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 March 31, 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, $1.00 par value per share, as of March 31, 1995 was 3,895,152.
CFX CORPORATION AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements:
Consolidated Balance Sheets -- March 31, 1995
and December 31, 1994 1
Consolidated Statements of Income -- Three
months ended March 31, 1995 and 1994 2
Consolidated Statement of Shareholders' Equity -- Three
months ended March 31, 1995 3
Consolidated Statements of Cash Flows -- Three
months ended March 31, 1995 and 1994 4
Notes to Consolidated Financial Statements --
March 31, 1995 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 3 Defaults upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CFX CORPORATION AND SUBSIDIARY
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except per share data) 1995 1994
<S> <C> <C>
Assets
Cash and due from banks $ 17,198 $ 18,832
Interest bearing deposits with other banks 1,545 2,663
Federal Home Loan Bank of Boston stock 6,471 6,471
Trading securities 16,410 236
Securities available for sale 3,389 4,358
Securities held to maturity 108,286 109,531
Mortgage loans held for sale 8,059 8,295
Loans and leases 574,499 569,980
Less allowance for loan and lease losses 6,999 7,025
Net Loans and Leases 567,500 562,955
Premises and equipment 13,644 13,643
Mortgage servicing rights 4,129 4,207
Goodwill and deposit base intangibles 10,204 10,387
Foreclosed real estate 907 906
Other assets 22,406 13,452
$780,148 $755,936
Liabilities and Shareholders' Equity
Deposits:
Interest bearing $567,621 $513,864
Noninterest bearing 38,614 37,675
Total Deposits 606,235 551,539
Short-term borrowed funds 26,914 27,316
Advances from Federal Home Loan Bank of Boston 55,688 92,201
Other liabilities 12,733 6,752
Total Liabilities 701,570 677,808
Shareholders' Equity
Preferred stock, 7.5% Series A Cumulative Convertible, par
value $1.00 per share-issued and outstanding 192,769 shares 193 193
Common stock, par value $1.00 per share-authorized
15,000,000 shares, issued 4,472,417 shares at March 31,
1995 and 4,469,876 shares at December 31, 1994 4,473 4,470
Paid-in capital 63,312 63,279
Retained earnings 18,216 17,858
Net unrealized losses on securities available for sale, after
tax effects (418) (474)
Cost of 577,265 shares of common stock in treasury (7,198) (7,198)
Total Shareholders' Equity 78,578 78,128
$780,148 $755,936
Number of common shares outstanding (thousands) 3,895 3,893
Common shareholders' equity per share $ 19.26 $ 19.15
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARY
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------------
(In thousands, except per share data) 1995 1994
<S> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 11,876 $ 9,498
Interest on investment securities:
Taxable 1,352 1,452
Tax exempt 255 127
1,607 1,579
Interest and dividends on trading securities 61 706
Dividends on marketable equity securities 3 37
Other 171 105
Total Interest and Dividend Income 13,718 11,925
Interest expense:
Interest on deposits 5,333 4,096
Interest on borrowings:
Short-term 1,385 841
Long-term 3 3
Total Interest Expense 6,721 4,940
Net Interest and Dividend Income 6,997 6,985
Provision for loan and lease losses 180 -
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 6,817 6,985
Other income:
Service charges on deposit accounts 522 366
Loan servicing fees 427 357
Net gains (losses) on trading securities 224 (441)
Net gains on sales of loans 12 327
Leasing activities 510 42
Other 317 311
2,012 962
Other expense:
Salaries and employee benefits 3,280 2,927
Occupancy 460 469
Equipment 469 418
Operation of foreclosed real estate 25 70
FDIC deposit insurance 319 302
Goodwill and deposit base intangible amortization 183 183
Other 1,987 1,750
6,723 6,119
Income Before Income Taxes 2,106 1,828
Income taxes 785 715
Net Income 1,321 1,113
Preferred stock dividends 67 67
Net Income Available to Common Stock $ 1,254 $ 1,046
Weighted average common shares outstanding (thousands) 3,895 3,847
Earnings per common share $ .32 $ .28
</TABLE>
See accompanying notes to unaudited financial statements.
CFX CORPORATION AND SUBSIDIARY
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
(In thousands) Stock Stock Capital Earnings For Sale Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $193 $4,470 $63,279 $17,858 $(474) $(7,198) $78,128
Net income - - - 1,321 - - 1,321
Common cash dividend
declared-$.23 per share - - - (896) - - (896)
Preferred cash dividend
declared-$.346875 per share - - - (67) - - (67)
Issuance of common stock under
stock option plan - - 1 - - - 1
Issuance of common stock
under employee stock
purchase plan - 3 32 - - - 35
Decrease in net unrealized
losses on securities
available for sale - - - - 56 - 56
Balance at March 31, 1995 $193 $4,473 $63,312 $18,216 $(418) $(7,198) $78,578
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARY
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
(In thousands) 1995 1994
<S> <C> <C>
Operating Activities
Net income $ 1,321 $ 1,113
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 719 700
Provision for loan and lease losses 180 -
Provision for foreclosed real estate losses 3 51
Loans originated and acquired for sale (18,281) (52,695)
Principal balance of loans sold 18,517 60,110
Net loss (gain) on sale of foreclosed real estate 11 (14)
Net deferred income tax 840 22
Net increase in trading securities (16,174) (6,912)
Other (3,860) (1,105)
Net Cash Provided by Operating Activities (16,724) 1,270
Investing Activities
Proceeds from sale and maturities of securities available for sale 1,011 1,318
Purchase of securities available for sale - (36)
Proceeds from maturities of securities held to maturity 2,248 7,516
Purchase of securities held to maturity (1,000) (7,206)
Proceeds from the sale of, or payments on, foreclosed real estate 382 353
Purchase of Federal Home Loan Bank of Boston stock - (1,588)
Net decrease (increase) in interest bearing deposits with other banks 1,118 (4,256)
Net increase in loans and leases (5,117) (16,551)
Purchases of premises and equipment (429) (529)
Net Cash Used by Investing Activities (1,787) (20,979)
Financing Activities
Net decrease in noninterest bearing deposits and savings accounts (19,153) (1,644)
Net increase (decrease) in time certificates of deposit 73,849 (10,076)
Net decrease in short-term borrowings (402) (13,912)
Net increase (decrease) in short-term advances from the
Federal Home Loan Bank of Boston (36,513) 42,964
Common cash dividends paid (873) (744)
Preferred cash dividends paid (67) (67)
Proceeds from the issuance of common stock under employee
stock purchase plan 35 41
Proceeds from common stock under stock option plan 1 118
Net Cash Provided (Used) by Financing Activities 16,877 16,680
Decrease in Cash and Cash Equivalents (1,634) (3,029)
Cash and cash equivalents at beginning of period 18,832 16,676
Cash and Cash Equivalents at End of Period $17,198 $13,647
Supplementary Information:
Interest paid on deposit accounts $ 4,699 $ 4,170
Interest paid on borrowed funds 1,269 701
Income taxes paid - 104
Net increase in due to broker - 20,692
Transfers from loans to foreclosed real estate 365 -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARY
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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 three month
period ended March 31, 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.
Certain amounts have been reclassified in the 1994 unaudited consolidated
financial statements to conform to the 1995 presentation.
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.
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.
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 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. 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 March 31, 1995 are as follows:
<TABLE>
<CAPTION>
Assets Interest Interest Notional Maturity Unrealized
Hedged Received Paid Amount Date Loss
(In thousands)
<S> <S> <S> <C> <C> <C>
Mortgage loans Fixed - 4.37% (1) Variable - $25,000 11/23/96 $(622)
held in portfolio 6 mo. LIBOR
(Rate: 6.3125%)(1)
<FN>
<F1> The contract can be terminated by counterparty in May 1995. If the
contract is not terminated in May 1995, the interest received
from the counterparty increases to 5.5% for the remaining term.
</FN>
</TABLE>
The effect of this swap agreement is to lengthen the repricing period of
certain variable-rate mortgage loans.
