================================================================================
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 June 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 [X] 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 12,229,372 as of July 31, 1996.
================================================================================
CFX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets -- June 30, 1996 and December 31, 1995..... 1
Consolidated Statements of Income -- Three months ended June 30, 1996
and 1995; Six months ended June 30, 1996 and 1995..................... 2
Consolidated Statement of Shareholders' Equity - Six months ended
June 30, 1996......................................................... 3
Consolidated Statements of Cash Flows -- Six months ended June 30, 1996
and 1995.............................................................. 4
Notes to Consolidated Financial Statements - June 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....................................................... 19
Item 2 Changes in Securities................................................... 19
Item 3 Defaults upon Senior Securities......................................... 19
Item 4 Submission of Matters to a Vote of Security Holders..................... 19
Item 5 Other Information....................................................... 20
Item 6 Exhibits and Reports on Form 8-K........................................ 20
SIGNATURES.............................................................. 21
</TABLE>
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
June 30, December 31,
- ---------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due form banks $ 25,198 $ 28,766
Federal funds sold 7,100 --
---------------------------
Cash and Cash Equivalents 32,298 28,766
Interest bearing deposits with other banks 1,002 327
Federal Home Loan Bank of Boston stock 7,496 7,388
Trading securities -- --
Securities available for sale 109,528 98,047
Securities held to maturity 16,458 19,729
Mortgage loans held for sale 13,032 6,554
Loans and leases 775,575 698,972
Less allowance for loan and lease losses 8,081 7,689
---------------------------
Net Loans and Leases 767,494 691,283
Premises and equipment 14,265 13,548
Mortgage servicing rights 4,446 4,373
Goodwill and deposit base intangibles 9,553 9,884
Foreclosed real estate 1,729 1,129
Other assets 48,470 19,521
---------------------------
$1,025,771 $900,549
===========================
Liabilities and Shareholders' Equity
Deposits:
Interest bearing $ 670,283 $617,872
Noninterest bearing 59,612 47,851
---------------------------
Total Deposits 729,895 665,723
Short-term borrowed funds 68,073 31,735
Advances from Federal Home Loan Bank of Boston 117,414 100,814
Other liabilities 17,558 12,323
---------------------------
Total Liabilities 932,940 810,595
---------------------------
Shareholders' Equity
Common stock, par value $.66 2/3 per share-authorized
22,500,000 shares, issued 7,566,236 shares at
June 30, 1996 and 7,509,921 shares at December 31, 1995 5,044 5,007
Paid-in capital 66,182 65,763
Retained earnings 22,999 19,422
Net unrealized losses on securities available for sale,
after tax effects (1,394) (238)
---------------------------
Total Shareholders' Equity 92,831 89,954
---------------------------
$1,025,771 $900,549
===========================
Number of common shares outstanding 7,566 7,510
===========================
Common shareholders' equity per share $ 12.27 $ 11.98
===========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 1
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, June 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 $ 16,568 $ 14,163 $ 32,245 $ 27,465
Interest on investment securities:
Taxable 1,562 1,369 3,043 2,793
Tax-exempt 218 270 428 525
----------------------------------------------
1,780 1,639 3,471 3,318
Interest and dividends on trading securities -- 2 -- 5
Dividends on marketable equity securities 51 62 101 128
Other 161 199 293 415
----------------------------------------------
Total Interest and Dividend Income 18,560 16,065 36,110 31,331
----------------------------------------------
Interest expense:
Interest on deposits 6,956 6,428 13,936 12,415
Interest on borrowings:
Short-term 2,240 1,517 3,986 2,902
Long-term 5 2 8 5
----------------------------------------------
Total Interest Expense 9,201 7,947 17,930 15,322
----------------------------------------------
Net Interest and Dividend Income 9,359 8,118 18,180 16,009
Provision for loan and lease losses 700 480 1,500 630
----------------------------------------------
Net Interest and Dividend Income After
Provision for Loan and Lease Losses 8,659 7,638 16,680 15,379
----------------------------------------------
Other income:
Service charges on deposit accounts 591 540 1,156 1,092
Loan servicing fees 342 389 742 816
Net gains on trading securities -- 294 153 518
Net gains on investment securities 61 114 118 114
Net gains on sales of loans 337 202 772 214
Leasing activities 613 527 1,361 1,037
Other 665 510 920 849
----------------------------------------------
2,609 2,576 5,222 4,640
----------------------------------------------
Other expense:
Salaries and employee benefits 3,684 3,393 7,206 6,939
Occupancy and equipment 969 964 2,030 1,938
Professional fees 277 351 643 736
Marketing 292 184 647 371
Operation of foreclosed real estate 72 59 128 92
FDIC deposit insurance 1 363 2 725
Goodwill and deposit base intangible amortization 168 179 335 368
Other 1,852 1,727 3,615 3,358
----------------------------------------------
7,315 7,220 14,606 14,527
