- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended September 30, 1996
------------------
Commission file number 1-10633
-------
CFX CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF NEW HAMPSHIRE 02-0402421
---------------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (603) 352-2502
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES XX NO
---- ----
The number of shares outstanding of each of the issuer's classes of common
stock, $0.66 2/3 par value per share, was 12,289,687 as of October 31, 1996.
- -------------------------------------------------------------------------------
CFX CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page
--------------------- ----
Item 1 Financial Statements:
Consolidated Balance Sheets -- September 30, 1996
and December 31, 1995............................. 1
Consolidated Statements of Income -- Three
months ended September 30, 1996 and 1995;
Nine months ended September 30, 1996 and 1995..... 2
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1996.............. 3
Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1996 and 1995.......... 4
Notes to Consolidated Financial Statements -
September 30, 1996................................ 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 7
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 SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
September 30, December 31,
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 51,561 $ 44,393
Federal funds sold - 2,500
---------- ----------
Cash and Cash Equivalents 51,561 46,893
Interest bearing deposits with other banks 1,306 13,475
Federal Home Loan Bank of Boston stock 9,216 8,043
Securities available for sale 259,871 193,203
Securities held to maturity 35,372 97,093
Mortgage loans held for sale 10,380 7,085
Loans and leases 1,061,776 927,430
Less allowance for loan and lease losses 15,790 15,449
---------- ----------
Net Loans and Leases 1,045,986 911,981
Premises and equipment 25,243 25,253
Mortgage servicing rights 5,181 4,373
Goodwill and deposit base intangibles 9,385 9,884
Foreclosed real estate 2,068 1,186
Other assets 65,108 26,411
---------- ----------
$1,520,677 $1,344,880
========== ==========
Liabilities and Shareholders' Equity
Deposits:
Interest bearing $1,008,775 $ 932,209
Noninterest bearing 135,126 124,615
---------- ----------
Total Deposits 1,143,901 1,056,824
Short-term borrowed funds 87,022 44,012
Advances from Federal Home Loan Bank of Boston 139,065 102,814
Other liabilities 21,347 14,198
---------- ----------
Total Liabilities 1,391,335 1,217,848
---------- ----------
Shareholders' Equity
Common stock, par value $.66 2/3 per share-authorized
22,500,000 shares, issued 12,257,215 shares at September
30, 1996 and 12,078,268 shares at December 31, 1995 8,172 8,052
Paid-in capital 86,680 85,902
Retained earnings 36,696 32,488
Net unrealized gains (losses) on securities available for sale,
after tax effects (2,194) 590
Cost of common stock in treasury (12) -
---------- ----------
Total Shareholders' Equity 129,342 127,032
---------- ----------
$1,520,677 $1,344,880
========== ==========
Number of common shares outstanding 12,257 12,078
---------- ----------
Common shareholders' equity per share $ 10.55 $ 10.52
---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $22,419 $19,539 $64,828 $56,708
Interest on investment securities:
Taxable 4,490 4,223 13,316 12,304
Tax-exempt 188 238 637 763
------- ------- ------- -------
4,678 4,461 13,953 13,067
Dividends on marketable equity securities 78 54 245 182
Other 241 445 1,022 1,379
------- ------- ------- -------
Total Interest and Dividend Income 27,416 24,499 80,048 71,336
------- ------- ------- -------
Interest expense:
Interest on deposits 10,163 9,543 30,189 27,626
Interest on borrowings:
Short-term 2,836 1,914 7,414 5,187
Long-term 6 3 14 8
------- ------- ------- -------
Total Interest Expense 13,005 11,460 37,617 32,821
------- ------- ------- -------
Net Interest and Dividend Income 14,411 13,039 42,431 38,515
Provision for loan and lease losses 680 625 2,335 2,283
------- ------- ------- -------
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 13,731 12,414 40,096 36,232
------- ------- ------- -------
Other income:
Service charges on deposit accounts 1,020 947 2,996 2,796
Loan servicing fees 405 443 1,180 1,296
Net gains on trading securities - 273 153 791
Net gains (losses) on investment securities (13) 73 190 182
Net gains on sales of loans 156 178 932 393
Leasing activities 459 530 1,820 1,567
Trust fees 553 554 1,717 1,638
Pension settlement gain 877 - 877 -
Other 958 702 2,374 2,042
------- ------- ------- -------
4,415 3,700 12,239 10,705
------- ------- ------- -------
Other expense:
Salaries and employee benefits 6,057 5,932 17,707 17,411
Occupancy and equipment expense 1,685 1,658 5,034 4,924
Professional fees 385 594 1,493 1,837
Advertising and marketing 329 442 1,382 1,184
Operation of foreclosed real estate 102 106 255 240
FDIC deposit insurance 98 42 294 1,202
Goodwill and deposit base intangible amortization 167 164 502 532
SAIF special assessment 908 - 908 -
Merger expenses 4,522 - 4,522 -
Other 2,334 2,323 7,517 7,197
------- ------- ------- -------
16,587 11,261 39,614 34,527
------- ------- ------- -------
Income Before Income Taxes 1,559 4,853 12,721 12,410
Income taxes 1,108 1,624 4,702 4,234
------- ------- ------- -------
Net Income 451 3,229 8,019 8,176
Preferred stock dividends - - - 89
------- ------- ------- -------
Net Income Available to Common Stock $ 451 $ 3,229 $ 8,019 $ 8,087
------- ------- ------- -------
Weighted average common shares outstanding 12,236 11,998 12,215 11,818
------- ------- ------- -------
Earnings per common share $ .04 $ .27 $ .66 $ .68
------- ------- ------- -------
Dividends declared per common share $ .20 $ .15 $ .38 $ .45
------- ------- ------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gains (Losses)
on Securities
Common Stock Paid-in Retained Available Treasury
(In thousands) Shares Dollars Capital Earnings For Sale Stock Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 12,078 $8,052 $85,902 $32,488 $ 590 $ - $127,032
Net income - - - 8,019 - - 8,019
Common cash dividends
declared ($.38 per share) - - - (3,811) - - (3,811)
Issuance of common stock
