<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
For the fiscal year Commission file number:
ended: 1-15079
DECEMBER 31, 1995
</TABLE>
------------------------
CFX CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
STATE OF NEW HAMPSHIRE 02-0402421
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
(Address of principal (Zip Code)
executive offices)
</TABLE>
Registrant's telephone number, including area code: (603) 352-2502
------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.66 2/3 PAR VALUE LISTED ON THE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on March 18, 1996, was $111,298,000.
Although directors and executive officers of the registrant were assumed to be
"affiliates" of the registrant for the purposes of this calculation, this
classification is not to be interpreted as an admission of such status.
As of March 18, 1996, 7,545,598 shares of the registrant's common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for Annual Report to
Shareholders for the fiscal year ended December 31, 1995 are incorporated by
reference into Part II and Part IV of this Form 10-K.
Portions of the definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders for the fiscal year ended December 31, 1995 are incorporated by
reference into Part III of this Form 10-K. The incorporation by reference herein
of portions of the Proxy Statement shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a) (8) of
Regulation S-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
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 is a state-chartered savings bank and is the product of several
smaller banks being merged into one financial institution. Its origin, Cheshire
County Savings Bank, has been incorporated since 1897 and changed it's name to
CFX Bank in 1993. Over the past several years, the Monadnock Bank, headquartered
in Jaffrey, New Hampshire, and The Valley Bank, headquartered in Hillsborough,
New Hampshire, both owned, through acquisition, by CFX Corporation, were merged
into CFX Bank. CFX Bank's subsidiaries include CFX Capital Systems, Inc. (CFX
Capital) and CFX Financial Services, Inc. (CFX Financial). CFX Capital's
wholly-owned subsidiary is CFX Mortgage, Inc. which engages in mortgage banking.
CFX Financial owns 51% of CFX Funding L.L.C., which engages in the facilitation
of lease financing and securitization.
On April 28, 1995, the Company acquired Orange Savings Bank ("Orange"), a
Massachusetts chartered savings bank, headquartered in Orange, Massachusetts.
Before adjustments for the 1995 stock split and 5% stock dividend, each of
Orange's 724,412 outstanding shares of common stock was converted into .8075
shares of the Company's common stock, resulting in the issuance of 584,963
shares of the Company's common stock to Orange shareholders. In addition, the
holders of the outstanding Orange stock options (representing the right to
purchase 81,049 shares of Orange common stock) received options to purchase
65,447 shares of CFX common stock in exchange.
On January 5, 1996, the Company signed a definitive agreement to acquire all
of the outstanding capital stock of The Safety Fund Corporation ("Safety Fund"),
a Massachusetts bank holding company, headquartered in Fitchburg, Massachusetts.
Pursuant to the definitive agreement and in the event that the transaction is
accounted for as a pooling-of-interests, each of Safety Fund's outstanding
shares of common stock has the potential to be converted into 1.7 shares of
CFX's common stock. The actual number of shares of CFX's common stock issuable
in the transaction is subject to adjustment based on the average price of CFX
common stock for the ten trading days immediately before CFX receives the last
regulatory approval required to consummate the transaction. In the event that
the average price of CFX common stock is below $12.43, the exchange ratio
becomes 1.806 shares; and if the average price of CFX common stock is above
$18.65, the exchange ratio becomes 1.629 shares. Safety Fund has the right to
terminate the agreement if the average price of CFX Common Stock is below $11.65
per share unless CFX agrees to increase the exchange ratio. The transaction is
tax free to the owners of Safety Fund and is subject to regulatory approval and
the approval of both CFX's and Safety Fund's shareholders. It is anticipated
that the transaction will be accounted for by the pooling-of-interests method of
accounting. However, if the transaction is required to be accounted for under
the purchase method of accounting the stock exchange ratio would be 1.52 shares,
subject to adjustment based on the average price of CFX common stock. At
December 31, 1995, Safety Fund had total assets of $287,483,000, deposits of
$252,788,000 and stockholders' equity of $21,387,000. Safety Fund's bank
subsidiary, Safety Fund National Bank, operates 12 full service offices and 11
automated teller machines in Worcester County and has a trust division with
approximately $350,000,000 in assets under management.