----------------------------------------------
Income Before Income Taxes 3,953 2,994 7,296 5,492
Income taxes 1,343 984 2,358 1,926
----------------------------------------------
Net Income 2,610 2,010 4,938 3,566
Preferred stock dividends -- 22 -- 89
----------------------------------------------
Net Income Available to Common Stock $ 2,610 $ 1,988 $ 4,938 $ 3,477
==============================================
Weighted average common shares outstanding 7,562 7,296 7,551 7,177
==============================================
Earnings per common share $ .34 $ .27 $ .65 $ .48
==============================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 2
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Losses on
Common Stock Securities
------------------ Paid-in Retained Available
(In thousands) Shares Dollars Capital Earnings For Sale Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,510 $ 5,007 $ 65,763 $ 19,422 $ (238) $ 89,954
Net income -- -- -- 4,938 -- 4,938
Common cash dividends declared
($.18 per share) -- -- -- (1,361) -- (1,361)
Issuance of common stock under
stock option plan 41 27 296 -- -- 323
Issuance of common stock under
employee stock purchase plan 16 11 148 -- -- 159
Increase in net unrealized losses
on securities available for sale -- -- -- -- (1,156) (1,156)
Fractional shares paid out (1) (1) (25) -- -- (26)
------------------------------------------------------------------------
Balance at June 30, 1996 7,566 $ 5,044 $ 66,182 $ 22,999 $ (1,394) $ 92,831
========================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 3
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Six Months Ended June 30,
- ------------------------------------------------------------------------------------------
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 4,938 $ 3,566
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 2,042 1,524
Amortization of deferred credit on leasehold residual (706) --
Provision for loan and lease losses 1,500 630
Loans originated and acquired for sale (55,396) (46,013)
Principal balance of loans sold 48,918 42,266
Net (gain) loss on sale of foreclosed real estate 15 (51)
Net gain on investment securities (118) (114)
Net increase in trading securities -- (20,379)
Net deferred income tax provision 2,040 1,234
Other (7,032) (5,680)
----------------------
Net Cash Used by Operating Activities (3,799) (23,022)
----------------------
Investing Activities
Proceeds from sales of securities available for sale 2,650 1,949
Purchases from maturities of securities available for sale 17,672 --
Purchases of securities available for sale (33,940) (240)
Proceeds from maturities of securities held to maturity 5,229 12,264
Purchases of securities held to maturity (1,970) (3,578)
Proceeds from the sale of, or payments on, foreclosed
real estate 415 404
Purchase of Federal Home Loan Bank of Boston stock (108) --
Net decrease in interest bearing deposits with
other banks (675) (506)
Net increase in loans and leases (73,987) (11,843)
Purchase of bank-owned life insurance (20,000) --
Purchases of premises and equipment (1,601) (688)
----------------------
Net Cash Used by Investing Activities (106,315) (2,238)
----------------------
Financing Activities
Net increase (decrease) in noninterest bearing deposits
and savings accounts 11,712 (11,968)
Net increase in time certificates of deposit 52,460 63,243
Net decrease in short-term borrowings 36,338 6,374
Proceeds from Federal Home Loan Bank of Boston advances
with maturities in excess of three months 226 (27,707)
Payment of Federal Home Loan Bank of Boston advances
with maturities in excess of three months or less (1) --
Proceeds from Federal Home Loan Bank of Boston advances
with maturities of three months or less 16,375 --
Common cash dividends paid (3,920) (1,945)
Preferred cash dividends paid -- (89)
Proceeds from issuance of common stock under
dividend reinvestment plan -- 84
Proceeds from issuance of common stock under
stock option plan 323 211
Proceeds from issuance of common stock under
employee stock purchase plan 159 35
Fractional shares paid out (26) --
----------------------
Net Cash Provided by Financing Activities 113,646 28,238
----------------------
Decrease in Cash and Cash Equivalents 3,532 2,978
Cash and cash equivalents at beginning of period 28,766 22,750
----------------------
Cash and Cash Equivalents at End of Period $ 32,298 $ 25,728
======================
Supplementary Information:
Interest paid on deposit accounts $ 13,074 $ 4,699
Interest paid on borrowed funds 3,946 1,269
Income taxes paid 357 436
Transfers from loans to foreclosed real estate 1,585 1,515
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> 4
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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 six month period ended June 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 will be 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, will
continue to operate as a subsidiary of CFX.
Both the Safety Fund and Milford mergers were accounted for by the
pooling-of-interests method of accounting.
As a result of the pending acquisitions, 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 poolings-of-interests.
Because the funds that would otherwise have been paid out as a cash dividend
were retained by the Company and increased book value, omission of the second
quarter dividend did not have an adverse economic effect on the interest of CFX
shareholders. The dividend was omitted solely in connection with The Safety Fund
and Milford mergers and does not reflect any change in CFX's dividend policy.