under stock option plan 164 110 655 - - - 765
Issuance of common stock under
employee stock purchase plan 17 11 148 - - - 159
Increase in net unrealized losses on
securities available for sale - - - - (2,784) - (2,784)
Cost of shares acquired for treasury - - - - - (12) (12)
Fractional shares paid out (2) (1) (25) - - - (26)
------ ------ ------- ------- ------- ---- --------
Balance at September 30, 1996 12,257 $8,172 $86,680 $36,696 $(2,194) $(12) $129,342
====== ====== ======= ======= ======= ==== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 8,019 $ 8,176
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 3,803 3,314
Amortization of deferred credit on leasehold residual (1,059) -
Provision for loan and lease losses 2,335 2,283
Provision for foreclosed real estate losses - 31
Loans originated and acquired for sale (77,968) (88,254)
Principal balance of loans sold 74,673 85,043
Net gain on sale of portfolio loans (932) (393)
Net gain on sale of foreclosed real estate (51) (36)
Net gains on investment securities (343) (178)
Net increase in trading securities - (22,522)
Net deferred income tax provision 603 1,124
Other (7,449) (2,289)
--------- --------
Net Cash Provided (Used) by Operating Activities (1,631) (13,701)
--------- --------
Investing Activities
Proceeds from sales of securities available for sale 23,120 12,348
Purchases from maturities of securities available for sale 66,937 10,190
Purchase of securities available for sale (80,276) (29,537)
Proceeds from maturities of securities held to maturity 25,330 34,247
Purchases of securities held to maturity (40,933) (33,594)
Proceeds from the sale of, or payments on, foreclosed real estate 609 643
Purchase of Federal Home Loan Bank of Boston (FHLBB) stock (1,173) (29)
Net decrease (increase) in interest bearing deposits with other banks 12,169 (26)
Net increase in loans and leases (132,954) (16,828)
Purchase of bank-owned life insurance (30,000) -
Purchases of premises and equipment (2,374) (1,541)
--------- --------
Net Cash Used by Investing Activities (159,545) (24,127)
--------- --------
Financing Activities
Net increase (decrease) in noninterest bearing deposits and savings
accounts 5,613 (19,782)
Net increase (decrease) in time certificates of deposit 81,464 84,473
Net increase in short-term borrowings 43,010 4,608
Proceeds from FHLBB advances with maturities in excess of three months 225 -
Payments of FHLBB advances with maturities in excess of three months (1)
Net proceeds from (payments of) FHLBB advances with maturities of
three months or less 36,027 (16,500)
Common cash dividends paid (4,654) (3,505)
Preferred cash dividends paid - (89)
Proceeds from issuance of common stock under dividend reinvestment plan - 209
Proceeds from issuance of common stock under stock option plan 765 336
Proceeds from issuance of common stock under employee stock purchase plan 159 35
Fractional shares paid out (26) (18)
--------- --------
Net Cash Provided by Financing Activities 162,582 49,767
--------- --------
Decrease in Cash and Cash Equivalents 4,668 11,939
Cash and cash equivalents at beginning of period 46,893 43,587
--------- --------
Cash and Cash Equivalents at End of Period $ 51,561 $ 55,526
========= ========
Supplementary Information:
Interest paid on deposit accounts $ 28,958 $ 26,802
Interest paid on borrowed funds 6,774 5,025
Income taxes paid 1,533 4,365
Transfers from loans to foreclosed real estate 2,666 2,072
Transfers from securities held to maturity to securities available for sale 76,849 -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
- -------------------------------------------------------------------------------
Note A-Basis of Presentation
- -------------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended September 30, 1996 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, 1995.
- -------------------------------------------------------------------------------
Note B-Acquisitions
- -------------------------------------------------------------------------------
On July 1, 1996, the Company acquired The Safety Fund Corporation ("Safety
Fund") and the Milford Co/operative Bank ("Milford").
Pursuant to the definitive agreements, each of Safety Fund's 1,665,000
outstanding shares of common stock and Milford's 689,000 outstanding shares
of common stock were converted into 1.7 shares and 2.6446 shares,
respectively, of the Company's common stock, resulting in the issuance of
2,831,000 shares and 1,823,000 shares, respectively, of the Company's common
stock to Safety Fund and Milford shareholders. Cash was paid in lieu of
issuing fractional shares.
Milford was a state-chartered co/operative bank, headquartered in Milford,
New Hampshire. Milford was merged into CFX's New Hampshire banking
subsidiary, CFX Bank, as part of the transaction.
Safety Fund was a bank holding company headquartered in Fitchburg,
Massachusetts. Safety Fund's subsidiary bank, Safety Fund National Bank,
continues to operate as a subsidiary of the Company.
Both the Safety Fund and Milford mergers were accounted for by the pooling-
of-interests method of accounting. The financial information for all prior
periods presented has been restated to present the combined financial
condition and results of operations as if the combination had been in effect
for all periods presented.
As a result of these acquisitions, the Company recorded a charge to earnings
in the third quarter of $3,722,000, on an after-tax basis for merger related
costs. The one-time after-tax charge of the transactions pertains to the
following areas: premises and equipment, $269,000; personnel, $855,000; and
other, $2,598,000. Premises and equipment costs consist primarily of write-
offs due to consolidation of operation centers, data processing, termination
charges, and duplication of computer hardware, software, and certain
telecommunications equipment. Personnel costs consist primarily of charges
related to employee severance and employee outplacement assistance. Other
costs include investment banking fees, legal and accounting fees, due
diligence costs, proxy registration/filing fees and mailing and printing
costs. A significant portion of other costs are capitalized for tax purposes
and, therefore, are not tax deductible.