Financial Option Contracts
The Company uses financial options to hedge interest rate exposure
generally on secondary mortgage market operations mortgage loans held
for sale. At March 31, 1995, the Company held put options (the option to
sell securities at a stated price within a specified term) on 30-year
Treasuries totaling $4 million (unrealized loss of $18,000) extending
through June 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 Ended March 31 (In thousands) 1995 1994
<S> <C> <C>
Mortgage-backed securities $ - $(1,935)
Other debt securities - 1
Equity securities 224 (18)
Futures, options and swaps - 1,511
$224 $ (441)
</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 Option
Exchange Contracts
(In thousands) Agreements (Long Position)
<S> <C> <C>
Balance at December 31, 1994 $25,000 $ 6,000
Contracts:
New - 16,000
Terminated - (12,000)
Expired - (6,000)
Balance at March 31, 1995 $25,000 $ 4,000
</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.
Note E-Accounting Change and Reclassification
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 which are
collectively evaluated for impairment. The Company does not presently have
any loans that are measured at fair value or the lower of cost or fair value.
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 non-performing 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 March 31, 1995, loans totaling $3,137,000 have been identified as impaired.
Note F-Acquisitions
On April 28, 1995, the Company purchased Orange Savings Bank, a Massachusetts-
chartered savings bank, headquartered in Orange, Massachusetts. The
acquisition is anticipated to be accounted for as a pooling-of-interests.
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) will receive
options to purchase 65,447 shares of CFX common stock in exchange.
The Pro forma financial statements reflecting the acquisition of Orange
Savings Bank for the period presented within the Form 10Q are included as
Exhibit 99.2.
CFX CORPORATION AND SUBSIDIARY
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 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 (previously named Cheshire Financial Corporation) is a bank
holding company incorporated under the laws of the State of New Hampshire. The
Company's wholly-owned subsidiary is CFX BANK (the Bank), headquartered in
Keene, New Hampshire. CFX BANK is the new name of the unified bank resulting
from the 1993 mergers of the Company's three wholly-owned subsidiary banks
(Cheshire County Savings Bank, The Monadnock Bank, and The Valley Bank).
The 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.,
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 portfolio at
the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1995 1994
% of % of
Balances Portfolio Balances Portfolio
<S> <C> <C> <C> <C>
Real estate:
Residential $377,507 65.71% $379,491 66.58%
Construction 6,464 1.12 7,761 1.36
Commercial 85,459 14.88 82,825 14.53
Commercial, financial, and agricultural 51,047 8.89 48,020 8.42
Warehouse lines of credit to leasing companies 11,314 1.97 15,339 2.69
Consumer and other 42,708 7.43 36,544 6.42
574,499 100.00% 569,980 100.00%
Less: Allowance for loan and lease losses 6,999 7,025
Net loans $567,500 $562,955
</TABLE>
Total loans and leases were $574,499,000, or 74% of total assets, at March 31,
1995, compared with $569,980,000, or 75% of total assets, at December 31,
1994.
Total loans and leases have increased by $4,519,000 since December 31, 1994,
primarily due to increased capacity in commercial lending and increased focus
on consumer finance activities.
In January 1995, CFX FUNDING completed the facilitation of its first lease
portfolio securitization. Leases securitized in January 1995 totaled
approximately $14,900,000 with outstanding loan balances of approximately
$13,654,000.
Risk Elements
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying value of the assets
are 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:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1995 1994(1)
<S> <C> <C>
Nonaccrual (nonperforming) loans $7,143 $7,203
Foreclosed real estate 1,036 1,100
Valuation allowance on foreclosed real estate (129) (194)
Total nonperforming loans $8,050 $8,109
Nonperforming loans as a percent of total
loans and leases 1.24% 1.26%
Nonperforming assets as a percent
of total assets 1.03% 1.07%
<FN>
<F1> 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.
</FN>
</TABLE>
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1995 December 31, 1994
% of % of
Balances Portfolio Balances Portfolio
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $4,457 62.4% $4,379 60.8%
Commercial 1,608 22.5 1,799 25.0
Commercial, financial, and agricultural 1,054 14.8 1,007 13.9
Consumer and other 24 .3 18 .3
7,143 100.0% 7,203 100.0%
Foreclosed real estate and
in-substance foreclosures:
Residential 642 70.8% 418 46.1%
Construction 182 20.1 330 36.4
Commercial 212 23.3 352 38.9
Valuation allowance (129) (14.2) (194) (21.4)
907 100.0% 906 100.0%
Total nonperforming assets $8,050 $8,109
</TABLE>
The following table provides a rollforward of the Company's foreclosed real
estate and in-substance foreclosures for the periods indicated:
<TABLE>
<CAPTION>
Three months Ended March 31, (In thousands) 1995 1994
<S> <C> <C>
Balance at beginning of period $1,573 $3,353
Reclassification, net, to non-performing loans
to reflect adoption of SFAS No. 114 (667) (1,694)
Balance at beginning of period, as reclassified 906 1,659
Additions 365 100
Provision for losses (3) (51)
Pay-offs/sales/other (361) (371)
Balance at end of period $ 907 $1,337
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended March 31, (In thousands) 1995 1994
<S> <C> <C>
Balance at beginning of period $7,025 $7,357
Provision for loan and lease losses 180 -
Loans charged-off (275) (52)
Recoveries of loans previously charged-off 69 85
Balance at end of period $6,999 $7,390
Allowance for loan and lease losses
as a percent of total loans and leases 1.22% 1.53%
Allowance for loan and lease losses as a
percent of total nonperforming loans 97.98% 99.89%
</TABLE>
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 six 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 period
indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31, (In thousands) 1994
<S> <C>
Interest income $ 698
Interest expense 423
Net interest income 275
Fair value change (423)
Total return $ (148)
Average investment $81,428
Percentage return on average investment (annualized) (0.72%)
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995 1994
(In thousands) Amount Rates Amount Rates
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 43,566 - $ 25,874 -
Regular savings deposits 102,549 2.96% 113,375 2.48%
NOW & money market deposits 166,202 2.11 186,035 2.26
Time deposits 242,832 5.21 210,517 4.52
Total Retail 555,149 3.46 535,801 3.09
Brokered time deposits 39,467 6.16 1,760 4.47
Total Deposits $594,616 3.11% $537,561 3.09%
</TABLE>
As interest rates declined during 1992 and 1993 periods, CFX customers became
very sensitive to the low interest rate environment and were unwilling to
commit their funds long-term. Therefore, the Company experienced a shift in
deposits from longer-term fixed rate deposits to shorter-term variable rate
deposits (savings, NOW, and money market accounts). In addition, and as a
result of the low interest rate environment in 1993, CFX experienced the
migration of individual depositors to alternative instruments (stock & bond
market, annuities, and mutual funds). However, the rising interest rate
environment in 1994 caused some instability with stocks, bonds, and mutual
funds, and therefore has allowed deposits to stabilize. Moreover, with
certificate of deposit rates beginning to rise in the fourth quarter of 1994,
depositors have begun to commit funds for longer-terms continuing through the
first quarter of 1995.
Shareholders' Equity
The following table summarizes shareholders' equity at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except per share data) 1995 1994
Amount Shares(1) Amount Shares(1)
<S> <C> <C> <C> <C>
Common shareholders' equity $75,012 3,895 $74,562 3,893
Preferred shareholders' equity 3,566 213 3,566 213
Total shareholders' equity $78,578 4,108 $78,128 4,106
Common shareholders' equity per share $ 19.26 $ 19.15
Preferred shareholders' equity per share $ 16.74 $ 16.74
Shareholders' equity per share, assuming
conversion of all preferred shares to common $ 19.13 $ 19.03
Shareholders' equity increased by $450,000 as of March 31, 1995 from
$78,128,000 at December 31, 1994 to $78,578,000 at March 31, 1995. The
increase was due to $1,321,000 in net income, issuance of $35,000 in common
stock under the employee stock purchase plan, issuance of $1,000 in common
stock under the stock option plan, a $56,000 decrease in net unrealized losses
on securities available for sale and $896,000 and $67,000 in common and
preferred cash dividends, respectively.
<FN>
<F1> Reflects 192,769 preferred shares outstanding, as adjusted for the
conversion factor of 1.1025.