Accordingly, the Company fully expects that normal dividends will resume in the
third quarter.
The following unaudited supplemental combined condensed financial statements
give effect to the acquisitions under the pooling-of-interests method of
accounting, but do not reflect anticipated expenses and nonrecurring charges or
estimated expense savings and revenue enhancements anticipated to result from
the acquisitions.
The unaudited supplemental combined financial data is not necessarily indicative
of the financial position and results of future operations of the combined
entity or the actual financial position and results of operations that would
have been achieved had the acquisitions been consummated at the date indicated.
<PAGE> 5
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1996
- --------------------------------------------------------------------------------
Note B - Acquisitions - Cont'd.
- --------------------------------------------------------------------------------
COMBINED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
June 30, 1996 Safety Pro Forma Pro Forma
(Dollars in thousands, except per share data) CFX Fund Milford Adjustment CFX
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investment securities $ 125,986 $ 118,557 $ 62,493 $ 307,036
Net loans and leases 767,494 157,442 69,324 994,260
Other assets 132,291 32,277 32,080 196,648
-------------------------------------------------------------------
Total Assets $ 1,025,771 $ 308,276 $ 163,897 $ 1,497,944
===================================================================
Liabilities and Shareholders' Equity
Deposits $ 729,895 $ 247,311 $ 145,465 $ 1,122,671
Borrowed funds 185,487 33,781 2,000 221,268
Other liabilities 17,558 4,532 1,042 23,132
-------------------------------------------------------------------
Total Liabilities 932,940 285,624 148,507 1,367,071
-------------------------------------------------------------------
Shareholders' Equity 92,831 22,652 15,390 130,873
-------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 1,025,771 $ 308,276 $ 163,897 $ 1,497,944
===================================================================
Common shares outstanding 7,566 4,654 12,220
=========== ======= ===========
Common shareholders' equity per share $ 12.27 $ 10.71
=========== ===========
</TABLE>
COMBINED CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Safety Pro Forma Pro Forma
(Dollars in thousands, except per share data) CFX Fund Milford Adjustment CFX
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1996
Net interest and dividend income $ 9,359 $ 3,566 $ 1,355 $ 14,280
Provision for loan and lease losses 700 30 30 760
Other income 2,609 1,204 203 4,016
Other expense 7,315 3,199 917 11,431
Income taxes 1,343 437 206 1,986
-------------------------------------------------------------------
Net Income $ 2,610 $ 1,104 $ 405 $ 4,119
============================================
Weighted average common shares outstanding 7,562 4,654 12,216
=========== ======= ===========
Earnings per common share $ .34 $ .34
=========== ===========
FOR THE SIX MONTHS ENDED JUNE 30, 1996
Net interest and dividend income $ 18,180 $ 7,061 $ 2,700 $ 27,941
Provision for loan and lease losses 1,500 105 60 1,665
Other income 5,222 2,292 364 7,878
Other expense 14,606 6,492 1,867 22,965
Income taxes 2,358 762 394 3,514
-------------------------------------------------------------------
Net Income $ 4,938 $ 1,994 $ 743 $ 7,675
===================================================================
Weighted average common shares outstanding 7,551 4,654 12,205
=========== ======= ===========
Earnings per common share $ .65 $ .63
=========== ===========
</TABLE>
<PAGE> 6
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 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, and Orange Savings Bank, headquartered in
Orange, Massachusetts.
CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX Capital
Systems, Inc. (CFX Capital) and CFX Financial Services, Inc. (CFX Financial).
CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. which engages in
mortgage banking. CFX Financial owns 51% of CFX Funding L.L.C. (CFX Funding),
which engages in the facilitation of lease financing and securitization. Orange
Savings Bank has one wholly-owned subsidiary, OSB Securities Corp, which is
engaged in investment activities.
On July 1, 1996 the Company completed the acquisitions of The Safety Fund
Corporation, headquartered in Fitchburg, Massachusetts, and Milford Co/operative
Bank, headquartered in Milford, New Hampshire. As a result of these
acquisitions, the Company will take a special charge to earnings in the third
quarter of 1996 of approximately $3.8 million on an after-tax basis for one-time
costs of the transactions. It is intended that substantially all of the costs
will be recognized upon consummation of the acquisitions and will be paid in
1996 and/or 1997. The one time after-tax charge of the transactions pertains to
the following areas: premises and equipment, $250,000; personnel, $900,000; and
other, $2,650,000. Premises and equipment costs consist primarily of write-offs
due to consolidation of operation centers 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. CFX management continues to
review all these costs. There can be no assurance that such costs will not
exceed the amounts described above. In addition to the above charges there is
the possibility of a special assessment to certain savings institutions.