- -------------------------------------------------------------------------------
Note C-Forward Looking Statements
- -------------------------------------------------------------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings per share, cost savings related to
acquisitions, credit quality and other financial business matters for 1996
and, in certain instances, subsequent periods. The Company cautions that
these forward-looking statements are subject to numerous assumptions, risks
and uncertainties, and that statements for periods subsequent to 1996 are
subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause
actual results to differ materially from such forward-looking statements:
continued pricing pressures on loan and deposit products, actions of
competitors, changes in economic conditions, the extent and timing of
actions of the Federal Reserve Board, continued customer disintermediation,
customers' acceptance of the Company's products and services, and the extent
and timing of legislative and regulatory actions and reforms.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the
Company assumes no duty to update them to reflect new, changing or
unanticipated events or circumstances.
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
September 30, 1996
- -------------------------------------------------------------------------------
General
- -------------------------------------------------------------------------------
All information within this section should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this Form
10-Q. All references in the discussion to financial condition and results of
operations are to the consolidated position of the Company and its
subsidiaries taken as a whole.
CFX Corporation is a bank holding company incorporated under the laws of the
State of New Hampshire. The Company's wholly-owned subsidiaries are CFX
Bank, headquartered in Keene, New Hampshire, Orange Savings Bank,
headquartered in Orange, Massachusetts, and Safety Fund National Bank,
headquartered in Fitchburg, Massachusetts.
CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX
Capital Systems, Inc. (CFX Capital) and CFX Financial Services, Inc. (CFX
Financial). CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc.
which engages in mortgage banking. CFX Financial owns 51% of CFX Funding
L.L.C. (CFX Funding), which engages in the facilitation of lease financing
and securitization. Orange Savings Bank has one wholly-owned subsidiary, OSB
Securities Corp, which is engaged in investment activities. Safety Fund
National Bank's direct subsidiaries, all of which are wholly-owned, are
Prichard Plaza Realty Corp. ("Prichard Plaza"), which engages in property
management, The Lenders/Massachusetts, Inc. ("Lenders"), which engages in
mortgage banking, and Safety Fund Securities Corp., which is engaged in
investment activities.
The 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.
In the third quarter, the Company announced a stock repurchase program
whereby the Company would purchase and hold as treasury stock up to 150,000
shares of its common stock, or approximately 1.25% of those outstanding. The
shares to be acquired will depend on market conditions and will be used in
connection with the Company's employee stock purchase plan, stock option
plans, dividend reinvestment plan, and such other corporate purposes as may
be determined.
- -------------------------------------------------------------------------------
Results of Operations - General
- -------------------------------------------------------------------------------
The following tables set forth comparisons of average interest earning
assets and interest bearing liabilities, and interest income and interest
expense expressed as a percentage of the related asset or liability. In
order to reflect the economic impact of the Company's tax-exempt loans and
leases and investments in state and municipal securities and to present data
on a comparative basis, the income from and yields on these loans and leases
and securities have been restated to a taxable-equivalent basis (using a
34.00% and 38.62% tax rate, respectively). The taxable-equivalent income
adjustments for loans and leases are $85,000 and $79,000 for the three
months ended September 30, 1996 and 1995, respectively, and $259,000 and
$189,000 for the nine months ended September 30, 1996 and 1995,
respectively. The taxable-equivalent income adjustments for investment
securities are $118,000 and $150,000 for the three months ended September
30, 1996 and 1995, respectively, and $401,000 and $480,000 for the nine
months ended September 30, 1996 and 1995, respectively. These adjustments,
however, are for comparison purposes only and have no impact on reported net
income.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend earning assets:
Loans and leases $1,041,765 $22,254 8.50% $ 878,027 $19,386 8.76%
Tax-exempt loans and leases 9,111 250 10.92 7,823 232 11.77
Taxable securities 277,904 4,490 6.43 286,724 4,223 5.84
Tax-exempt securities 16,178 306 7.52 21,019 388 7.32
Other 19,681 319 6.45 35,154 499 5.63
---------- ------- ---------- -------
Total interest earning assets 1,364,639 27,619 8.05 1,228,747 24,728 7.98
------- -------
Noninterest earning assets 123,825 94,228
---------- ----------
Total $1,488,464 $1,322,975
---------- ----------
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $ 450,657 2,670 2.36 $ 458,787 2,886 2.50
Time deposits 538,703 7,493 5.53 470,824 6,657 5.61
Advances from Federal Home Loan
Bank of Boston 135,409 1,915 5.63 82,477 1,302 6.26
Other borrowed funds 80,059 927 4.61 49,305 615 4.95
---------- ------- ---------- -------
Total interest bearing liabilities 1,204,828 13,005 4.29 1,061,393 11,460 4.28
------- -------
Noninterest bearing liabilities:
Demand deposits 130,722 120,382
Other 19,938 16,418
Shareholders' equity 132,976 124,782
---------- ----------
Total $1,488,464 $1,322,975
========== ==========
Net interest and dividend income $14,614 $13,268
======= =======
Interest rate spread 3.76% 3.70%
Net interest margin 4.26% 4.28%
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend earning assets:
Loans and leases $ 992,582 $64,325 8.66% $ 864,794 $56,341 8.71%
Tax-exempt loans and leases 8,816 762 11.55 6,951 556 10.69
Taxable securities 291,309 13,316 6.11 278,485 12,304 5.91
Tax-exempt securities 18,749 1,038 7.40 23,138 1,243 7.18
Other 25,056 1,267 6.75 35,652 1,561 5.85
---------- ------- ---------- -------
Total interest earning assets 1,338,512 80,708 8.07 1,209,020 72,005 7.96
------- -------
Noninterest earning assets 112,612 96,679
---------- ----------
Total $1,449,124 $1,305,699
========== ==========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $ 450,646 7,963 2.36 $ 467,574 8,889 2.54
Time deposits 532,142 22,226 5.58 463,376 18,737 5.41
Advances from Federal Home Loan
Bank of Boston 115,808 4,947 5.71 72,766 3,340 6.30
Other borrowed funds 72,562 2,481 4.57 46,003 1,765 5.13
---------- ------- ---------- -------
Total interest bearing liabilities 1,171,158 37,617 4.29 1,049,719 32,821 4.18
------- -------
Noninterest bearing liabilities:
Demand deposits 128,275 118,447
Other 19,924 15,545
Shareholders' equity 129,767 121,988
---------- ----------
Total $1,449,124 $1,305,699
========== ==========
Net interest and dividend income $43,091 $39,184
======= =======
Interest rate spread 3.78% 3.78%
Net interest margin 4.31% 4.33%
</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 For the Nine Months Ended
September 30, September 30,
1996 vs. 1995 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
- ---------------------------------------------------------------------------------------------
(In thousands) Volume Rate Net Volume Rate Net
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividends earned on:
Loans and leases $3,549 $(663) $2,886 $8,015 $ 175 $8,190
Investments (224) 409 185 431 376 807
Other (244) 64 (180) (194) (100) (294)
------ ----- ------ ------ ----- ------
Total interest and
dividend income 3,081 (190) 2,891 8,252 451 8,703
------ ----- ------ ------ ----- ------
Interest paid on:
Savings and time deposits 900 (280) 620 2,619 (56) 2,563
Borrowed funds 1,106 (181) 925 2,200 33 2,233
------ ----- ------ ------ ----- ------
Total interest expense 2,006 (461) 1,545 4,819 (23) 4,796
------ ----- ------ ------ ----- ------
Change in net interest
and dividend income $1,075 $ 271 $1,346 $3,433 $ 474 $3,907
====== ===== ====== ====== ===== ======
</TABLE>
Net Income & Net Income Available to Common Stock
Exclusive of charges for mergers and other adjustments, net income available
to common stock was $4,191,000, or $.34 per share, for the quarter ended
September 30, 1996, compared to $3,229,000, or $.27 per share, for the
corresponding period a year ago. On the same basis as described above, net
income available to common stock for the nine months ended September 30,
1996 amounted to $11,759,000 or $.96 per share, compared to $8,087,000 or
$.68 per share, for the corresponding period a year ago.