On February 9, 1996, CFX Corporation signed a definitive agreement to merge
Milford Co/operative Bank (Milford), headquartered in Milford, New Hampshire
into CFX Bank. Pursuant to the definitive agreement, each of Milford's
outstanding shares of common stock has the potential to be converted into 2.645
shares of the Company's common stock. The actual number of shares of the
Company's common stock issuable in the transaction is subject to adjustment
based on the average price of the Company's common stock for the ten trading
days immediately before the Company receives the last regulatory approval
required to consummate the transaction. In the event that the
1
<PAGE>
average price of the Company's common stock is below $12.59, the exchange ratio
becomes 2.70 shares; and if the average price of the Company's common stock is
above $17.66, the exchange ratio becomes 2.61 shares. Milford has the right to
terminate the agreement if the average price of the Company's common stock is
below $12.10 per share unless the Company agrees to increase the exchange ratio.
The transaction is tax free to the shareholders of Milford and is subject to
regulatory approval and the approval of both the Company's and Milford's
shareholders. It is anticipated that the transaction will be accounted for by
the pooling-of-interests method of accounting. At December 31, 1995, Milford
Co/operative Bank had total assets of $156,848,000, deposits of $138,313,000,
and stockholder's equity of $15,692,000. Milford operates six branches located
in Amherst, Brookline, Milford, Mount Vernon, New Boston, and
Wilton/Lyndeborough, New Hampshire.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note Y -- segment information in item 8(a)
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company's primary retail banking markets are New Hampshire and north
central Massachusetts. The mortgage banking company uses loan production offices
attracting loan applications from throughout New Hampshire, Maine, Vermont and
northern Massachusetts.
The Company's principal business is to serve as a financial intermediary,
attracting deposits from, and making loans to, consumers and small-to-mid sized
businesses. CFX Bank and Orange Savings Bank (collectively referred to as the
"Banks") use customer deposits and loan payments to fund first mortgage loans on
residential real estate. In addition to originating mortgage loans, the Banks
also make commercial, consumer and other term and installment loans. Other
traditional services available at the Banks include: a wide range of deposit
programs designed to attract both short-term and long-term deposits from the
general public, businesses and local government; safe deposit boxes; travelers
checks and money orders, and many other similar services.
To further the Banks' goals of providing a broad range of retail services
and to generate additional fee income, the Banks have remote service units
located at various business locations in its service area and/or automated
teller machines providing customers with a convenient vehicle for conducting
routine banking transactions. In addition, CFX Bank is a subscriber to
INVEST-TM- Financial Corporation which enables customers to buy and sell
securities and obtain investment advice at CFX Bank. A full line of trust and
investment management services are also available to CFX Bank customers, on
premise, through an affiliation with a local trust company. Safety Fund will add
trust capacity to CFX's business.
CFX Mortgage originates and purchases residential and construction mortgage
loans and sells these loans to CFX Bank and the secondary market, while
retaining the servicing of these loans. CFX Mortgage is an approved seller and
servicer of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA"), Department of Housing and Urban Development
("HUD"), Veteran's Administration ("VA"), and New Hampshire Housing Financing
Authority loans. CFX Mortgage also services loans owned by private investors.
The Company operates a small-ticket lease financing and securitization
business through Funding. Funding's strategy continues to be to increase the
availability of credit to a select group of lessors while controlling the risk
inherent in lease portfolios through credit enhancements. The business is built
on stable relationships with a limited number of well-qualified lease
originators (lessors) who adhere to specified underwriting guidelines. The
warehouse lines of credit are typically paid down every 90 to 180 days through
securitization or sales of the various lease portfolios.
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,
2
<PAGE>
which consist of deposits and borrowings. The Company's results of operations
are also affected by the provision for loan and lease losses, resulting from the
Company's assessment of the adequacy of the allowance for loan and lease losses;
the level of its other operating income, including gains and losses on the sale
of loans and securities, and loan and other fees; operating expenses; and income
tax expenses and benefits.
MARKET AREA AND COMPETITION
The Banks operate primarily in New Hampshire and north central
Massachusetts. Based on total deposits as of December 31, 1995, CFX Bank had the
largest market share in southwestern New Hampshire.
The banking business in the Banks' market areas has become increasingly
competitive over the past several years. The Banks' major competitors in
attracting deposits and lending funds are other banks, and, to a certain extent,
regional money center and non-bank financial institutions. A number of banks
maintain branches in cities and towns where the Banks maintain offices.
The principal factors in successfully competing for deposits are convenient
office locations, flexible hours, remote service units, interest rates and
services, while those relating to loans are interest rates, the range of lending
services offered and lending fees. Additionally, the Banks believe that the
local character of their businesses and their community bank management
philosophy enables it to compete successfully in its market area.