Presently, Congress is considering a bill recommending that savings institutions
which have deposits insured by the Federal Deposit Insurance Corporation's
Savings Association Insurance Fund (SAIF) be charged a special assessment of
.85% of insured deposits in order to recapitalize the insurance fund. If a
special assessment is required, a one-time charge of approximately $1.1 million
would result under the SAIF deposits acquired in the Milford acquisition.
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.
<PAGE> 7
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Results of Operations - General
- --------------------------------------------------------------------------------
The following tables set forth comparisons of average interest earning assets
and interest bearing liabilities, and interest income and interest expense
expressed as a percentage of the related asset or liability. In order to reflect
the economic impact of the Company's investments in state and municipal
securities and to present data on a comparative basis, the income from and
yields on these securities have been restated to a taxable-equivalent basis
(using a 38.62% tax rate). The taxable-equivalent income adjustments are
$137,000 and $168,000 for the three months ended June 30, 1996 and 1995,
respectively, and $269,000 and $330,000 for the six months ended June 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 June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend earning assets:
Loans and leases $ 773,098 $16,568 8.62% $662,646 $14,163 8.57%
Taxable securities 111,633 1,616 5.82 109,266 1,433 5.26
Tax-exempt securities 19,509 355 7.32 24,734 438 7.10
Other 10,335 158 6.15 10,644 199 7.54
--------------------- -------------------
Total interest earning assets 914,575 18,697 8.22 807,290 16,233 8.07
------- -------
Noninterest earning assets 85,818 67,799
---------- --------
Total $1,000,393 $875,089
========== ========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $ 284,689 1,664 2.35 $299,930 1,931 2.58
Time deposits 379,027 5,292 5.62 326,591 4,497 5.52
Advances from Federal Home Loan
Bank of Boston 116,592 1,624 5.60 67,384 1,080 6.43
Other borrowed funds 53,011 621 4.71 30,411 439 5.79
--------------------- -------------------
Total interest bearing liabilities 833,319 9,201 4.44 724,316 7,947 4.40
------- -------
Noninterest bearing liabilities:
Demand deposits 58,777 48,819
Other 15,999 13,256
Shareholders' equity 92,298 88,698
---------- --------
Total $1,000,393 $875,089
========== ========
Net interest and dividend income $ 9,496 $ 8,286
======= =======
Interest rate spread 3.78% 3.67%
Net interest margin 4.18% 4.12%
</TABLE>
<PAGE> 8
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Results of Operations - General - (Cont'd.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend earning assets:
Loans and leases $ 747,705 $32,245 8.67% $ 655,569 $27,465 8.45%
Taxable securities 118,485 3,147 5.34 109,668 2,926 5.38
Tax-exempt securities 19,258 697 7.28 24,215 855 7.12
Other 9,618 290 6.06 12,645 415 6.62
-------------------- --------------------
Total interest earning assets 895,066 36,379 8.17 802,097 31,661 7.96
------- -------
Noninterest earning assets 74,466 67,130
--------- ---------
Total $ 969,532 $ 869,227
========= =========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits $ 283,823 3,312 2.35 $ 304,689 3,881 2.57
Time deposits 377,791 10,624 5.66 320,599 8,534 5.37
Advances from Federal Home Loan
Bank of Boston 103,900 2,974 5.76 65,441 2,057 6.34
Other borrowed funds 43,233 1,020 4.75 30,194 850 5.68
-------------------- --------- -------
Total interest bearing liabilities 808,747 17,930 4.46 720,923 15,322 4.29
------- -------
Noninterest bearing liabilities:
Demand deposits 54,942 47,250
Other 14,189 12,761
Shareholders' equity 91,654 88,293
--------- ---------
Total $ 969,532 $ 869,227
========= =========
Net interest and dividend income $18,449 $16,339
======= =======
Interest rate spread 3.71% 3.67%
Net interest margin 4.15% 4.11%
</TABLE>
<PAGE> 9
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Results of Operations - General - (Cont'd.)
- --------------------------------------------------------------------------------
The following table presents changes in interest and dividend income, interest
expense, and net interest income which are attributable to changes in the
average amounts of interest earning assets and interest bearing liabilities
and/or changes in rates earned or paid thereon.
The net changes attributable to both volume and rate have been allocated
proportionately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
June 30, June 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 $2,361 $ 44 $2,405 $4,102 $678 $4,780
Investments (63) 163 100 63 (0) 63
Other (6) (35) (41) (109) (16) (125)
-----------------------------------------------------------
Total interest and dividend
income 2,292 172 2,464 4,056 662 4,718
-----------------------------------------------------------
Interest paid on:
Savings and time deposits 631 (103) 528 1,311 210 1,521
Borrowed funds 979 (253) 726 1,184 (97) 1,087
-----------------------------------------------------------
Total interest expense 1,610 (356) 1,254 2,495 113 2,608
-----------------------------------------------------------
Change in net interest and
dividend income $ 683 $ 527 $1,210 $1,561 $549 $2,110
===========================================================
</TABLE>
Net Income & Net Income Available to Common Stock
Net income for the three and six months ended June 30, 1996 was $2,610,000, and
$4,938,000, respectively, compared to $2,010,000, and $3,566,000, respectively,
for the same periods a year ago. Net income available to common stock for the
three and six months ended June 30, 1996 was $2,610,000, or $.34 per share, and
$4,938,000 and $.65 per share, respectively, compared with $1,988,000, or $.27
per share, and $3,477,000 or $.48 per share respectively, for the corresponding
periods a year ago.