A reconciliation of net income available to common stock to net income
available to common stock before charges for mergers and other adjustments
for the quarter and nine months ended September 30, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Earnings Reconciliation
- -----------------------------------------------------------------------------------
September 30, 1996 Three Months Nine Months
(Dollars in thousands, except per share data) Ended Ended
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net Income Available to Common Stock (As Reported) $ 451 $ 8,019
Add (Subtract) - After Tax:
Merger Costs (1) 3,722 3,722
FDIC-SAIF Settlement (2) 557 557
Gain From Settlement of Pension Plans (3) (539) (539)
------ -------
3,740 3,740
------ -------
Net Income Available to Common Stock
Before Merger and Other Adjustments $4,191 $11,759
------ -------
Earnings Per Common Share:
Net Income Available to Common Stock (As Reported) $ .04 $ .66
------ -------
Net Income Available to Common Stock
Before Merger and Other Adjustments $ .34 $ .96
------ -------
<F1> Costs related to The Safety Fund Corporation and Milford Co/operative
Bank mergers completed on July 1, 1996. (See Note B - Acquisitions
in the "Notes to Consolidated Financial Statements".)
<F2> On September 30, 1996, a law was passed to recapitalize the FDIC -
Savings Association Insurance Fund (SAIF) through a special assessment
of .657 percent of SAIF insured deposits (i.e., Milford Co/operative Bank
deposits).
<F3> The Company terminated CFX Corporation's and Safety Fund's pension plans
and transferred the assets and liabilities to a multi-employer pension
plan.
</TABLE>
After charges for mergers and other adjustments, net income available to
common stock was $451,000, or $.04 per share, and $8,019,000, or $.66 per
share, for the quarter and nine months ended September 30, 1996,
respectively, compared to $3,229,000, or $.27 per share, and $8,087,000, or
$.68 per share, for the corresponding periods a year ago, respectively.
The increase in earnings before merger costs and other adjustments was
primarily due to increased core earnings (net interest and dividend income
and recurring noninterest income). The stronger core earnings were the
result of a $130 million, or 15%, increase in average loans and leases over
the past twelve months, and an increased focus on the generation of
noninterest income. However, a portion of the increase in income was offset
by an increase in the provision for loan and lease losses and certain
operating expenses.
Total core earnings were $17,949,000 and $53,793,000 for the three and nine
months ended September 30, 1996, compared to $16,739,000 and $49,220,000 for
the same periods a year ago.
Net Interest and Dividend Income
Taxable-equivalent net interest and dividend income was $14,614,000, and
$43,091,000, respectively, for the three and nine months ended September 30,
1996, compared to $13,268,000, and $39,184,000 for the same periods a year
ago. The increase in net interest and dividend income in the 1996 periods
was principally due to higher average interest earning assets and higher
demand deposits.
The increase in average interest earning assets resulted principally from
growth in loans and leases (see "Financial Condition - Loans and Lease"
section of this Management's Discussion and Analysis), as loan and lease
demand increased in the current environment.
The interest rate spread, along with the net interest margin, stayed fairly
consistent in the 1996 periods with the 1995 periods. The Company's net
interest margin of 4.26% and 4.31% for the three and nine months ended
September 30, 1996 decreased slightly from 4.28% and 4.33% for the
corresponding periods a year ago. The decrease in the net interest margin is
partially due to the Company's investment in Bank-Owned Life Insurance
("BOLI") which totaled $30 million at September 30, 1996. The investment
occurred in the second and third quarters of 1996 and generates non-interest
income for the Company, tax free, as the cash surrender value of the
policies increase. However, these insurance policies are funded with
wholesale borrowings, which decreases the net interest margin. (For more
information on BOLI, see "Other Assets" section of this analysis.)
Volatile interest rates can have a material impact on the performance of
financial institutions. Since late 1993 interest rates have alternated
between periods of significant increase and rapid decline. The Company
attempts to manage and minimize the earnings impact of changing interest
rates by comprehensively assessing the impact of interest rate changes on
forecasted income and equity levels. Included in these analyses are
estimates of prepayment variability in certain asset categories, changes in
mix and cost of deposits and other liabilities, other imbedded options
throughout the balance sheet, and equity leverage or arbitrage activities.
