATE NET
<S> <C> <C> <C> <C> <C> <C>
Interest and dividends earned on:
Loans and leases $1,519 $1,529 $3,048 $5,044 $3,843 $8,887
Investments (462) (44) (506) (1,450) (14) (1,464)
Other (65) 28 (37) (100) 96 (4)
----- ----- ----- ----- ----- ------
Total interest and
dividend income 992 1,513 2,505 3,494 3,925 7,419
----- ----- ----- ----- ----- ------
Interest paid on:
Savings and time
deposits 786 864 1,650 2,375 2,277 4,652
Borrowed funds (75) 417 342 (232) 1,609 1,377
----- ----- ----- ------ ----- ------
Total interest expense 711 1,281 1,992 2,143 3,886 6,029
----- ----- ----- ----- ----- ------
Change in net interest
and dividend income $ 281 $ 232 $ 513 $1,351 $ 39 $1,390
===== ===== ===== ====== ===== ======
</TABLE>
NET INCOME & NET INCOME AVAILABLE TO COMMON STOCK
Net income for the three and nine months ended September 30, 1995 was $2,188,000
and $5,754,000, respectively, compared to $1,552,000 and $4,396,000,
respectively for the same periods a year ago. Net income available to common
stock for the three and nine months ended September 30, 1995 was $2,188,000, or
$.30 per share and $5,665,000, or $.80 per share, respectively, compared with
$1,486,000, or $.22 per share and $4,195,000, or $.63 per share, respectively,
for the corresponding periods a year ago.
The increase in earnings was primarily due to increased core earnings (net
interest and noninterest income). The stronger core earnings are the result of
an $48 million, or 8.06%, increase in loans and leases over the past twelve
months, and an increased focus on the generation of noninterest income. However,
a portion of the increase in core earnings was offset by a higher provision for
loan and lease losses and higher operating expenses in 1995 compared to 1994.
Total core earnings were $10,749,000 and $31,398,000, respectively, for the
three and nine months ended September 30, 1995, compared to $9,216,000 and
$27,109,000, respectively, for the same periods a year ago. The Company's net
interest margin of 4.10% for the three months ended September 30, 1995 increased
from 4.02% for the corresponding period a year ago.
Contributing to the increase in noninterest income was the adoption of SFAS No.
122, Accounting for Mortgage Servicing Rights. In the second quarter of 1995,
the Company adopted this SFAS as of January 1, 1995, which resulted in a
$152,000 increase in gains on the sales of loans. Of the total recognized in the
second quarter of 1995 from the adoption of SFAS No. 122, $43,000 was related to
mortgage servicing rights generated in the first quarter of 1995.
NET INTEREST AND DIVIDEND INCOME
Taxable-equivalent net interest income was $8,409,000 and $24,748,000,
respectively, for the three and nine months ended September 30, 1995, compared
to $7,896,000 and $23,358,000 for the same periods a year ago. The increase in
net interest income in the 1995 periods was principally due to higher average
interest earning assets and higher demand deposits.
The increase in average interest earning assets resulted principally from growth
in loans and leases (see `Financial Condition - Loans and Lease'' section of
this Management's Discussion and Analysis), as loan and lease demand increased
in the current environment.
The interest rate spread in the 1995 periods declined from the 1994 periods
principally as a result of increases in the cost of deposits and borrowed funds.
In addition to interest rates paid for certificates of deposit increasing over
the last nine months, the Company's deposit customers have shifted funds from
variable rate deposits (savings, NOW, and money market accounts) to the higher
rate certificate accounts. Although the interest rate spread declined in 1995,
the net interest margin remained constant in the 1995 periods compared to the
1994 periods as a result of the increase in demand deposits in 1995 compared to
1994.
Falling short-term interest rates are having, and are anticipated over the near
term to continue to cause compression with the Company's interest rate spread
and net interest margin due to interest earning assets repricing more rapidly
than interest bearing liabilities. This expectation is based on the fact that
one year adjustable rate mortgages will begin repricing to lower market rates
while deposit rates are not likely to decrease as rapidly in a lower interest
rate environment. In addition, with fully indexed adjustable rate mortgage loans
carrying higher interest rates than new 30-year fixed rate mortgage, the Company
may experience higher prepayments from adjustable rate mortgages refinancing to
a fixed rate mortgages, and therefore, requiring the Company to reinvest the
cash flows at lower yields.