The increase in earnings was primarily due to increased core earnings (net
interest and dividend income and noninterest income) and reduced Federal Deposit
Insurance Corporation (FDIC) insurance premiums. The stronger core earnings were
the result of a $92 million, or 14.05%, 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 $11,968,000 and $23,402,000 for the three and six
months ended June 30, 1996, compared to $10,694,000 and $20,649,000 for the same
periods a year ago. The Company's net interest margin of 4.18% and 4.15% for the
three and six months ended June 30, 1996 increased from 4.12% and 4.11% for the
corresponding periods a year ago.
<PAGE> 10
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Results of Operations - General - (Cont'd.)
- --------------------------------------------------------------------------------
Net Interest and Dividend Income
Taxable-equivalent net interest income was $9,496,000, and $18,449,000,
respectively, for the three and six months ended June 30, 1996, compared to
$8,286,000, and $16,339,000 for the same periods a year ago. The increase in net
interest income in the 1996 period was principally due to higher average
interest earning assets and higher demand deposits.
The increase in average interest earning assets resulted principally from growth
in loans and leases (see "Financial Condition - Loans and Lease" section of this
Management's Discussion and Analysis), as loan and lease demand increased in the
current environment.
The interest rate spread in the 1996 periods increased from the 1995 periods
principally as a result of increases in the yield on interest earning assets
outpacing the increases in the cost of interest bearing liabilities. The
increase in the net interest margin is the result of an increase in interest
rate spread and demand deposits in the 1996 periods compared to the 1995
periods.
Volatile interest rates can have a material impact on the performance of
financial institutions. Since late 1993 interest rates have alternated between
periods of significant increase and rapid decline. The Company attempts to
manage and minimize the earnings impact of changing interest rates by
comprehensively assessing the impact of interest rate changes on forecasted
income and equity levels. Included in these analyses are estimates of prepayment
variability in certain asset categories, changes in mix and cost of deposits and
other liabilities, and other imbedded options throughout the balance sheet, and
equity leverage or arbitrage activities. Policy guidelines for interest rate
risk exposure are established and have allowed the Company to maintain a
relatively stable interest margin throughout several interest rate cycles.
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 six months ended June
30, 1996 was $700,000, and $1,500,000, respectively, compared to $480,000 and
$630,000, 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 $1,108,000 for the six months ended June 30, 1996 as compared to
$547,000 for the six months ended June 30, 1995.
At June 30, 1996, nonperforming loans stood at $7,805,000, or 1.01% of total
loans and leases, compared to $7,844,000, or 1.12% 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 June 30, 1996 and December 31, 1995 amounted to
103.54% and 98.02%, respectively.
<PAGE> 11
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Results of Operations - General - (Cont'd.)
- --------------------------------------------------------------------------------
Other Income
Other income for the three and six months ended June 30, 1996 totaled
$2,609,000, and $5,222,000, respectively, compared to $2,576,000, and $4,640,000
for the same periods a year ago.
The increase in other income is principally due to an increase in mortgage
banking and leasing activities in 1996 compared to 1995; offset by lower trading
securities gains in 1996. Net gains on sales of loans have been positively
impacted by a more favorable interest rate environment in 1996. The increase in
leasing activities is the result of three securitizations completed in 1996,
compared to two in 1995. In addition, in 1996, CFX Funding had two additional
leasing companies participating in the program. The lower trading securities
gains is the result of liquidating trading securities in April of 1996. Trading
securities, an investment in a money market mutual fund, was used by the Company
to generate capital gains to offset capital loss carryforwards.
Other Expense
Other expense for the three and six months ended June 30, 1996 totaled
$7,315,000, and $14,606,000, respectively, compared to $7,220,000, and
$14,527,000, respectively, for the same periods a year ago.
While other expense remained constant in the 1996 periods compared to the 1995
period, the increase in occupancy and equipment costs and marketing costs in
1996 was offset by a reduction in FDIC insurance premiums. The higher occupancy
and equipment costs reflect the new Manchester, NH branch which opened in June
1995 and the higher snow removal costs in 1996, compared to 1995. Marketing
costs increased to support the implementation of the new free CFX Bank ATM card
and other marketing initiatives.