INVESTMENT PORTFOLIO
The following table sets forth the book value of securities available for
sale and securities held to maturity at the dates indicated. Securities
available for sale are carried at fair value. Securities held to maturity are
carried at amortized cost.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1995 1994 1993
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
United States Treasury and agency obligations................................. $ 19,574 $ 3,172 $ --
Corporate bonds............................................................... 5,072 150 --
Collateralized mortgage obligations (CMOs).................................... 14,747 -- 17,772
Federal agency mortgage pass-through securities............................... 55,408 -- --
Money market funds............................................................ -- 1,056 675
Other marketable equity securities............................................ 3,246 3,856 3,862
--------- ----------- ---------
$ 98,047 $ 8,234 $ 22,309
--------- ----------- ---------
--------- ----------- ---------
SECURITIES HELD TO MATURITY:
United States Treasury and agency obligations................................. $ 500 $ 1,754 $ 3,757
State and municipal........................................................... 19,229 23,498 10,591
Corporate bonds............................................................... -- 5,932 7,992
Collateralized mortgage obligations (CMOs).................................... -- 16,962 --
Federal agency mortgage pass-through securities............................... -- 62,966 76,841
Asset-backed securities....................................................... -- 173 620
--------- ----------- ---------
$ 19,729 $ 111,285 $ 99,801
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
3
<PAGE>
The following table sets forth an analysis of the maturity distributions and
the weighted average yields of all debt securities of the Company at December
31, 1995:
<TABLE>
<CAPTION>
MATURING
--------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE BUT
WITHIN BUT WITHIN WITHIN AFTER TEN FIVE YEARS
ONE YEAR FIVE YEARS TEN YEARS
----------------------- --------------------- --------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------- ---------- --------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
other............................. $ 2,753 5.46% $ 7,311 6.61% $ 10,010 6.74% $ -- -- %
State and municipal (1)............ 5,260 6.90 7,982 7.30 5,987 7.50 -- --
Corporate securities (2)........... 1,826 6.50 3,118 6.83 128 7.04 -- --
Mortgage-backed securities and
CMO's (3)......................... -- -- 4,334 4.82 885 8.27 64,936 6.54
----------- --------- --------- ---------
Total debt securities.............. $ 9,839 6.42% $ 22,745 6.54% $ 17,010 7.09% $ 64,936 6.54%
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
- --------------------------
(1) Yields on tax-exempt investment securities are stated on a
taxable-equivalent basis (using a 38.62% tax rate).
(2) Includes corporate and public utility obligations. The majority of these
obligations contain put and call provisions.
(3) Included in table based on contractual maturities.
LOAN PORTFOLIO
The following table shows the Company's loan distribution, net of unearned
income and deferred costs, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential................................... $ 474,015 $ 447,458 $ 381,098 $ 398,610 $ 381,493
Construction.................................. 5,902 7,761 9,292 10,920 16,010
Commercial.................................... 87,469 82,468 76,955 56,027 56,451
Commercial, financial, and agricultural......... 52,462 48,020 42,835 54,788 59,318
Warehouse lines of credit to leasing
companies...................................... 12,906 15,339 5,428 1,497 --
Consumer lease financing........................ 24,399 306 -- -- --
Consumer and other.............................. 41,819 39,055 27,720 26,666 28,779
----------- ----------- ----------- ----------- -----------
Total loans and leases...................... $ 698,972 $ 640,407 $ 543,328 $ 548,508 $ 542,051
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
4
<PAGE>
The following table shows the maturity of loans (excluding residential
mortgages of 1 - 4 family residences and all consumer loans) outstanding at
December 31, 1995. Also provided are the amounts due after one year, classified
according to sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
MATURING
------------------------------------------------
AFTER ONE AFTER
WITHIN BUT WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
----------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate -- construction.................................... $ 5,902 $ -- $ -- $ 5,902
Real estate -- commercial...................................... 77,147 7,273 3,049 87,469
Commercial, financial, and agricultural........................ 32,481 4,524 15,457 52,462
Warehouse lines of credit to leasing companies................. 12,906 -- -- 12,906
----------- ----------- --------- -----------
Total...................................................... $ 128,436 $ 11,797 $ 18,506 $ 158,739
----------- ----------- --------- -----------
----------- ----------- --------- -----------
Loans maturing after one year with:
Fixed interest rates......................................... $ 4,483 $ 18,506
Variable interest rates...................................... 7,314 --