</FN>
</TABLE>
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 $161,000 and $80,000 for the three months ended March 31,
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 March 31, 1995 1994
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend earning assets:
Loans and leases $577,667 $11,876 8.34% $491,426 $ 9,498 7.84%
Taxable securities 104,481 1,416 5.50 157,559 2,164 5.57
Tax-exempt securities 23,690 415 7.11 12,956 207 6.48
Other 10,697 172 6.52 11,331 136 4.87
Total interest earning assets 716,535 13,879 7.86 673,272 12,005 7.23
Noninterest earning assets 61,496 91,134
Total $778,031 $764,406
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $268,751 1,616 2.44 $299,411 1,740 2.36
Time deposits 282,299 3,717 5.34 212,276 2,356 4.50
Advances from Federal Home Loan
Bank of Boston 63,477 978 6.25 82,563 727 3.57
Other borrowed funds 28,929 410 5.75 19,915 117 2.38
Total interest bearing liabilities 643,456 6,721 4.24 614,165 4,940 3.26
Noninterest bearing liabilities:
Demand deposits 43,566 25,874
Other 11,686 47,434
Shareholders' equity 79,323 76,933
Total $778,031 $764,406
Net interest and dividend income $ 7,158 $ 7,065
Interest rate spread 3.62% 3.97%
Net interest margin 4.05% 4.26%
</TABLE>
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
March 31,
1995 vs. 1994
Increase (Decrease) Due to
(In thousands) Volume Rate Net
<S> <C> <C> <C>
Interest and dividends earned on:
Loans and leases $1,761 $ 617 $2,378
Investments (535) (5) (540)
Other (8) 44 36
Total interest and dividend income 1,218 656 1,874
Interest paid on:
Savings and time deposits 678 559 1,237
Other borrowed funds (127) 671 544
Total interest expense 551 1,230 1,781
Change in net interest
and dividend income $ 667 $ (574) $ 93
</TABLE>
Net Income & Net Income Available to Common Stock
Net income for the three months ended March 31, 1995 was $1,321,000, compared
to $1,113,000 for the same period a year ago. Net income available to common
stock for the three months ended March 31, 1995 was $1,254,000, or $.32 per
share, compared with $1,046,000, or $.28 per share, for the corresponding
period a year ago.
Earnings for the first quarter of 1995 were positively affected by higher non-
interest income in 1995 compared to 1994. Total non-interest income (including
trading securities transactions) increased in 1995 by $1,050,000 to
$2,012,000. Partially offsetting this increase was an increase in total
operating expenses of $604,000.
Net Interest Income
Taxable-equivalent net interest income was $7,158,000 for the three months
ended March 31, 1995, compared to $7,065,000 for the same period a year ago.
The increase in net interest income in 1995 was principally due to higher
average interest earning assets, offset by lower interest rate spread in the
1995 period.
The increase in average interest earning assets resulted principally 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 and net interest margin in 1995 declined from the
1994 levels principally as a result of increases in the cost of deposits and
borrowed funds and the relatively low interest rates (teaser rates) offered on
newly originated adjustable rate mortgage loans generated over the last nine
months. In addition to interest rates paid for certificates of deposit
increasing over the last six 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.
Stable short-term interest rates are having, and are anticipated over the
near term to continue to have, a favorable impact on 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 short-term interest rates have risen substantially over the
past twelve months and that the Company's portfolio of residential mortgages
consists predominantly of adjustable rate mortgages (most of which bear
interest at rates based on one-year Treasury securities with the balance at
rates based on three-and five-year Treasury securities). However, there can
be no assurance that this favorable impact will continue. Moreover, if short-
term interest rates move significantly higher over the next twelve months,
the 200 basis point annual adjustment caps contained in the Company's
adjustable rate mortgages, coupled with the absence of similar limitations on
the repricing of liabilities, could cause the Company's interest rate spread
and net interest margin to contract.
Provision for Loan and Lease Losses
The amount of provision for loan and lease losses is determined by management
through its periodic search review of the Bank'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 months ended March 31,
1995, was $180,000, compared $-0- for the same period a year ago. The higher
provision for loan and lease losses in 1995 is principally the result growth
in the loan portfolio.
At March 31, 1995, nonperforming loans stood at $7,143,000, or 1.24% of total
loans and leases, compared to $7,203,000, or 1.26% 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 March 31, 1995 and December 31, 1994
amounted to 97.98% and 97.53%, respectively.
Other Income
Other income for the three months ended March 31, 1995 totaled $2,012,000
compared to $962,000 for the same period a year ago.
The net gains (losses) on trading securities between the 1995 and 1994 periods
are summarized as follows:
<TABLE>
<CAPTION>
Three months
Ended
March 31,
(In thousands) 1995 1994
<S> <C> <C>
Wholesale leverage program $ - $ (423)
Other trading activities 224 (18)
$224 $ (441)
</TABLE>
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 better collection practices. The increase in loan servicing fees is
from lower amortization of purchased mortgage servicing rights as a result of
lower prepayment speeds on outstanding mortgage servicing. Lower gains on the
sale of loans is due to lower volumes 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. 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 months ended March 31, 1995 totaled $6,723,000
compared to $6,119,000 for the same period a year ago. The increase in other
expense was primarily attributable to the increase in salaries and employees
benefits, a $191,000 loss on the sale of a real estate investment property,
and costs incurred in connection with the pending acquisition of Orange
Savings Bank. The higher salaries and employee benefits are the result of
normal salary adjustments, higher medical costs and lower salary costs
deferred 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 branch opened in Gilford, New Hampshire as of December
1993.
Income Tax
Income taxes for the three months ended March 31, 1995 were 37.27% of pretax
income, compared to 39.11% of pretax income for the same period a year ago.
The effective tax rate was lower in 1995 because of higher tax-exempt income.
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 March 31, 1995 interest bearing
deposits with other banks totaled $1,545,000 and trading and available for
sale securities totaled $19,799,000.
Because the Company's subsidiary, CFX BANK, maintains a large residential
mortgage loan portfolio, 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 CFX BANK 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 March 31, 1995, the Company's Tier 1 capital to asset ratio was 8.88%.
In addition, the Company's Tier 1 to risk-weighted asset ratio and total
capital to risk-weighted asset ratios were 14.95% and 16.23%, respectively.
CFX CORPORATION AND SUBSIDIARY
Part II - Other Information
March 31, 1995
Item 1 - Legal Proceedings
There are no material pending legal proceedings to which the Company,
its subsidiary, or any directors, officers, affiliates or any owner
of record or beneficiary of more than five percent (5%) of the common
stock of the Company, or any associate of any such director, officer,
affiliate of the Company or any security holder is a party adverse to
the Company or its subsidiary or has a material interest adverse to
the Company or its subsidiary.
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
As previously reported, the Company and Orange Savings Bank, a
Massachusetts-chartered savings bank in stock form headquartered in
Orange, Massachusetts ("Orange"), entered into an Amended and
Restated Agreement and Plan of Merger dated as of July 26, 1994
("Merger Agreement"), pursuant to which CFX Interim Trust Company, a
newly-formed Massachusetts-chartered trust company and a wholly-owned
subsidiary of the Company, would be merged with and into Orange ("the
Merger").
On April 28, 1995, all shareholders and regulatory approvals having
been obtained, the Merger was completed, and Orange became a wholly-
owned subsidiary of the Company. Pursuant to the Merger Agreement,
each of Orange's 724,412 outstanding shares of common stock was
converted into the right to receive .8075 shares of Company common
stock, resulting in the issuance of 584,963 shares of Company common
stock to Orange shareholders. Additionally, options previously
issued pursuant to Orange's stock option plans for the purchase of
81,049 shares of Orange common stock were converted into the right to
receive options for the purchase of 65,447 shares of Company common
stock. The transaction is being accounted for as a pooling of
interests.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exibit Number Description
<C> <S>
*2 Amended and Restate Agreement and Plan of Merger dated as of
July 26, 1994 by and between the Comapny and Orange.
27 Financial Data Schedule
99.1 Orange's Annual report on Form F-2 for the year ended
December 31, 1994, including Orange's 1994 Annual Report
to Stockholders.
99.2 Pro Forma Combined Financial Information of the Company and
Orange for the three-month periods ending March 31, 1995 and
March 31, 1994 and for the year ending December 31, 1994.
(b) Reports on Form 8-K
(i) None
<FN>
<F1> * Previously filed with the Registration on Form S-4 of the company,
No. 033-56875, effective January 13, 1995.