PROVISION FOR LOAN AND LEASE LOSSES
The amount of provision for loan and lease losses is determined by management
through its periodic review of the Company's loan portfolio. This review
includes an assessment of problem loans and potential unknown losses based on
current economic conditions, the regulatory environment and historical
experience.
The provision for loan and lease losses for the three and nine months ended
September 30, 1995, was $345,000 and $975,000, respectively, compared to $50,000
and $62,000, respectively for the same periods a year ago. The higher provision
for loan and lease losses in 1995 is principally the result of continued growth
in the loan portfolio, the change in loan mix from residential to commercial and
consumer, and the higher net charge-offs in 1995 compared to 1994. Total net
charge-offs amounted to $737,000 for the nine months ended September 30, 1995,
compared to $503,000 for the same period a year ago.
At September 30, 1995, nonperforming loans stood at $8,937,000, or 1.40% of
total loans and leases, compared to $7,801,000, or 1.22% of total loans and
leases, as of December 31, 1994. The allowance for loan and lease losses as a
percentage of nonperforming loans as of September 30, 1995 and December 31, 1994
amounted to 87.23% and 96.89%, respectively.
OTHER INCOME
Other income for the three and nine months ended September 30, 1995 totaled
$2,490,000 and $7,130,000, respectively, compared to $1,470,000 and $4,088,000,
respectively, for the same periods a year ago.
The net gains (losses) on trading securities between the 1995 and 1994 periods
are summarized as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1995 1994 1995 1994
Wholesale leverage program $ - $ (151) $ - $ (587)
Other trading activities 273 162 791 206
------ ------ ------ ------
$ 273 $ 11 $ 791 $ (381)
====== ====== ====== ======
For a discussion on the Company's wholesale leverage program, see the
`Financial Condition'' section of this Management's Discussion and Analysis.
The increase in service charges on deposit accounts is due to an increase in
fees and enhanced collection practices. Lower gains on the sale of loans for the
first nine months of 1995 is due to lower volumes in the first half of 1995
generated by the Company's mortgage banking subsidiary, CFX MORTGAGE. The lower
volumes are directly related to the increased interest rate environment and the
corresponding lower consumer demand for loan products. However, in the third
quarter of 1995 interest rates decreased and volumes increased, realizing
increased gains on the sale of loans. The lower gains on the sale of loans in
1995 was offset in the second quarter through the implementation of SFAS No.
122, `Accounting for Mortgage Servicing Rights.'' (See ``Note E'' to the
`Unaudited Notes'' to consolidated financial statements.) In the second quarter
of 1995, the Company adopted SFAS No. 122 as of January 1, 1995, which resulted
in a $152,000 increase in gains on the sales of loans. Of the total recognized
in the second quarter of 1995 from the adoption of SFAS No. 122, $43,000 was
related to mortgage servicing rights generated in the first quarter of 1995. The
increase in other income from leasing activities is due principally to fees
generated by CFX FUNDING and the amortization of deferred credits relating to an
investment in lease residuals.
OTHER EXPENSE
Other expense for the three and nine months ended September 30, 1995 totaled
$6,941,000 and $21,468,000, respectively, compared to $6,771,000 and $20,008,000
for the same periods a year ago. The increase in other expense was primarily
attributable to the increase in salaries and employees benefits, losses on the
sale of real estate investment properties in the first and second quarters of
1995, and costs incurred in connection with the acquisition of Orange Savings
Bank. The higher salaries and employee benefits are the result of normal salary
adjustments, higher medical costs and lower deferred salary costs in CFX
MORTGAGE pertaining to loan origination. In addition, contributing to the higher
salary and employee benefits was an increase in capacity in both commercial and
consumer lending, along with new employees hired for the de novo New Hampshire
branches opened in Gilford (December 1994) and Manchester (June 1995).
However, the above increases in other expense were offset by a $424,000 (pre-
tax) insurance premium refund from the Federal Deposit Insurance Corporation
(FDIC). The FDIC's Bank Insurance Fund (BIF) surpassed its congressionally
mandated reserve ratio of 1.25 percent of insured deposits during the month
of May, 1995.The new assessment rate schedule for the BIF, which substanti-
ally lowers rates for most banks, thus became effective June 1, 1995,
enabling the FDIC to refund excess premiums already paid by BIF-insured
institutions for the four-month period June 1, 1995 to September 30, 1995.