Policy guidelines for interest rate risk exposure are established and have
allowed the Company to maintain a relatively stable interest margin
throughout several interest rate cycles.
Provision for Loan and Lease Losses
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses realized, and recoveries received, are
charged or credited directly to the allowance. The Company's management
determines the level of the allowance for loan and lease losses based upon a
review of the Company's loan and lease portfolio. This review identifies
specific problem loans and leases requiring allocations of the allowance and
also estimates an allocation for potential loans and leases based on current
economic conditions and historical experience.
The provision for loan and lease losses in the three and nine months ended
September 30, 1996 was $680,000, and $2,335,000, respectively, compared to
$625,000 and $2,283,000, respectively, for the same periods a year ago. The
higher provision for loan and lease losses in 1996 is principally the result
of continued growth in the loan portfolio, the change in loan mix toward
consumer loans and leases, and the higher net charge-offs in 1996 compared
to 1995. Total net charge-offs amounted to $1,994,000 for the nine months
ended September 30, 1996 as compared to $1,078,000 for the nine months ended
September 30, 1995. The higher net charge-offs in 1996 were principally due
to residential real estate foreclosures and the resolution of several long-
term problem commercial loan relationships.
At September 30, 1996, nonperforming loans stood at $9,206,000, or .87% of
total loans and leases, compared to $10,034,000, or 1.08% of total loans and
leases, as of December 31, 1995. The allowance for loan and lease losses as
a percentage of nonperforming loans as of September 30, 1996 and December
31, 1995 amounted to 171.52% and 153.97%, respectively.
Other Income
Other income for the three and nine months ended September 30, 1996 totaled
$4,415,000 and $12,239,000, respectively, compared to $3,700,000, and
$10,705,000 for the same periods a year ago.
The $715,000 increase in other income for the third quarter of 1996 compared
to third quarter of 1995 is principally due to the recognition of a pre-tax
pension settlement gain of $877,000. The Company terminated CFX
Corporation's and Safety Fund's pension plans and transferred the assets and
liabilities to a multi-employer pension plan. This transaction resulted in a
settlement gain and a reduction of current year pension expense. In
addition, other income in this category increased $239,000 for the three
months ended September 30, 1996, compared to the same period in prior year
principally as a result of investing in Bank-Owned Life Insurance (BOLI).
This investment, totaling $30,000,000 at September 30, 1996, generated
$315,000 in other income during the third quarter of 1996. This investment
was not in place in 1995. (For more information on BOLI, see "Other Assets"
section of this analysis.) Offsetting these increases in other income were
decreases in net gains in trading securities of $273,000 and a reduction in
leasing activities by $71,000. The leasing income was lower in 1996 as CFX
Funding completed no lease securitizations or structured loan sales in the
third quarter compared to one in the third quarter of 1995.
Other Expense
Other expense for the three and nine months ended September 30, 1996 totaled
$16,587,000 and $39,614,000, respectively, compared to $11,261,000 and
$34,527,000, respectively, for the same periods a year ago.
Other expenses increased $5,326,000 in the three month period ended
September 30, 1996, compared to the same period a year ago, principally due
to the merger expenses associated with the purchases of Safety Fund and
Milford totaling $4,522,000 (see Note B - Acquisitions in the "Notes to
Consolidated Financial Statements" section) and the one-time SAIF special
assessment of $908,000 which was previously discussed. These expenses were
partially offset by a reduction in professional fees of $209,000 in the
third quarter of 1996, compared to the same period in 1995. This reduction
in professional fees is due to efficiencies gained in the two mergers. All
other third quarter expenses for 1996 were in line with those of 1995.
For the nine months ended September 30, 1996, other expenses increased
$5,087,000 over the same period a year ago. This increase was primarily due
to the merger-related expenses and SAIF special assessment incurred in the
third quarter totaling $5,430,000, partially offset by a reduction in FDIC
deposit insurance premiums of $908,000. The decrease in the year-to-date
professional fees of $344,000 of which most was from efficiencies gained
from the 1996 mergers, was partially offset from increases in advertising
and marketing expenses of $198,000. The marketing expense increase was
principally due to the promotion of a free ATM card and other marketing
initiatives. The increase in the "other" other expense category of $320,000
for the period was due to various items, none of which were individually
significant.
Income Tax
Income taxes for the three and nine months ended September 30, 1996 were
71.07% and 36.96%, respectively, of pretax income, compared to 33.46%, and
34.12% of pretax income for the same periods a year ago. The effective tax
rate for the nine months ended September 30, 1996 was higher due to the
merger-related expenses of $4,522,000, $2,537,000 of which were not tax
deductible. Excluding these charges, the effective tax rates for the three
and nine months ended September 30, 1996 would have been 27.05% and 30.82%,
respectively. The lower rates for 1996 are primarily due to higher tax
credits pertaining to low income housing projects and the reversal of a
portion of a valuation allowance established by Safety Fund for net
operating loss carryforwards at one of their subsidiaries as a result of
current and projected profits from that subsidiary.
- -------------------------------------------------------------------------------
Financial Condition
- -------------------------------------------------------------------------------
Investment Securities
The carrying value and estimated fair value of investment securities at
September 30, 1996 and December 31, 1995, follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
September 30, December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Treasury and agency obligations $160,338 $160,338 $102,531 $102,531
Corporate bonds 3,185 3,185 5,072 5,072
Federal agency mortgage pass-through securities 70,459 70,459 65,118 65,118
Other asset backed collateralized mortgage
obligations (CMO's) 19,487 19,487 14,747 14,747
State and municipal 435 435 - -
Marketable equity securities 5,686 5,686 5,454 5,454
Other securities 281 281 281 281
-------- -------- -------- --------
Total securities available for sale $259,871 $259,871 $193,203 $193,203
======== ======== ======== ========
Securities held to maturity:
Debt securities:
U.S. Treasury and agency obligations $ 10,337 $ 10,230 $ 48,323 48,879
State and municipal 15,383 15,399 19,229 19,345
Federal agency mortgage pass-through securities 9,352 9,402 21,243 21,502
Other asset backed, collateralized mortgage
obligations (CMO's) - - 8,098 8,243
Other securities 300 256 200 172
-------- -------- -------- --------
Total securities held to maturity $ 35,372 $ 35,287 $ 97,093 $ 98,141
======== ======== ======== ========
</TABLE>
As discussed in Note B - Acquisitions in the "Notes to Consolidated
Financial Statements" section, the Company acquired The Safety Fund
Corporation and the Milford Co/operative Bank on July 1, 1996. To be
consistent with the Company's current interest risk profile, certain
securities held to maturity with an amortized cost of $76,849,000 and a net
unrealized loss of $2,522,000 were transferred to securities available for
sale.