Income Tax
Income taxes for the three and six months ended June 30, 1996 were 33.97% and
32.32%, respectively, of pretax income, compared to 32.86%, and 35.07% of pretax
income for the same periods a year ago. The effective tax rate for the six
months ended June 30, 1996 was lower because of higher tax-exempt income and tax
credits pertaining to low-income housing projects.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
Investment Securities
The carrying value and estimated fair value of investment securities at June 30,
1996 and December 31, 1995, follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
June 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 $ 43,866 $ 43,866 $ 19,574 $ 19,574
Corporate bonds 4,344 4,344 5,072 5,072
Federal agency mortgage pass-through securities 48,884 48,884 55,408 55,408
Collateralized mortgage obligations (CMO's) 9,249 9,249 14,747 14,747
Marketable equity securities 3,185 3,185 3,246 3,246
-----------------------------------------------
Total securities available for sale $ 109,528 $ 109,528 $ 98,047 $ 98,047
===============================================
Securities held to maturity:
Debt securities:
U.S. Treasury and agency obligations $ -- $ -- $ 500 $ 498
State and municipal 16,458 16,394 19,229 19,345
-----------------------------------------------
$ 16,458 $ 16,394 $ 19,729 $ 19,843
===============================================
</TABLE>
<PAGE> 12
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Financial Condition - Cont'd.
- --------------------------------------------------------------------------------
Loans and Leases
The table below sets forth the composition of the Company's loan and lease
portfolio, net of unearned income and deferred costs, at the dates indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
June 30, December 31,
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
% of % of
Balances Portfolio Balances Portfolio
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Residential $ 535,473 69.04% $ 474,015 67.82%
Construction 7,509 .97 5,902 .84
Commercial 84,729 10.77 87,469 12.51
Commercial, financial, and agricultural 62,022 8.00 52,462 7.51
Warehouse lines of credit to leasing companies 3,294 .58 12,906 1.85
Consumer lease financing 44,538 5.74 24,399 3.49
Other consumer 38,010 4.90 41,819 5.98
------------------------------------------------
775,575 100.00% 698,972 100.00%
====== ======
Less allowance for loan and lease losses 8,081 7,689
--------- ---------
Net loans and leases $ 767,494 $ 691,283
========= =========
</TABLE>
At June 30, 1996 and December 31, 1995, respectively, the recorded investment in
impaired loans totaled $1,803,000 and $2,981,000, respectively, of which
$1,091,000 and $993,000, respectively, related to loans with no valuation
allowance and $712,000 and $1,988,000, respectively, related to loans with a
corresponding valuation allowance of $325,000 and $853,000, respectively.
The $76,603,000 increase in total loans and leases was primarily due to a
$61,458,000 increase in residential real estate loans and a $20,139,000 increase
in indirect automobile leasing, offset by a $9,612,000 decline in warehouse
lines to leasing companies. 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. Although these warehouse lines of
credit to balances at June 30, 1996 totaled only $3,294,000, the average balance
for the six months ended June 30, 1996 totaled $11,328,000. CFX Funding services
approximately $82,000,000 in leases for others.
<PAGE> 13
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
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>
- ------------------------------------------------------------------------------------------
June 30, December 31,
- ------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual (nonperforming) loans $ 7,805 $ 7,844
Foreclosed real estate 1,729 1,179
Valuation allowance on foreclosed real estate -- (50)
--------------------
Total nonperforming assets $ 9,534 $ 8,973
====================
Nonperforming loans as a percent of total loans and leases 1.01% 1.12%
====================
Nonperforming assets as a percent of total assets .93% 1.00%
====================
</TABLE>
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
June 30, December 31,
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------
% of % of
Balances Portfolio Balances Portfolio
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $ 5,549 71.1% $ 5,097 65.0%
Commercial 1,381 17.7 1,487 19.0
Commercial, financial, and agricultural 768 9.8 1,161 14.8
Consumer and other 107 1.4 99 1.2
---------------------------------------------
7,805 100.0% 7,844 100.0%
------- ===== ------- =====
Foreclosed real estate:
Residential 909 52.6% 728 64.5%
Construction 476 27.5 128 11.3
Commercial 344 19.9 323 28.6
Valuation allowance -- -- (50) (4.4)
---------------------------------------------
1,729 100.0% 1,129 100.0%
------- ===== ------- =====
Total nonperforming assets $ 9,534 $ 8,973
======= =======
</TABLE>
<PAGE> 14
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
Risk Elements - Cont'd.