</FN>
</TABLE>
CFX CORPORATION AND SUBSIDIARY
March 31, 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
May 15, 1995 /s/ MARK A. GAVIN
Mark A. Gavin
Authorized Officer
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 17,198
<INT-BEARING-DEPOSITS> 1,545
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 16,410
<INVESTMENTS-HELD-FOR-SALE> 3,389
<INVESTMENTS-CARRYING> 108,286
<INVESTMENTS-MARKET> 104,738
<LOANS> 574,499
<ALLOWANCE> 6,999
<TOTAL-ASSETS> 780,148
<DEPOSITS> 606,235
<SHORT-TERM> 82,401
<LIABILITIES-OTHER> 12,733
<LONG-TERM> 201
<COMMON> 3,895
193
0
<OTHER-SE> 74,490
<TOTAL-LIABILITIES-AND-EQUITY> 780,148
<INTEREST-LOAN> 11,876
<INTEREST-INVEST> 1,671
<INTEREST-OTHER> 171
<INTEREST-TOTAL> 13,718
<INTEREST-DEPOSIT> 5,333
<INTEREST-EXPENSE> 6,721
<INTEREST-INCOME-NET> 6,997
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 224
<EXPENSE-OTHER> 6,723
<INCOME-PRETAX> 2,106
<INCOME-PRE-EXTRAORDINARY> 2,106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,321
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 7.86
<LOANS-NON> 8,050
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,025
<CHARGE-OFFS> 275
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 6,999
<ALLOWANCE-DOMESTIC> 5,619
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,380
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Orange Savings Bank
We have audited the accompanying consolidated balance sheet of Orange Savings
Bank and subsidiary as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies at December 31,
1994, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 27, 1995
Boston, MA
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
Orange Savings Bank:
We have audited the accompanying consolidated balance sheet of Orange Savings
Bank and subsidiary as of December 31, 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two year period ended December 31, 1993. These consolidated
financial statements are the responsibility of the Bank'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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orange
Savings Bank and subsidiary at December 31, 1993 and the results of their
operations and their cash flows for each of the years in the two year period
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 1, effective December 31, 1993 the Bank adopted Financial
Accounting Standards Board Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
February 4, 1994
ORANGE SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(in thousands, except for per share data)
<TABLE>
<CAPTION>
1994 1993
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,793 $ 1,674
Federal funds sold 1,125 2,502
Total cash and cash equivalents 3,918 4,176
Certificates of deposit (Note 2) 587 484
Securities, available-for-sale, (amortized of cost
$3,908 and $570 at December 31, 1994 and 1993,
respectively (Note 3 and 7) 3,876 614
Securities, held-to-maturity (market value of
$1,713 and $3,758 at December 31, 1994 and 1993,
respectively) (Note 3 and 7) 1,754 3,757
Loans, net of allowance for possible loan losses of
$533 and $595 at December 31, 1994 and 1993,
respectively (Note 4 and 7) 70,561 70,461
Stock in Federal Home Loan Bank of Boston, at cost (Note 7) 917 917
Land, building and equipment, net (Note 5) 444 444
Accrued income receivable 307 247
Deferred tax asset (Note 8) 66 55
Other real estate owned 412 457
Other assets 426 337
------- -------
$83,268 $81,949
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6) $73,383 $72,394
Advance payments from mortgagors 507 540
Accrued interest payable 3 3
Accrued income taxes (Note 8) 32 147
Other liabilities 899 642
------- -------
Total liabilities 74,824 73,726
------- -------
Commitments and contingencies (Note 10) - -
Stockholders' equity (Notes 8, 9, and 11)
Serial preferred stock, par value $0.10 per share
200,000 shares authorized, none issued or outstanding - -
Common stock, par value $0.10 per share; authorized
1,300,000 shares; 724,412 shares issued and outstanding
at December 31,1994 and 1993 72 72
Additional paid-in capital 2,974 2,974
Unrealized (loss) gain on investment securities
available-for-sale, net (Note 3) (32) 35
Retained earnings 5,430 5,142
------- -------
Total stockholders' equity 8,444 8,223
------- -------
Total liabilities and stockholders' equity $83,268 $81,949
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
ORANGE SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1993 and 1992
(in thousands except for per share data)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 5,303 $ 5,560 $ 5,972
Federal funds sold 101 66 115
Certificates of deposit 31 32 39
Securities 219 94 128
Dividends 108 131 147
Total interest and dividend income 5,762 5,883 6,401
Interest expense:
Deposits 2,507 2,667 3,301
Borrowed funds - - 111
Total interest expense 2,507 2,667 3,412
Net interest and dividend income 3,255 3,216 2,989
Provision for possible loan losses (Note 4) 12 90 242
Net interest and dividend income
after provision for possible loan losses 3,243 3,126 2,747
Non-interest income:
Net gain (loss) from sale or write-down of investments 1 (21) 91
Net gain (loss) from sales of loans 4 27 2
Net loss on investment in limited partnership - - (1,120)
Commissions, fees and other income 286 270 249
Net non-interest income 291 276 (778)
Net interest, dividend and other income 3,534 3,402 1,969
Non-interest expense:
Salaries and employee benefits (Note 9) 1,024 943 861
Building and equipment expenses 251 250 219
EDP processing fees 280 251 228
Legal fees 53 57 39
Merger related expenses 410 - -
Other expenses 749 661 686
Total non-interest expenses 2,767 2,162 2,033
Income (loss) before income taxes and cumulative effect
of a change in accounting principle 767 1,240 (64)
Income taxes (Note 8) 334 91 465
Net income (loss) before cumulative effect of a
change in accounting principle 433 1,149 (529)
Cumulative effect to January 1, 1992 of a change in
accounting for income taxes (Note 8) - - 50
Net income (loss) $ 433 $ 1,149 ($ 479)
Average common and common equivalent
shares outstanding 754,831 742,446 731,286
Earnings (loss) per share before cumulative
effect of change in accounting principle $ 0.57 $ 1.55 ($ 0.72)
Earnings per share from cumulative effect of
change in accounting principle - - $ 0.07
Earnings (loss) per share $ 0.57 $ 1.55 ($ 0.65)
Cash dividends declared $ 0.20 $ 0.20 $ 0.20
</TABLE>
See accompanying notes to consolidated financial statements
ORANGE SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (loss) on
Investment
Additional Securities
Common Paid-in Retained Available-
Stock Capital Earnings for-sale Total
<S> <C> <C> <C> <C> <C>
Balance December 31, 1991 $71 $2,940 $4,758 - $7,769
Cash dividends declared, $0.20 per share - - (143) - (143)
Net loss - - (479) - (479)
Balance December 31, 1992 71 2,940 4,136 - 7,147
Cash dividends declared, $0.20 per share - - (143) - (143)
Stock options exercised 1 34 - - 35
Unrealized gain on investment securities
available-for-sale, net - - - 35 35
Net income - - 1,149 - 1,149
Balance December 31, 1993 $72 $2,974 $5,142 $35 $8,223
Cash dividends declared, $0.20 per share - - (145) - (145)
Change in unrealized loss on investment
securities available-for-sale, net - - - (67) (67)
Net income - - 433 - 433
Balance December 31, 1994 $72 $2,974 $5,430 ($32) $8,444
=== ====== ====== === ======
</TABLE>
See accompanying notes to consolidated financial statements
ORANGE SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 433 $1,149 ($479)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 91 92 80
Provision for possible loan losses 12 90 242
Net amortization of premiums and discounts 6 (9) 34
Amortization of deferred loan income 5 3 13
Loss (gain) on sale or writedown of securities (1) 21 (91)
Gain on sale of loans (4) (27) (2)
Loss on investment in limited partnership - - 1,120
(Increase) decrease in accrued income receivable (60) 10 108
Decrease (increase) in other real estate owned 45 461 (818)
Increase in deferred tax assets (11) (55) -
(Increase) decrease in other assets (89) 22 38
Decrease in accrued interest payable - (4) (17)
(Decrease) increase in accrued income taxes (115) (372) 92
Increase in other liabilities 257 37 338
Net cash provided by operations 569 1,418 658
Investing activities:
Securities purchased (3,379) (3,807) (3,494)
Proceeds from sales of securities available-for-sale 55 - -
Proceeds from sales of securities - 388 3,855
Proceeds from maturity of securities 2,000 1,430 1,750
Certificates of deposit purchased (198) - (195)
Proceeds from matured certificates of deposit 95 - 285
Net decrease (increase) in loans (120) 49 (8,287)
Proceeds from redemption of FHLB stock - 233 -
Purchase of land, buildings and equipment (91) (94) (38)
Net cash used by investing activities (1,638) (1,801) (6,124)
Financing activities:
Net increase in deposits 989 44 8,345
Decrease in mortgage escrow accounts (33) (48) (7)
Repayment of borrowings - - (1,500)
Cash dividends paid (145) (143) (143)
Net cash provided (used) by financing activites 811 (147) 6,695
Increase (decrease) in cash and cash equivalents (258) (530) 1,229
Cash and cash equivalents beginning of year 4,176 4,706 3,477
Cash and cash equivalents end of year $3,918 $4,176 $4,706
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $2,513 $2,671 $3,429
Income taxes $ 460 $ 490 $ 396
Non-cash transactions:
Real estate aquired through foreclosure or
substantially repossessed $ 684 $ 375 $ 919
Stock options exercised - $ 35 -
</TABLE>
See accompanying notes to consolidated financial statements
ORANGE SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1993
NOTE 1 - Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and to general practices within
the banking community.