It is estimated that the reduced insurance premium on an annual basis will
save the Company approximately $1.2 million (pre-tax).
INCOME TAX
Income taxes for the three and nine months ended September 30, 1995 were 36.82%
and 35.75% of pretax income, respectively, compared to 35.20% and 37.55%,
respectively, of pretax income for the same periods a year ago. The effective
tax rates for the nine months ended September 30, 1995 were lower because of
higher tax-exempt income, tax credits pertaining to low-income housing and the
reversal of a $117,000 valuation allowance relating to Orange Savings Bank's
capital loss carryforward.
ASSET/LIABILITY MANAGEMENT
The Company's primary objective regarding asset/liability management is to
position the Company so that changes in interest rates do not have a material
adverse impact upon forecasted net income and the net fair value of the Company.
The Company's primary strategy for accomplishing its asset/liability management
objective is achieved by matching the weighted average maturities of assets,
liabilities, and off-balance sheet items (duration matching).
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of the
Company assuming both instantaneous and permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net income and the net
market value of the Company as a result of these interest rate changes represent
greater interest rate risk than do smaller increases or decreases in net fair
value. In connection with these recalculations, the Company makes assumptions
regarding the probable changes in cash flows of its assets, liabilities, and
off-balance sheet positions that would be expected in those various interest
rate environments. Accordingly, the Company adjusts the pro forma net income and
net market values as it believes appropriate on the basis of historical
experience and prudent business judgment. The Company endeavors to maintain a
position where it experiences no material change in net fair value and no
material fluctuation in forecasted net income as a result of assumed 100 and 200
basis point increases and decreases in interest rates. However, there can be no
assurances that Company projections in this regard will be achieved.
Management believes that the above method of measuring and managing interest
rate risk is consistent with the Federal Deposit Insurance Corporation (FDIC)
regulation regarding the interest rate risk component of regulatory capital.
LIQUIDITY
The Company maintains numerous sources of liquidity in the form of marketable
assets and borrowing capacity. Interest bearing deposits with other banks,
trading and available for sale securities, regular cash flows from loan and
securities portfolios and Federal Home Loan Bank of Boston borrowings are the
primary sources of asset liquidity. At September 30, 1995 interest bearing
deposits with other banks totaled $11,641,000 and trading and available for sale
securities totaled $38,710,000.
Because the Company's bank subsidiaries maintain large residential mortgage loan
portfolios, a substantial capability exists to borrow funds from the Federal
Home Loan Bank of Boston. Additionally, investment portfolios are predominantly
made up of securities which can be readily borrowed against through the
repurchase agreement market. Relationships with deposit brokers and
correspondent banks are also maintained to facilitate possible borrowing needs.
CAPITAL RESOURCES
Federal regulation requires the Company to maintain minimum capital standards.
Tier 1 capital is composed primarily of common stock, retained earnings and
perpetual preferred stock in limited amounts less certain intangibles. The
minimum requirements include a 3% Tier 1 leverage capital ratio for the most
highly-rated institutions; all other institutions are required to meet a minimum
leverage ratio that is at least 1% to 2% above the 3% minimum. In addition, the
Company and its bank subsidiaries are required to satisfy certain capital
adequacy guidelines relating to the risk nature of an institution's assets.
These guidelines established by the Federal Reserve Board and the FDIC are
applicable to bank holding companies and state chartered non-member banks,
respectively. Under the "risk-based" capital rules, banks and bank holding
companies are required to have a level of Tier 1 capital equal to 4% of total
risk-weighted assets, as defined. Banks and bank holding companies are also
required to have total capital (composed of Tier 1 plus "supplemental" or Tier 2
capital, the latter being composed primarily of allowances for loan and lease
losses, perpetual preferred stock in excess of the amount included in Tier 1
capital, and certain "hybrid capital instruments" including mandatory
convertible debt) equal to 8% of total risk-weighted assets.
As of September 30, 1995, the Company's Tier 1 capital to asset ratio was 9.16%.