Loans and Leases
The table below sets forth the composition of the Company's loan and lease
portfolio, net of unearned income and deferred costs, at the dates
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
September 30, December 31,
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
% of % of
Balances Portfolio Balances Portfolio
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Residential $ 672,313 63.32% $586,489 63.24%
Construction 8,616 0.81 9,190 0.99
Commercial 139,890 13.18 141,618 15.27
Commercial, financial, and agricultural 114,923 10.82 104,412 11.26
Warehouse lines of credit to leasing companies 22,435 2.11 12,906 1.39
Consumer lease financing 54,963 5.18 24,399 2.63
Other consumer 48,636 4.58 48,416 5.22
---------- ------ -------- ------
1,061,776 100.00% 927,430 100.00%
====== ======
Less allowance for loan and lease losses 15,790 15,449
---------- --------
Net loans and leases $1,045,986 $911,981
========== ========
</TABLE>
The $134,346,000 increase in total loans and leases was primarily due to a
$85,824,000 increase in residential real estate loans, a $10,511,000
increase in commercial business loans, and a $30,564,000 increase in
indirect automobile leasing. Residential loan production is generated by a
combination of originations and purchases by the Company's mortgage banking
affiliate, CFX Mortgage. The consumer lease paper is generated through a
lease program targeted towards automobile dealerships throughout New
Hampshire and central Massachusetts. In addition, lending volumes remain
strong in the warehouse lines of credit to leasing companies participating
in CFX Funding's lease financing and securitization programs. CFX Funding
services approximately $86,000,000 in leases for others.
Other Assets
During 1996, the Company invested $30,000,000 in Bank-Owned Life Insurance
("BOLI") to help finance the cost of certain employee benefit plan expenses.
The BOLI investment is accomplished through the purchase of life insurance
on the lives of certain employees through two insurance companies with a
Standard & Poors rating of AA+ or better. The Company, not the employee or
family, is the beneficiary of the insurance policies. The first source of
income is from the growth of the cash value of the policy. The cash value
increases each year as interest (rate is guaranteed each year and changes
annually to reflect market rates) is added by the insurance company. The
second source of income comes from the insurance proceeds paid to the bank
upon the death of an employee. The payment of the insurance proceeds and the
earnings from the cash value are income tax free (unless the policy is
surrendered). The Company finances the cost of the premium payment with
wholesale funding (i.e. Federal Home Loan Bank borrowings). While the
earnings from the investment are captured in other income as the cash
surrender value (CSV) increases, the net interest margin is negatively
impacted as a result of funding the investment with wholesale borrowings.
- -------------------------------------------------------------------------------
Risk Elements
- -------------------------------------------------------------------------------
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying value of the assets
is reasonable and in accordance with generally accepted accounting
principles, regulatory requirements, and the Company's policies. Loans are
placed on nonaccrual status when management determines that significant
doubt exists as to the collectibility of principal or interest on a loan.
Moreover, loans past due 90 days or more as to principal or interest are
placed on nonaccrual status.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
September 30, December 31,
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual (nonperforming) loans $ 9,206 $10,034
Foreclosed real estate 2,068 1,236
Valuation allowance on foreclosed real estate - (50)
------- -------
Total nonperforming assets $11,274 $11,220
------- -------
Nonperforming loans as a percent of total loans and leases .87% 1.08%
------- -------
Nonperforming assets as a percent of total assets .74% .83%
------- -------
</TABLE>
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
September 30, December 31,
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------
% of % of
Balances Portfolio Balances Portfolio
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $ 6,685 72.62% $ 6,177 61.56%
Commercial 1,933 21.00 1,710 17.04
Commercial, financial, and agricultural 527 5.72 2,039 20.32
Consumer and other 61 .66 108 1.08
------- ------ ------- ------
9,206 100.00% 10,034 100.00%
------- ------ ------- ------
Foreclosed real estate:
Residential 1,197 57.88% 735 61.97%
Construction 477 23.07 128 10.79
Commercial 394 19.05 373 31.45
Valuation allowance - - (50) (4.22)
------- ------ ------- ------
2,068 100.00% 1,186 100.00%
------- ------ ------- ------
Total nonperforming assets $11,274 $11,220
------- -------
</TABLE>
The increase in foreclosed real estate over the December 31, 1995 balance is
more reflective of the increase in the size of the overall portfolio than an
indication of economic deterioration. In addition, efforts have been made to
expedite the foreclosure process when other solutions are not advantageous,
thus increasing foreclosure totals and decreasing nonperforming loan totals.
Loans delinquent less than 90 days have been decreasing since year end from
$27,149,000 at December 31, 1995 to $19,405,000 at September 30, 1996. The
reduction is primarily noted in the residential real estate portfolio and is
principally due to a more intensified collection process.
The following table provides a rollforward of the Company's foreclosed real
estate for the periods indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Nine Months Ended September 30, (In thousands) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,186 $ 2,599
Reclassification, net, to nonperforming loans to
reflect adoption of SFAS No. 114 - (714)
Additions 2,221 2,320
Sales and other (1,339) (3,057)
------- -------
Balance at end of period $ 2,068 $ 1,148
======= =======
</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>
- ------------------------------------------------------------------
Nine Months Ended September 30, (In thousands) 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $15,449 $14,402
Provision for loan and lease losses 2,335 2,283
Loans charged-off (2,508) (1,727)
Recoveries of loans previously charged-off 514 649
------- -------
Balance at end of period $15,790 $15,607
------- -------
Allowance for loan and lease losses
as a percent of total loans and leases 1.49% 1.68%
------- -------
Allowance for loan and lease losses as a
percent of total nonperforming loans 171.52% 155.54%
------- -------
Net charge-offs/average loans and leases (1) .27% .17%
------- -------
<F1> Annualized
</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. However, if economic
conditions deteriorate, the Company may have to increase the allowance for
loan and lease losses from its current level.