- --------------------------------------------------------------------------------
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 determination. 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
$23,003,000 at December 31, 1995 to $11,552,000 at June 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>
- -------------------------------------------------------------------------------
Six Months Ended June 30, (In thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,129 $ 1,985
Reclassification, net, to nonperforming loans to
reflect adoption of SFAS No. 114 -- (714)
Additions 1,282 1,515
Sales and other (682) (1,372)
--------------------
Balance at end of period $ 1,729 $ 1,414
====================
</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>
- ----------------------------------------------------------------------
Six Months Ended June 30, (In thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 7,689 $ 7,558
Provision for loan and lease losses 1,500 630
Loans charged-off (1,295) (697)
Recoveries of loans previously charged-off 187 150
--------------------
Balance at end of period $ 8,081 $ 7,647
====================
Allowance for loan and lease losses as a
percent of total loans and leases 1.04% 1.17%
====================
Allowance for loan and lease losses as a
percent of total nonperforming loans 103.54% 100.54%
====================
Net chargeoffs/average loans and leases (1) .30% .19%
====================
<FN>
- -------------------
<F1> Annualized
</FN>
</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.
<PAGE> 15
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
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>
- ------------------------------------------------------------------------------------------------
Six Months Ended, (Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------
Amount Rates Amount Rates
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 54,942 $ 47,250 --
Regular savings deposits 120,797 2.93% 121,776 3.04%
NOW & money market deposits 163,026 1.91 182,913 2.26
Time deposits 313,805 5.66 282,008 5.25
--------- ---------
Total retail deposits 652,570 3.74 633,947 3.57
Brokered time deposits 63,986 5.65 38,591 6.25
--------- ---------
Total deposits $ 716,556 3.91% $ 672,538 3.72%
========= =========
Borrowed Funds:
Advances from Federal Home Loan Bank of Boston $ 103,900 5.76% $ 65,453 6.34%
Other borrowed funds 43,234 4.75 30,181 5.68
--------- ---------
Total borrowed funds $ 147,134 5.46% $ 95,634 6.13
========= =========
</TABLE>
Over the past twelve months, the Company has increased average demand deposits
by $7,692,000 and average interest bearing retail deposits by $10,931,000. 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 $2,877,000 as of June 30, 1996 from
$89,954,000 at December 31, 1995 to $92,831,000 at June 30, 1996. The increase
was due to $4,938,000 in net income, issuance of $323,000 in common stock under
the stock option plan, issuance of $159,000 in common stock under the employee
stock purchase plan offset by a $1,156,000 increase in net unrealized losses on
securities available for sale, $26,000 paid for fractional shares on a 3 for 2
stock split, and $1,361,000 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.
<PAGE> 16
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
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 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, permanent parallel shifts in the yield
curve of both up and down 100 and 200 basis points, or four separate
calculations. Larger increases or decreases in forecasted net income and the net
market value of the Company as a result of these interest rate changes represent
greater interest rate risk than do smaller increases or decreases.
The results of the financial planning model are highly dependent on numerous
assumptions. These assumptions generally fall into two categories: those
relating to the interest rate environment and those relating to general business
and economic factors. Assumptions related to the interest rate environment
include the prepayment speeds on mortgage-related assets and the cash flows and
maturities of financial instruments. Assumptions related to general business and
economic factors include changes in market conditions, loan volumes and pricing,
deposit sensitivity, customer preferences, competition, and management's
financial and capital plans. The assumptions are developed based on current
business and asset/liability management strategies, historical experience, the
current economic environment, forecasted economic conditions and other analyses.
These assumptions are inherently uncertain and subject to change as time passes.
Accordingly, the Company adjusts the pro forma net income and net fair values as
it believes appropriate on the basis of historical experience and prudent
business judgment. The Company endeavors to maintain a position where it
experiences no material change in net fair value and no material fluctuation in
forecasted net income as a result of assumed 100 to 200 basis point increases
and decreases in interest rates. However, there can be no assurances that the
Company's projections in this regard will be achieved.
Management believes that the above method of measuring and managing interest
rate risk is consistent with the Federal Deposit Insurance Corporation (FDIC)
regulation regarding an interest rate risk component of regulatory capital.
<PAGE> 17
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
June 30, 1996
- --------------------------------------------------------------------------------
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 June 30, 1996, interest bearing deposits
with other banks totaled $1,002,000 and trading and available for sale
securities totaled $109,528,000.
Because 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
$8,201,000 as of June 30, 1996, comprised of $3,485,000 in cash and due from
banks and interest bearing deposits with bank subsidiaries and notes receivable
from bank subsidiaries of $4,466,000.
- --------------------------------------------------------------------------------
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 June 30, 1996, the Company's Tier 1 leverage capital ratio was 8.81%. In
addition, the Company's Tier 1 to risk-based capital ratio and total risk-based
capital ratio were 13.56% and 14.82%, respectively.
<PAGE> 18
CFX CORPORATION AND SUBSIDIARIES
Part II - Other Information
June 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
(a) The Annual Meeting of Shareholders of the Company, at which the
holders of common shares entitled to 7,561,176 votes were
represented in person or by proxy, was held on May 31, 1996.
(b) Election of Directors. Three nominees were elected as directors
of the Company, each for a term of three years.