In addition, the Company's Tier 1 to risk-weighted asset ratio and total capital
to risk-weighted asset ratios were 15.33% and 16.60%, respectively.
CFX CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
SEPTEMBER 30, 1995
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company, its
subsidiaries, or any directors, officers, affiliates or any owner of
ecord or beneficiary of more than five percent (5%) of the common stock
of the Company, or any associate of any such director, officer, affiliate
of the Company or any security holder is a party adverse to the Company
or its subsidiaries or has a material interest adverse to the Company or
its subsidiaries.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
99.1 Computation of Equivalent Shares and Per Share Earnings
(b)Reports on Form 8-K
(i) None
CFX CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFX CORPORATION
November 14, 1995 /S/ Mark A. Gavin
------------------------------
Mark A. Gavin
Authorized Officer
Chief Financial Officer
CFX CORPORATION
COMPUTATION OF EQUIVALENT SHARES AND PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 1994
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
<S> <C> <C> <C> <C>
Equivalent shares:
Average shares outstanding 7,083 7,083 6,670 6,670
Additional shares due to stock
options 252 287 - -
------- ------ ------- ------
Total equivalent shares 7,335 7,370 6,670 6,670
======= ====== ======= ======
Earnings per share:
Net income $ 2,188 $2,188 $ 1,552 $1,552
Less: Preferred stock dividends - - 66 66
------- ------ ------- ------
Net income available to
common stock $ 2,188 $2,188 $ 1,486 $1,486
======= ====== ======= ======
Total equivalent shares 7,335 7,370 6,670 6,670
======= ====== ======= ======
Earnings per common share $ .30 $ 0.30 $ .22 $ .22
======= ====== ======= ======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 1994
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
Equivalent shares:
Average shares outstanding 6,919 6,919 6,661 6,661
Additional shares due to stock
options 194 285 - -
------- ------ ------- ------
Total equivalent shares 7,113 7,204 6,661 6,661
======= ====== ======= ======
Earnings per share:
Net income $ 5,754 $5,754 $ 4,396 $4,396
Less: Preferred stock dividends 89 89 201 201
------- ------ ------- ------
Net income available to
common stock $ 5,665 $5,665 $ 4,195 $4,195
======= ====== ======= ======
Total equivalent shares 7,113 7,204 6,661 6,661
======= ====== ======= ======
Earnings per common share $ .80 $ 0.79 $ .63 $ .63
======= ====== ======= ======
</TABLE>
[ARTICLE] 9
[LEGEND]
This schedule contains summary information extracted from financial statements
and footnotes of the September 30, 1995 Form 10-Q and is qualified in its
entirety by reference to such filing.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] SEP-30-1995
[CASH] 26,458
[INT-BEARING-DEPOSITS] 11,641
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 22,758
[INVESTMENTS-HELD-FOR-SALE] 15,952
[INVESTMENTS-CARRYING] 100,006
[INVESTMENTS-MARKET] 99,094
[LOANS] 640,010
[ALLOWANCE] 7,796
[TOTAL-ASSETS] 879,419
[DEPOSITS] 667,768
[SHORT-TERM] 106,841
[LIABILITIES-OTHER] 15,034
[LONG-TERM] 201
[COMMON] 4,725
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 84,850
[TOTAL-LIABILITIES-AND-EQUITY] 879,419
[INTEREST-LOAN] 42,005
[INTEREST-INVEST] 5,133
[INTEREST-OTHER] 592
[INTEREST-TOTAL] 47,730
[INTEREST-DEPOSIT] 18,825
[INTEREST-EXPENSE] 4,637
[INTEREST-INCOME-NET] 24,268
[LOAN-LOSSES] 975
[SECURITIES-GAINS] 949
[EXPENSE-OTHER] 21,468
[INCOME-PRETAX] 8,955
[INCOME-PRE-EXTRAORDINARY] 8,955
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 5,754
[EPS-PRIMARY] .80
[EPS-DILUTED] .79
[YIELD-ACTUAL] 8.00
[LOANS-NON] 8,937
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 7,558
[CHARGE-OFFS] 962
[RECOVERIES] 225
[ALLOWANCE-CLOSE] 7,796
[ALLOWANCE-DOMESTIC] 7,796
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 1,262
</TABLE>