- -------------------------------------------------------------------------------
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>
- -----------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 1995
- -----------------------------------------------------------------------------------
(Dollars in thousands) Amount Rates Amount Rates
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 128,275 - $ 118,447 -
Regular savings deposits 169,180 2.70% 166,581 2.82%
NOW & money market deposits 281,466 2.15 300,993 2.39
Time deposits 469,489 5.57 431,001 5.34
---------- ----------
Total retail deposits 1,048,410 3.51 1,017,022 3.43
Brokered time deposits 62,653 5.67 32,375 6.28
---------- ----------
Total deposits $1,111,063 3.63% $1,049,397 3.52%
---------- ----------
Borrowed Funds:
Advances from Federal Home Loan Bank
of Boston $ 115,808 5.71% $ 72,766 6.30%
Other borrowed funds 72,562 4.57 46,003 5.13
---------- ----------
Total borrowed funds $ 188,370 5.27% $ 118,769 5.85%
---------- ----------
</TABLE>
Over the past twelve months, the Company has increased average demand
deposits by $9,828,000 and average interest bearing retail deposits by
$21,560,000. The majority of the increase in overall deposits is the result
of two de novo New Hampshire branches opened in Gilford (December, 1994) and
Manchester (June, 1995). In addition, as a result of fixed rate deposits
(time deposits) becoming more attractive to our customers, the Company has
experienced a shift in deposits from shorter-term variable rate deposits
(savings, NOW, and money market accounts) to longer-term fixed rate
deposits.
The increase in advances from the Federal Home Loan Bank of Boston, short-
term borrowed funds, and brokered deposits funded asset growth over the past
twelve months. Management customarily directs movement of funding between
brokered deposits, advances from the Federal Home Loan Bank and repurchase
agreements (included in other borrowed funds) in order to achieve a more
favorable cost of funds.
- -------------------------------------------------------------------------------
Shareholders' Equity
- -------------------------------------------------------------------------------
Shareholders' equity increased by $2,310,000 as of September 30, 1996 from
$127,032,000 at December 31, 1995 to $129,342,000 at September 30, 1996. The
increase was due to $8,019,000 in net income, issuance of $765,000 in common
stock under the stock option plan, issuance of $159,000 in common stock
under the employee stock purchase plan offset by a $2,784,000 decrease in
net unrealized losses on securities available for sale, $26,000 paid for
fractional shares on a 3 for 2 stock split, cost of shares acquired for
treasury of $12,000, and $3,811,000 in common cash dividends.
Historically, CFX has, in accordance with its strategic plans, with the
exception of reacting to the economic downturn from 1992 and 1994, declared
cash dividends on average in excess of 80% of earnings on an annual basis in
order to maximize shareholder value to appropriately leverage the Company's
capital.
However, as a result of the pending acquisitions described in Note B -
Acquisitions of the "Notes to Consolidated Financial Statements", the
Company was required to omit its second quarter dividend in 1996 in order to
comply with certain technical accounting rules relating to the payment of
special dividends preceding a business combination. Omission of the second
quarter dividend in an amount equal to the special dividend paid by CFX in
January, 1996, permits CFX to account for its pending mergers with The
Safety Fund Corporation and Milford Co/operative Bank as pooling-of-
interests.
- -------------------------------------------------------------------------------
Asset/Liability Management
- -------------------------------------------------------------------------------
The Company's primary objective regarding asset/liability management is to
position the Company so that changes in interest rates do not have a
materially adverse impact upon forecasted net income and the net fair value
of the Company. The Company's primary strategy for accomplishing its
asset/liability management objective is achieved by matching the cash flows
and repricing characteristics of assets, liabilities, and off-balance-sheet
items.
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of
the Company assuming instantaneous, permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net income and the
net market value of the Company as a result of these interest rate changes
represent greater interest rate risk than do smaller increases or decreases.
The results of the financial planning model are highly dependent on numerous
assumptions. These assumptions generally fall into two categories: those
relating to the interest rate environment and those relating to general
business and economic factors. Assumptions related to the interest rate
environment include the prepayment speeds on mortgage-related assets and the
cash flows and maturities of financial instruments. Assumptions related to
general business and economic factors include changes in market conditions,
loan volumes and pricing, deposit sensitivity, customer preferences,
competition, and management's financial and capital plans. The assumptions
are developed based on current business and asset/liability management
strategies, historical experience, the current economic environment,
forecasted economic conditions and other analyses. These assumptions are
inherently uncertain and subject to change as time passes. Accordingly, the
Company adjusts the pro forma net income and net fair values as it believes
appropriate on the basis of historical experience and prudent business
judgment. The Company endeavors to maintain a position where it experiences
no material change in net fair value and no material fluctuation in
forecasted net income as a result of assumed 100 and 200 basis point
increases and decreases in interest rates. However, there can be no
assurances that the Company's projections in this regard will be achieved.
Management considers interest rate risk exposure in concert with other
business risks, such as credit risk and liquidity risk. The Company's Board
of Directors and the directors of each subsidiary bank establish various
policy guidelines and limitations for interest rate risk. Management
communicates regularly with boards of directors and board committees about
key assumptions, current strategies, and exposure positions being
deliberated by the Company's Asset/Liability Management Committee.
Management feels that these processes in place at the Company are in
compliance with new risk management guidelines issued jointly by the
Company's three primary regulatory agencies.
Interest rate risk and liquidity positions were affected by the recent
acquisition of Milford Co/operative Bank and The Safety Fund Corporation.