In preparing the 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 revenues and expenses for
the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for possible loan losses,
valuation of other real estate owned and the valuation allowance on deferred
tax assets. In connection with the determination of the allowance for possible
loan losses and the valuation of other real estate owned, management obtains
independent appraisals for significant properties.
A substantial portion of the Bank's loans are secured by real estate in
the Orange, Massachusetts area which has generally been affected by the
depressed economic environment in the northeastern United States. Accordingly,
the ultimate collectibility of a substantial portion of the Bank's loan
portfolio and the recovery of a substantial portion of the carrying amount of
other real estate owned are susceptible to changes in market conditions in
these markets.
Basis of presentation
The consolidated financial statements include the accounts of the Bank
and its wholly-owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to conform to the 1994 presentation without effect on
stockholders' equity or net income.
Statement of cash flows
Cash and cash equivalents include cash, due from banks and Federal funds
sold.
Certificates of deposit
Certificates of deposit are carried at cost, which approximates market
value. All certificates mature within two years.
Securities
Effective December 31, 1993, the Bank adopted Financial Accounting
Standards Board ("FASB") Statement of Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities". Under FASB
No. 115, debt securities that the Bank has the positive intent to hold to
maturity are classified as held-to-maturity and reported at amortized cost;
debt and equity securities that are bought and held principally for the
purpose of selling in the near term are classified as trading and reported at
fair value with unrealized gains and losses included in earnings; and debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value with unrealized
gains and losses excluded from earnings and reported as a separate component
of stockholders' equity, net of estimated income taxes. FASB No. 115 does not
apply to unsecuritized loans. However, after mortgage loans are converted to
mortgage backed securities, they are subject to its provisions. Upon adoption,
the Bank classified its securities into two categories: held-to-maturity and
available-for-sale; The Bank has no securities held for trading as of December
31, 1993 and 1994.
Prior to the adoption of FASB 115, securities intended to be held-to-
maturity were carried at amortized cost and marketable equity securities were
carried at the lower of aggregate cost or market value.
Premiums and discounts on securities are amortized or accreted into
income using the straight-line basis, the result of which approximates the
level yield method. If a decline in value below the amortized cost basis of a
security is judged to be other than temporary, the cost basis of the
investment is written down to fair value as a new cost basis and the amount of
the write-down is included as a charge against earnings. Gains and losses on
the sale of securities are recognized at the time of sale on a specific
identification basis.
Loans
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans.Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full and timely collection of
interest or principal, or when a loan becomes contractually past due 90 days
with respect to interest or principal. The accrual of some loans, however, may
continue even though they are more than 90 days past due if management deems
it appropriate, provided that the loans are well secured and in the process of
collection. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when they
are brought fully current with respect to interest and principal and when, in
the judgment of management, the loans are estimated to be fully collectable as
to both principal and interest.
Loan origination fees, net of certain direct loan origination costs, are
considered adjustments of interest rate yield and are amortized into interest
income over the loan term.
Loans held for sale
Loans held for sale are carried at the lower of aggregate cost or market
value.
Allowance for possible loan losses
The allowance for possible loan losses is established through a
provision for possible loan losses charged to operations and is maintained at
a level considered adequate by management. Assessing the adequacy of the
allowance for possible loan losses involves substantial uncertainties and is
based upon management's evaluation of the amounts required to meet estimated
losses inherent in the loan portfolio after weighing various factors. Among
the factors management may consider are generally, the level of non-accruing
loans, current economic conditions, trends in delinquencies and charge-offs
and collateral values of the underlying security. In connection with the
determination of the allowance for possible loan losses, management obtains
independent appraisals for significant properties. Ultimate losses may vary
significantly from current estimates.
Management believes that the allowance for possible loan losses is
adequate; however, adjustments to the allowance may become necessary if future
economic conditions differ substantially from the assumptions used in making
the evaluation. In addition, various regulatory agencies periodically review
the Bank's allowance for possible loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on judgments different from
those of management.
Stock in the Federal Home Loan Bank of Boston
Stock in the Federal Home Loan Bank of Boston (FHLBB) represents stock
purchased under the requirements of the FHLBB. As and when such stock is
redeemed, the Bank will receive an amount equal to the par value of the stock.
The stock is carried at cost.
Land, building and equipment
Land is stated at cost. Buildings and equipment are stated at cost, less
allowances for depreciation computed on a straight-line method over the useful
lives of the respective assets.
The cost of maintenance and repairs is charged to earnings when
incurred. Major expenditures for betterments are capitalized and depreciated.
Other real estate owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings, acceptance of a deed in lieu of foreclosure or
repossessed in-substance. When there is an indication that a borrower no
longer has equity in property collateralizing a loan and it is doubtful that
the equity will be rebuilt in the foreseeable future or foreclosure
proceedings are imminent, the property is considered repossessed in substance.
Both in-substance foreclosures and real estate formally acquired in settlement
of loans are recorded at the lower of the carrying value of the loan or the
market value of the property constructively or actually received, reduced for
estimated disposal costs. Losses arising from the aquisition of such
properties or from the write-downs to fair value of loans substantively
repossessed are charged against the allowance for possible loan losses. Costs
relating to the development and improvement of property are capitalized,
whereas operating expenses and any subsequent provisions to reduce the
carrying value to fair value minus costs to sell are charged to current
earnings. Gains and lossses upon disposition are reflected in earnings as
realized.
Income taxes
Effective January 1, 1992, the Bank adopted Financial Accounting
Standards Board (FASB) Statement No. 109 "Accounting for Income Taxes".
Statement 109 changed the Bank's method of accounting for income taxes from
the deferred method required under APB 11 to the asset and liability method.
The cumulative effect of this accounting change totaling $50,000 has been
reported separately in the 1992 consolidated statement of operations. Under
the asset and liability method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis and the
tax basis of the Bank's assets and liabilities at the legislated tax rates
which are expected to be in effect when the temporary differences reverse. The
Bank's tax assets and liabilities are reviewed regularly and adjustments are
recognized as deferred income tax expense or benefit based on management's
judgment regarding its realizability.
Earnings per share
Earnings per share is computed by dividing earnings by the average
number of common stock and common stock equivalents outstanding during the
year. Common stock equivalents include stock options outstanding, when
dilutive.
Recent accounting developments
In May, 1993, the FASB issued FASB Statement No. 114 "Accounting by
Creditors for Impairment of a loan", which requires a change in accounting
method for most financial institutions, commencing with fiscal years beginning
after December 15, 1994, with early adoption permissible.
FASB No. 114, as amended, is applicable to all creditors and to all
loans, uncollateralized as well as collateralized, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment (i.e., residential mortgages, credit card and consumer installment
loans), loans that are measured at fair value or at the lower of cost or fair
value (i.e., loans in a trading or held for sale portfolio), leases, and
convertible or nonconvertible debentures, bonds and other debt securities.
Management does not expect that adopting the provisions of FASB No. 114
will have a material impact on the Bank's financial condition or results of
its operations.
NOTE 2 - Certificates of Deposit
Certificates of deposit at December 31, 1994 and 1993 are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993
(Dollars in thousands)
Weighted Weighted
Average Average
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Original maturities within:
under one year $389 6.24% $194 6.87%
one to two years 198 6.58% 290 6.18%
two to three years - -
587 6.35% 484 6.46%
</TABLE>
NOTE 3 - Securities
A summary of securities classified as available for sale and held to
maturity at December 31, 1994 and 1993 is as follows;
Available for Sale
<TABLE>
<CAPTION>
December 31, 1994
(In thousands)
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury and Agency Obligations $3,234 - $62 $3,172
Corporate Bonds 150 - - 150
Marketable equity securities 524 67 36 554
$3,908 $67 $98 $3,876
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
(In thousands)
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Marketable equity securities $579 $49 $14 $614
Held to Maturity
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
(In thousands)
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury and Agency Obligations $1,754 - ($41) $1,713
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
(In thousands)
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury and Agency Obligations $3,757 $4 $3 $3,758
</TABLE>
At December 31, 1994 and 1993, the net unrealized (losses) gains,
respectively, on available-for-sale securities are included as a separate
component of stockholders' equity. During the year ended December 31, 1994
there were no sales of securities classified as held-to-maturity.