For Withheld
--------- --------
Eugene E. Gaffey 6,148,640 76,444
Walter R. Peterson 6,147,971 77,113
Richard F. Astrella 6,188,945 106,139
(c) Other Matters
(i) The adoption of the Agreement and Plan of Merger dated as
of January 5, 1996 by and between CFX Corporation and The
Safety Fund Corporation was approved.
For Against Abstained Broker Non-Votes
--------- ------- --------- ----------------
4,545,974 58,177 50,863 1,570,070
(ii) The adoption of the Agreement and Plan or Reorganization
and related Agreement and Plan of Merger, dated as of
February 9, 1996 by and among CFX Corporation, CFX Bank and
Milford Co/operative Bank was approved.
For Against Abstained Broker Non-Votes
--------- ------- --------- ----------------
4,548,148 68,330 38,036 1,570,070
(iii)The appointment, by the Board of Directors, of Wolf &
Company, P.C., as independent auditors for the Registrant
was ratified.
For Against Abstained
--------- ------- ---------
6,187,207 15,587 22,290
<PAGE> 19
CFX CORPORATION AND SUBSIDIARIES
Part II - Other Information
June 30, 1996
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) On July 16, 1996, a Form 8-K was filed updating the
Current Report on Form 8-K consummating the mergers of The
Safety Fund Corporation and Milford Co/operative Bank,
effective July 1, 1996. The following financial
statements, pro forma financial information and exhibits
were included in the Form 8-K:
(a) Financial Statements.
(1) Audited financial statements of Safety Fund as of
December 31, 1995 and 1994 and for the years
ended December 31, 1995, 1994 and 1993, and the
independent auditors' reports thereon.
(2) Unaudited interim financial statements of Safety
Fund as of March 31, 1996 and 1995 and for the
quarters then ended.
(3) Unaudited financial statements of Milford as of
June 30, 1995 and 1994 and for the years ended
June 30, 1995, 1994 and 1993, and the independent
auditors reports thereon, and the unaudited
financial statements of Milford as of December
31, 1995 and December 31, 1994 and for the six
months then ended.
(4) Unaudited interim financial statements of Milford
as of March 31, 1996 and 1995 and the nine months
then ended.
(b) Pro Forma Financial Information.
(1) Unaudited pro forma combined financial
information as of December 31, 1995 and for the
years ended December 31 1995, 1994 and 1993,
giving effect to the Safety Fund Merger and the
Milford Merger.
(2) Unaudited pro forma combined financial
information as of March 31, 1996 and for the
three months ended March 31, 1996 and 1995.
(c) Exhibits.
First Amendment to the Safety Fund Merger, dated
March 28, 1996.
Second Amendment to the Safety Fund Merger Agreement,
dated April 30, 1996.
Joinder to the Safety Fund Merger Agreement, dated
June 15, 1996.
Amendment to the Milford Reorganization Agreement,
dated April 29, 1996.
Press Release, dated July 1, 1996.
Unaudited interim financial statements of Safety Fund
as of March 31, 1996.
Unaudited interim financial statements of Milford as
of March 31, 1996.
<PAGE> 20
CFX CORPORATION AND SUBSIDIARIES
June 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
August 14, 1996 /s/
---------------------------------------
Mark A. Gavin
Authorized Officer
Chief Financial Officer
<PAGE> 21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from financial
statements and footnotes of the June 30, 1996 Form 10-Q and is qualified in its
entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 32,298
<INT-BEARING-DEPOSITS> 1,002
<FED-FUNDS-SOLD> 7,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,528
<INVESTMENTS-CARRYING> 16,458
<INVESTMENTS-MARKET> 16,394
<LOANS> 775,575
<ALLOWANCE> 8,081
<TOTAL-ASSETS> 1,025,771
<DEPOSITS> 729,895
<SHORT-TERM> 185,061
<LIABILITIES-OTHER> 17,558
<LONG-TERM> 426
0
0
<COMMON> 5,044
<OTHER-SE> 87,787
<TOTAL-LIABILITIES-AND-EQUITY> 1,025,771
<INTEREST-LOAN> 32,245
<INTEREST-INVEST> 3,471
<INTEREST-OTHER> 394
<INTEREST-TOTAL> 36,110
<INTEREST-DEPOSIT> 13,936
<INTEREST-EXPENSE> 3,994
<INTEREST-INCOME-NET> 18,180
<LOAN-LOSSES> 1,500
<SECURITIES-GAINS> 271
<EXPENSE-OTHER> 4,951
<INCOME-PRETAX> 7,296
<INCOME-PRE-EXTRAORDINARY> 7,296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,938
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 8.17
<LOANS-NON> 7,805
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,689
<CHARGE-OFFS> 1,295
<RECOVERIES> 187
<ALLOWANCE-CLOSE> 8,081
<ALLOWANCE-DOMESTIC> 8,081
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 684
</TABLE>