Interest rate risk in a declining interest rate environment was increased
slightly primarily as a result of callable securities in the investment
portfolio at Milford Co/operative Bank and adjustable rate commercial loans
at Safety Fund National Bank. Interest rate risk is, however, still small
and well within the Company's policy guidelines. Adjustments to wholesale
liability maturity structures and loan mixes in coming months are expected
to reduce interest rate risk exposures further.
- -------------------------------------------------------------------------------
Liquidity
- -------------------------------------------------------------------------------
The Company maintains numerous sources of liquidity in the form of
marketable assets and borrowing capacity. Interest bearing deposits with
other banks, trading and available for sale securities and regular cash
flows from loan and securities portfolios are the primary sources of asset
liquidity. At September 30, 1996, interest bearing deposits with other banks
totaled $1,306,000 and trading and available for sale securities totaled
$259,590,000.
Because two of the Company's subsidiaries, CFX Bank and Orange Savings Bank,
maintain large residential mortgage loan portfolios, a substantial
capability exists to borrow funds from the Federal Home Loan Bank of Boston.
Additionally, investment portfolios are predominantly made up of securities
which can be readily borrowed against through the repurchase agreement
market. Relationships with deposit brokers and correspondent banks are also
maintained to facilitate possible borrowing needs. The holding company also
maintains liquid assets totaling $9,578,000 as of September 30, 1996,
comprised of $4,436,000 in cash and due from banks and interest bearing
deposits with bank subsidiaries and notes receivable from bank subsidiaries
of $5,142,000.
Due to the relatively large investment portfolios and the high proportion of
core deposit funding at both banks acquired in 1996, liquidity levels at the
Company have increased from their previous levels. The Company maintains
asset and liability liquidity levels in accordance with conservative
guidelines established by each subsidiary bank's board of directors and the
Company's board of directors.
- -------------------------------------------------------------------------------
Capital Resources
- -------------------------------------------------------------------------------
Federal regulation requires the Company to maintain minimum capital
standards. Tier 1 capital is composed primarily of common stock, retained
earnings and perpetual preferred stock in limited amounts less certain
intangibles. The minimum requirements include a 3% Tier 1 leverage capital
ratio for the most highly-rated institutions; all other institutions are
required to meet a minimum leverage ratio that is at least 1% to 2% above
the 3% minimum. In addition, the Company and its subsidiary banks are
required to satisfy certain capital adequacy guidelines relating to the risk
nature of an institution's assets. These guidelines, established by the
Federal Reserve Board and the FDIC are applicable to bank holding companies
and state chartered non-member banks, respectively. Under the "risk-based"
capital rules, banks and bank holding companies are required to have a level
of Tier 1 capital equal to 4% of total risk-weighted assets, as defined.
Banks and bank holding companies are also required to have total capital
(composed of Tier 1 plus "supplemental" or Tier 2 capital, the latter being
composed primarily of allowances for loan and lease losses, perpetual
preferred stock in excess of the amount included in Tier 1 capital, and
certain "hybrid capital instruments" including mandatory convertible debt)
equal to 8% of total risk-weighted assets.
As of September 30, 1996, the Company's Tier 1 leverage capital ratio was
8.31%. In addition, the Company's Tier 1 to risk-based capital ratio and
total risk-based capital ratio were 13.96% and 15.23%, respectively.
CFX CORPORATION AND SUBSIDIARIES
Part II - Other Information
September 30, 1996
Item 1 - Legal Proceedings
There are no material pending legal proceedings to which the Company,
its subsidiaries, or any directors, officers, affiliates or any owner
of record or beneficiary of more than five percent (5%) of the common
stock of the Company, or any associate of any such director, officer,
affiliate of the Company or any security holder is a party adverse to
the Company or its subsidiaries or has a material interest adverse to
the Company or its subsidiaries.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
(i) None
CFX CORPORATION AND SUBSIDIARIES
September 30, 1996
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFX CORPORATION
November 14, 1996 /s/ Mark A. Gavin
------------------------------
Mark A. Gavin
Authorized Officer
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995 SEP-30-1995
<CASH> 51,561 44,393 0
<INT-BEARING-DEPOSITS> 1,306 13,475 0
<FED-FUNDS-SOLD> 0 2,500 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 259,590 193,203 0
<INVESTMENTS-CARRYING> 35,372 97,093 0
<INVESTMENTS-MARKET> 35,287 98,141 0
<LOANS> 1,061,776 927,430 0
<ALLOWANCE> 15,790 15,449 0
<TOTAL-ASSETS> 1,520,677 1,344,880 0
<DEPOSITS> 1,143,901 1,056,824 0
<SHORT-TERM> 225,662 146,826 0
<LIABILITIES-OTHER> 21,347 14,198 0
<LONG-TERM> 425 201 0
0 0 0
0 0 0
<COMMON> 8,172 8,052 0
<OTHER-SE> 121,170 118,980 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,520,677 1,344,880 0
<INTEREST-LOAN> 64,828 56,708 19,539
<INTEREST-INVEST> 13,953 13,067 4,461
<INTEREST-OTHER> 1,267 1,561 499
<INTEREST-TOTAL> 80,048 71,336 24,499
<INTEREST-DEPOSIT> 30,189 27,626 9,543
<INTEREST-EXPENSE> 37,617 32,821 11,460
<INTEREST-INCOME-NET> 42,431 38,515 13,039
<LOAN-LOSSES> 2,335 2,283 625
<SECURITIES-GAINS> 343 973 346
<EXPENSE-OTHER> 39,614 34,527 11,261
<INCOME-PRETAX> 12,721 12,410 4,853
<INCOME-PRE-EXTRAORDINARY> 8,019 8,087 3,229
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,019 8,087 3,229
<EPS-PRIMARY> .66 .68 .27
<EPS-DILUTED> .66 .68 .27
<YIELD-ACTUAL> 0 0 0
<LOANS-NON> 0 0 0
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 0 0 0
<CHARGE-OFFS> 0 0 0
<RECOVERIES> 0 0 0
<ALLOWANCE-CLOSE> 0 0 0
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