A schedule of the maturity distribution of bonds and obligations at
December 31, 1994 and 1993 is as follows. All held-to-maturity securities
mature within 1 to 5 years.
<TABLE>
<CAPTION>
December 31,
1994 1993
(Dollars in thousands)
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
<S> <C> <C> <C> <C>
Within 1 year $1,254 4.00% $1,999 3.70%
Over 1 year to 5 years 3,885 5.93% 1,758 4.11%
Over 5 years to 10 years - - - -
After 10 years - - - -
$5,139 5.47% $3,757 3.89%
</TABLE>
Realized gains on the sales of equity securities were $1,000, $25,000
and $73,000 in 1994, 1993 and 1992, respectively. Realized losses on the
sales of equity securities were $7,000 and $25,000 in 1993 and 1992,
respectively. Write-downs amounted to $39,000 in 1993. There were no realized
losses or write-downs on marketable equity securities in 1994 and no
write-downs on marketable equity securities in 1992.
NOTE 4 - Loans
The composition of the balance of loans is as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
(in thousands)
Mortgage Loans:
Conventional - adjustable rate $51,108 $51,398
Conventional - fixed rate 11,249 10,995
F.H.A. and V.A. 503 608
Total principal balances 62,860 63,001
Less: Due to borrowers uncompleted loans (125) (384)
Deferred loan fees (25) (28)
Total mortgage loans 62,710 62,589
Other loans:
Equity line of credit 4,869 5,086
Auto 1,190 853
Education 543 548
Home improvement 150 145
Secured 569 489
Personal 365 327
Total principal balances 7,686 7,448
Add: Deferred loan costs 8 8
Total other loans 7,694 7,456
Add: Loans in process 690 1,011
Less: Allowance for possible loan losses (533) (595)
$70,561 $70,461
</TABLE>
The Bank's lending activities are conducted principally in Orange and
the surrounding area. The Bank makes single family and multi-family
residential loans and a variety of consumer loans. In addition, the Bank makes
loans for the construction of residential homes.
Most loans made by the Bank are collateralized either by real estate or
personal property. The ability of the single family residential and consumer
borrower to honor repayment commitments is generally affected by the level of
overall economic activity within the borrowers' geographic areas, on real
estate values and on the general economy.
In the ordinary course of business, the Bank makes loans to directors
and principal officers, including their immediate families and companies with
whom they are affiliated. Such loans of $60,000 or more in the aggregate,
which are substantially on the same terms as those existing at the time of
origination for comparable transactions with other borrowers, amounted to
$195,000 and $207,000 at December 31, 1994 and 1993, respectively. There were
no new loans granted to directors and principal officers during 1994.
Loans serviced for others were $13,939,000 and $13,461,000 at December
31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, loans overdue 90 days and still accruing
were $221,000 and $448,000, respectively. In addition, the Bank had non-
accrual loans during the same periods of $377,000 and $1,015,000. Forgone
interest on non-accrual loans amounted to approximately $8,000 and $45,000 for
the years ended December 31, 1994 and 1993, respectively.
Changes in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993 1992
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period $595 $483 $370
Provision charged to operations 12 90 242
Charges against insubstance foreclosure properties - - (87)
Net realized losses charged to allowance (83) (18) (42)
Charge-offs recovered 9 40 -
Balance at end of period $533 $595 $483
Allocated as follows:
Mortgage loans $477 $551 $442
Consumer loans 56 44 41
$533 $595 $483
</TABLE>
Note 5 - Land, Building and Equipment
Major classes of fixed assets at December 31, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993 Useful lives
(In thousands)
<S> <C> <C> <C>
Land $ 47 $ 47
Land Improvements 27 27 10 years
Building and improvements 534 534 32 - 40 years
Furniture and equipment 931 840 1 - 5 years
1,539 1,448
1,095 1,004
$ 444 $ 444
</TABLE>
The Bank leases its branch office under an operating lease which expires
in 1997. The lease contains an option to extend the term of the lease for an
additional two years. The lease stipulates that the Bank pay one third of the
real estate taxes, insurance and maintenance costs. The annual rental expense
under the lease is $18,000 per year.
NOTE 6 - Deposits
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
(Dollars in thousands)
Weighted Weighted
Average Average
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Now accounts $ 8,735 1.89% $ 8,011 2.12%
Savings accounts 18,628 3.02% 18,865 3.21%
Money market deposit accounts 13,055 3.24% 14,457 3.40%
Demand deposit accounts 2,167 - 1,699 -
Total non-certificate accounts 42,585 2.86% 43,032 3.12%
Term deposit certificates 13,335 4.89% 12,938 5.05%
Money market certificates 17,463 4.12% 16,424 4.40%
Total certificate accounts 30,798 4.34% 29,362 4.65%
Total deposits $73,383 3.46% $72,394 3.71%
</TABLE>
A summary of certificate accounts by maturity at December 31, 1994 and
1993 is as follows: (In thousands)
<TABLE>
<CAPTION>
1994 1993
In Denominations In Denominations
Under Over Under Over
$100 $100 Total $100 $100 Total
<S> <C> <C> <C> <C> <C> <C>
3 months or less $ 6,719 $ 407 $ 7,126 $ 7,166 $ 366 $ 7,532
3 - 6 months 5,098 406 5,504 6,052 365 6,417
6 - 12 months 10,988 813 11,801 6,234 732 6,966
12 months or more 5,810 557 6,367 7,412 1,035 8,447
$28,615 $2,183 $30,798 $26,864 $2,498 $29,362
</TABLE>
Interest expense on deposits of $100,000 or more was $96,000, $110,000
and $131,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. The Bank held no brokered deposits at December 31, 1994 and
1993.
NOTE 7 - Borrowed Funds
The Bank is a member of the Federal Home Loan Bank of Boston. As a
member, the Bank is generally entitled to borrow up to 30% of its total
assets. Borrowings from the Federal Home Loan Bank of Boston are secured by a
blanket lien on residential first mortgage loans, investment securities and
all stock in the Federal Home Loan Bank of Boston equal in value to the amount
of borrowings outstanding.
At December 31, 1994 and 1993, the Bank had no borrowings outstanding.
NOTE 8 - Income Taxes
Effective January 1, 1992, the Bank adopted Statement of Accounting
Standards No. 109, "Accounting for Income Taxes" which changed the method of
accounting for income taxes from the deferred method to the asset and
liability method. The cumulative effect of this accounting change of $50,000
was determined as of January 1, 1992 and is reported separately in the
consolidated statement of operations for the year ended December 31, 1992.
Prior period financial statements have not been restated.
The components of income tax expense were as follows: (In thousands)
<TABLE>
<CAPTION>
December 31,
1994 1993 1992
<S> <C> <C> <C>
Current tax expense (benefit)
Federal $237 $133 $328
State 107 134 144
Total current tax expense (benefit) 344 267 472
Deferred tax expense (benefit)
Federal (8) 222 (7)
State (2) (14) -
Total deferred expense (benefit) (10) 208 (7)
Change in valuation reserve - (384) -
Total income tax expense (benefit) $334 $ 91 $465
</TABLE>
The difference between total expected income tax expense (benefit)
computed by applying the statutory Federal income tax rate of 34% to income
(loss) before income taxes and cumulative effect of accounting change and the
reported income tax expense (benefit) for the periods indicated is analyzed as
follows:
<TABLE>
<CAPTION>
December 31,
1994 1993 1992
<S> <C> <C> <C>
Federal income tax expense at statutory rate 34% 34% 34%
State income taxes net of Federal benefit 8% 6% 95%
Bad debt deduction - - -
Loss on investment in real estate limited partnerships - - 603%
Capital loss for which no current benefit is available - - 28%
Change in valuation reserve - -31% -
Other 2% -2% 22%
Income tax expense (benefit) appearing on
accompanying consolidated financial statements 44% 7% 782%
</TABLE>
The tax effects of temporary differences (the difference between the
fiinancial statement carrying amounts of existing assets and liabilities and
their respective tax bases) that give rise to significant portions of the
deferred tax asset and deferred tax liability are as follows as of December
31, in the year indicated: (In thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax assets:
Accrued pension costs $120 $ 76
Other 33 37
Allowance for loan loss 147 202
Premium on deposits 23 17
Security write-downs 98 89
State net operating loss 48 48
Capital loss carryforward 58 43
Gross deferred tax asset 527 512
Valuation reserve (204) (180)
323 332
Deferred tax liabilities:
Banking premises and equipment 3 23
Real estate partnership losses 254 254
257 277
Net deferred tax asset $ 66 $ 55
</TABLE>
The Bank's subsidiary, Orange Corporation, has state net operating loss
carryforwards of approximately $500 which expire within five years as of
December 31, 1994.
At December 31, 1994, retained earnings includes a tax loan loss reserve
of approximately $1,500,000 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, or if the Bank ceases to qualify to utilize the PTI method
under the Internal Revenue Code, the Bank will incur a tax liability at
current applicable income tax rates. The Bank anticipates that it will
continue to meet the qualifying assets test and that the $1,500,000 of
retained earnings will not be used for any purpose that would result in the
payment of income taxes.
NOTE 9 - Employee Benefits
The Bank has a qualified defined benefit plan providing for pension
benefits through membership in the Savings Banks Employees Retirement
Association ("SBERA"). All full-time employees who have reached age 21 and
have completed one year of service are automatically eligible to participate.
All participants become fully vested in the plan after three years or at age
62.
The following table sets forth the plan's funded status and amounts
recognized in the Bank's consolidated financial statements, as of October 31,
the most recent date for which such information is available:
<TABLE>
<CAPTION>
1994 1993
(In thousands)
<S> <C> <C>
Plan assets at fair value $575 $568
Actuarial present value of benefit obligations:
Vested benefits 480 407
Non-vested benefits 3 3
Accumulated benefit obligation 483 410
Effect of projected future salary increases 307 421
Projected benefit obligation for past service 790 831
Plan assets less than projected benefit obligations (215) (263)
Unrecognized liability being recognized over 26 years
commencing November 1, 1986 68 (63)
Accrued pension cost ($283) ($200)
</TABLE>
Net pension expense for the years ended December 31, includes the
following components:
<TABLE>
<CAPTION>
1994 1993 1992
(In thousands)
<S> <C> <C> <C>
Service costs earned during the year $55 $64 $48
Interest costs on projected benefit obligations 63 58 40
Actual return on plan assets (46) (40) (36)
Net amortization and deferral (4) 2 12
Net periodic pension cost $68 $84 $64
</TABLE>
The weighted average discount rates used in determining the projected
benefit obligation were 8.00% in 1994, 7.00% in 1993 and 7.00% in 1992. The
expected long-term return on plan assets was 7.00% in 1994, 7.00% in 1993 and
6.75% in 1992. The rate of increase in future compensation levels used in
determining projected benefit obligations was 6%.
Stock Option Plans
The Bank has adopted Stock Option Plans which provide for the granting
of options to purchase shares of the Bank's common stock to eligible employees
to provide incentives and encourage their continued employment. The term of
each plan is ten years. Each stock option will terminate no later than ten
years from the date of grant. The Bank has reserved 285,922 shares of common
stock for issuance pursuant to the plans. Options may be granted from time to
time at a purchase price per share of 100% of the fair market value per share
of stock on the date of the grant. At December 31, 1994, 81,049 shares were
exercisable under the plans. Transactions involving the Stock Option Plans are
as follows:
<TABLE>
<CAPTION>
Number Price Range
of Per
Shares Share
<S> <C> <C>
1987 Plan
Granted upon conversion 71,388 $ 4.44
Options exercised 17,762 $ 4.44
Options canceled (37,066)
Options outstanding from 1987 Plan 16,560 $ 4.44
1988 Plan
Options granted 69,958 $ 6.00
Options exercised 1,621 $ 6.00
Options canceled (36,822)
Option outstanding from 1988 plan 31,515 $ 6.00
1989 Plan
Options granted 37,005 $12.38
Options exercised -
Options canceled (4,031)
Options outstanding from 1989 plan 32,974 $12.38
Total options outstanding at December 31, 1993 81,049 $ 4.44-$12.38
</TABLE>
No options were exercised in 1994 or 1992. Options for 17,525 shares
were exercised by seven employees during 1993.
NOTE 10 - Commitments and Contingencies
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the needs of its customers. These
financial instruments include commitments to originate loans and fund
unadvanced amounts on lines of credit. The instruments involve, to various
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. Commitments to fund loans amounted to
$535,000 and $1,060,000 and unadvanced home equity lines of credit were
approximately $4,355,000 and $4,807,000, respectively, at December 31, 1994
and 1993.
The Bank's exposure to credit loss in the event of nonperformance by the
party to financial instruments for loan commitments and unadvanced home equity
lines is represented by the contractual amounts of those instruments.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained is based on management's credit
evaluation of the borrower.
The Bank has no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Bank or its
subsidiary is a party or of which any of their property is the subject.
By letter dated December 27, 1994, the Columbians of Orange, Inc. and
the Knights of Columbus, Orange Council number 2135 (collectively, the
"Knights") have alleged that the Bank orally agreed to make certain loans to
the Knights in the aggregate amount of not more than $610,000 and failed to
fulfill that oral commitment. The letter also alleged that in reliance on
representations by the Bank, the Knights have expended certain sums of money
and suffered certain damages in the aggregate amount of $50,000. The letter
threatens litigation under the provisions of Massachusetts General Laws
Chapter 93A, pursuant to which a court has authority to award a prevailing
plaintiff double or treble damages. The Bank denies that it has any obligation
to make these loans and, in the opinion of management, the ultimate resolution
of this matter will not be material to the Bank's financial position.
NOTE 11 - Stockholders' Equity
Upon completion of its conversion to stock ownership in 1987, the Bank
was required to establish a "Liquidation Account" in the amount equal to the
stockholders' equity of the Bank at September 30, 1986 totalling $2,372,000
for the benefit of eligible account holders who continue to maintain their
accounts with the Bank after conversion. The "Liquidation Account" amounted to
approximately $617,000 (unaudited) at December 31, 1993 and will be reduced in
proportion to reductions in the balances of eligible holder's interest in his
or her liquidation sub-account. Eligible account holders would be entitled, in
the event of a complete liquidation of the Bank and only in such event, to
receive liquidating distributions of any assets remaining after payment of all
applicable taxes, and creditors claims (including the claims of all
depositors to the withdrawal values of their deposit accounts), but before any
distributions are made to the Bank's capital stockholders, equal to their
interests at that time in the liquidation account.
The Bank may not declare or pay any cash dividend on its common stock if
the effect thereof would cause the net worth of the Bank to be reduced below
the amount required to be maintained for the liquidation account.
The Bank is required to comply with Federal regulatory requirements
which require banks to maintain a core leverage ratio (stockholders equity
less goodwill), to total assets of at least 3% and some banks to maintain a
leverage ratio of 4% to 5%. In addition, regulatory risk-based capital
guidelines establish a risk-adjusted ratio relating capital to different
categories of balance sheet assets and off-balance sheet obligations, which
are assigned to one of four risk-weighted categories. Two categories of
capital are defined: Tier 1 (stockholders equity less goodwill) and Tier 2 or
supplemental capital. The minimum risk-based capital ratio required was 8% at
December 31, 1994 and 1993.
At December 31, 1994 and 1993, the Bank's capital ratios exceeded all
regulatory capital requirements.
Note 12 - Acquisition
In August 1991, the Bank acquired the Athol branch of Peoples Savings
Bank of Worcester, purchasing $8.4 million of deposits and its operations. The
premium paid in connection with this acquisition amounted to $170,000. The
transaction was accounted for as a purchase. At December 31, 1994, the
unamortized premium was $89,000 and is included in other assets in the
accompanying consolidated balance sheets.
Note 13 - Quarterly results (In thousands except per share data)(unaudited)
<TABLE>
<CAPTION>
1994
Fourth Third Second First
<S> <C> <C> <C> <C>
Interest income $1,503 $1,469 $1,415 $1,375
Interest expense 654 626 618 609
Net interest income 849 843 797 766
Provision for possible loan losses - - - (12)
Other income 65 73 96 57
Other expense (1,009) (619) (565) (574)
Income before income taxes (95) 297 328 237
Income taxes (11) 119 131 95
Net income ($84) $178 $197 $142
Weighted average shares outstanding 754,831 769,703 742,474 741,699
Earnings per share ($0.12) $0.23 $0.27 $0.19
Cash dividend per share $0.08 $0.04 $0.04 $0.04
<CAPTION>
1993
Fourth Third Second First
<S> <C> <C> <C> <C>
Interest income $1,422 $1,460 $1,502 $1,499
Interest expense 633 658 670 706
Net interest income 789 802 832 793
Provision for possible loan losses (22) (23) (22) (23)
Other income 76 55 82 63
Other expense (534) (549) (562) (517)
Income before income taxes 309 285 330 316
Income taxes (281) 114 132 126
Net income $590 $171 $198 $190
Weighted average shares outstanding 742,446 736,005 732,273 742,567
Earnings per share $0.79 $0.23 $0.27 $0.26
Cash dividend per share $0.08 $0.04 $0.04 $0.04
</TABLE>
CFX CORPORATION - ORANGE SAVINGS BANK
PRO FORMA COMBINED CONDENSED BALANCE SHEET
March 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
CFX Orange Pro Forma CFX
(In thousands, except per share data) (Historical) (Historical) Adjustments Pro Forma
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 17,198 $ 5,633 $ 22,831
Interest bearing deposits with other banks 1,545 587 2,132
Federal Home Loan Bank of Boston stock 6,471 917 7,388
Trading securities 16,410 - 16,410
Securities available for sale 3,389 3,931 7,320
Securities held to maturity 108,286 1,503 109,789
Mortgage loans held for sale 8,059 - 8,059
Loans and leases, net 567,500 70,269 637,769
Premises and equipment 13,644 425 14,069
Mortgage servicing rights 4,129 - 4,129
Goodwill and deposit base intangibles 10,204 83 10,287
Foreclosed real estate 907 153 1,060
Other assets 22,406 1,066 23,472
$780,148 $84,567 $ - $864,715
Liabilities and Shareholders' Equity
Deposits $606,235 $74,467 $680,702
Other borrowed funds 26,914 - 26,914
Advances from Federal Home Loan Bank of Boston 55,688 - 55,688
Other liabilities 12,733 1,512 14,245
Total Liabilities 701,570 75,979 - 777,549
Shareholders' Equity
Preferred stock(1) 193 - 193
Common stock(2,3 & 4) 4,473 72 513 5,058
Paid-in capital 63,312 2,974 (513) 65,773
Retained earnings 18,216 5,521 23,737
Net unrealized losses on securities available
for sale, after tax effects (418) 21 (397)
Cost of 577,265 shares of common stock
in treasury (7,198) - (7,198)
Total Shareholders' Equity 78,578 8,588 - 87,166
$780,148 $84,567 $ - $864,715
Number of common shares outstanding 3,895 724 4,480
Common shareholders' equity per share(5) $ 19.26 $ 11.86 $ 18.66
</TABLE>
CFX CORPORATION - ORANGE SAVINGS BANK
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
For the Three Months Ended March 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
CFX Orange CFX
(In thousands, except per share data) (Historical) (Historical) Pro Forma
<S> <C> <C> <C>
Interest income:
Interest on loans and leases $11,876 $1,427 $13,303
Interest and dividends on securities 1,671 77 1,748
Other interest income 171 44 215
Total Interest and Dividend Income 13,718 1,548 15,266
Interest expense:
Interest on deposits 5,333 654 5,987
Interest on borrowings 1,388 - 1,388
Total Interest Expense 6,721 654 7,375
Net Interest and Dividend Income 6,997 894 7,891
Provision for loan and lease losses 180 (30) 150
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 6,817 924 7,741
Other income 2,012 52 2,064
Other expense 6,723 584 7,307
Income Before Income Taxes 2,106 392 2,498
Income taxes 785 157 942
Net Income 1,321 235 1,556
Preferred stock dividends 67 - 67
Net Income Available to Common Stock $1,254 $ 235 $ 1,489
Weighted average common shares outstanding 3,895 759 4,480
Earnings per common share(6) $ .32 $ .31 $ .33
</TABLE>
CFX CORPORATION - ORANGE SAVINGS BANK
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
For the Three Months Ended March 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
CFX Orange CFX
(In thousands, except per share data) (Historical) (Historical) Pro Forma
<S> <C> <C> <C>
Interest income:
Interest on loans and leases $ 9,498 $1,292 $10,790
Interest and dividends on securities 2,322 47 2,369
Other interest income 105 44 149
Total Interest and Dividend Income 11,925 1,383 13,308
Interest expense:
Interest on deposits 4,096 609 4,705
Interest on borrowings 844 - 844
Total Interest Expense 4,940 609 5,549
Net Interest and Dividend Income 6,985 774 7,759
Provision for loan and lease losses - 12 12
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 6,985 762 7,747
Other income 962 48 1,010
Other expense 6,119 573 6,692
Income Before Income Taxes 1,828 237 2,065
Income taxes 715 95 810
Net Income 1,113 142 1,255
Preferred stock dividends 67 - 67
Net Income Available to Common Stock $ 1,046 $ 142 $ 1,188
Weighted average common shares outstanding 3,847 742 4,432
Earnings per common share (6) $ .28 .19 .27
</TABLE>
CFX CORPORATION - ORANGE SAVINGS BANK
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
For the Year Ended December 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
CFX Orange CFX
(In thousands, except per share data) (Historical) (Historical) Pro Forma
<S> <C> <C> <C>
Interest income:
Interest on loans and leases $40,765 $5,303 $46,068
Interest and dividends on securities 8,277 327 8,604
Other interest income 639 132 771
Total Interest and Dividend Income 49,681 5,762 55,443
Interest expense:
Interest on deposits 16,670 2,507 19,177
Interest on borrowings 4,962 - 4,962
Total Interest Expense 21,632 2,507 24,139
Net Interest and Dividend Income 28,049 3,255 31,304
Provision for loan and lease losses 425 12 437
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 27,624 3,243 30,867
Other income 6,225 291 6,516
Other expense 25,162 2,767 27,929
Income Before Income Taxes 8,687 767 9,454
Income taxes 3,214 334 3,548
Net Income 5,473 433 5,906
Preferred stock dividends 268 - 268
Net Income Available to Common Stock $ 5,205 $ 433 $ 5,638
Weighted average common shares outstanding 3,860 755 4,445
Earnings per common share(6) $ 1.35 $ .57 $ 1.27
</TABLE>
CFX CORPORATION - ORANGE SAVINGS BANK
Notes to Pro Forma Combined Condensed Financial Statements
(1) Preferred Stock at March 31, 1995:
CFX, $1.00 par value, 4,000,000 authorized shares, of which 192,769
shares of 7.5% Series A Cumulative Convertible Stock are issued and
outstanding.
Orange, $.10 par value, 200,000 authorized share, none of which are
issued or outstanding.
(2) Common Stock at March 31, 1995:
CFX, $1.00 par value, 15,000,000 authorized shares, of which 4,472,417
shares have been issued and of which 3,895,152 shares are outstanding.
Orange, $.10 par value, 1,300,000 authorized shares, of which 724,412
shares are issued and outstanding.
(3) The pro forma financial statements reflect the exchange of Orange Common
Stock for CFX Common Stock in connection with the Merger at the Exchange
Ratio of .8075.
As required by generally accepted accounting principles, this
transaction has been reflected in the pro forma financial statements
using the pooling-of-interests method of accounting.
In combining the companies, a pro forma adjustment at March 31, 1995
was made to reflect the issuance of shares of CFX Common Stock in
exchange for the outstanding shares of Orange Common Stock.
(4) The Merger Agreement provides that each holder of Orange Common Stock,
who would otherwise have been entitled to a fraction of a share of CFX
Common Stock, will be paid the cash value of such fraction. Such cash
payments have not been reflected in the pro forma information.
(5) Pro forma common shareholders' equity per share was computed by dividing
combined historical common shareholders' equity by the sum of the common
shares outstanding at period end, adjusted to give effect to the Merger,
assuming the Exchange Ratio of .8075.
(6) Pro forma weighted average common shares outstanding represent the
weighted average common shares outstanding of CFX for each of the
respective periods plus the pro forma issuance of 584,963 shares of CFX
Common Stock in exchange for the outstanding shares of Orange Common
Stock. The pro forma effect of stock options outstanding after the
Merger is not dilutive and therefore not included in the calculation of
earnings per share.