----------- ---------
Total...................................................... $ 11,797 $ 18,506
----------- ---------
----------- ---------
</TABLE>
The following table summarizes the Company's nonaccrual, past due, and
potential problem loans:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------
1995 1994 1993 1992 1991
--------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate (2)................................... $ 6,584 $ 5,879 $ 6,840 $ 4,745 $ 2,732
Commercial, financial, and agricultura1........... 1,161 1,007 460 2,002 1,768
Consumer and other................................ 99 27 187 209 261
--------- ----------- ----------- --------- -----------
Total........................................... 7,844 6,913 7,487 6,956 4,761
--------- ----------- ----------- --------- -----------
Accruing loans past due 90 days or more:
Real estate (2)................................... -- 221 448 3,295 9,194
Commercial, financial, and agricultural........... -- -- -- 409 777
Consumer and other................................ -- -- -- 118 29
--------- ----------- ----------- --------- -----------
Total........................................... -- 221 448 3,822 10,000
--------- ----------- ----------- --------- -----------
Potential problem loans (3)......................... -- -- -- 1,535 963
--------- ----------- ----------- --------- -----------
Total nonperforming loans........................... $ 7,844 $ 7,134 $ 7,935 $ 12,313 $ 15,724
--------- ----------- ----------- --------- -----------
--------- ----------- ----------- --------- -----------
Percentage of total loans........................... 1.1% 1.1% 1.5% 2.2% 2.9%
Percentage of total assets.......................... 0.9% 0.9% 1.0% 1.7% 2.1%
Total restructured loans............................ $ 187 $ 1,824 $ 837 $ 963 $ 963
--------- ----------- ----------- --------- -----------
--------- ----------- ----------- --------- -----------
</TABLE>
- ------------------------
(1) All loans past due 90 days or more as to principal or interest are placed on
nonaccrual status. In addition, a loan (including a loan impaired under SFAS
No. 114, defined below) is generally classified as nonaccrual when
management determines that significant doubt exists as to the collectibility
of principal or interest. An impaired loan may remain on accrual status if
it is guaranteed or well secured. Interest accrued but not received on loans
placed on nonaccrual status is reversed and charged against current income.
Interest on nonaccrual loans is recognized when received. Cash received on
impaired loans is generally allocated to principal and interest based on the
contractual terms of the note, unless management believes such receipt
should be applied directly to principal based on collection concerns. Loans
are restored to accrual status when the borrower has demonstrated the
ability to make future payments of principal and
5
<PAGE>
interest, as scheduled. Prior to the third quarter of 1993, and during 1993
and 1994 for certain loans originated by Orange Savings Bank, loans past 90
days or more remained on accrual status if, in management's judgment, they
were fully secured and in the process of collection.
In May 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for Impairment of a Loan", ("SFAS 114"), which
was amended in October, 1994 by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan, Income Recognition and Disclosure" ("SFAS 118"). The
Company adopted SFAS Nos. 114 and 118 on January 1, 1995. Under this
Statement, a loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and insignificant
shortfalls in payment amounts generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest
owed. The statement is not applicable to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, and loans
that are measured at fair value or the lower of cost or fair value.
Accordingly, the Company has not applied SFAS No. 114 to its consumer and
residential mortgage loans which are collectively evaluated for impairment
or to loans held for sale. The Company measures impairment on a loan by loan
basis by either the present value of expected future cash flows discounted
at the loan's effective interest rate, the loans obtainable market price, or
the fair value of the collateral if the loan is collateral dependent.
Collateralized loans are generally measured by fair value of existing
collateral, unless market prices or discounted cash flow information is
deemed to be more current and reflective of the economies of the lending
relationship. At December 31, 1995, the Company had $2,981,000 in impaired
loans of which approximately 65% were measured by the fair value of
collateral, 20% by market price, and 15% by discounted cash flow analysis.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. Accordingly, upon adoption of SFAS No.
114, the Company transferred $796,000 of loans previously classified as in-
substance foreclosures and $131,000 of the valuation allowance for
foreclosed real estate losses to nonaccrual loans. Prior period prohibited
by SFAS No. 114. Total in-substance foreclosures at December 31, 1994, 1993,
1992, and 1991 were $714,000, $2,068,000, $6,085,000, and $4,556,000,
respectively. If these amounts were reclassified to nonaccrual loans, total
nonaccrual loans at December 31, 1994, 1993, 1992, and 1991 would have been
$7,627,000, $9,555,000, $13,041,000, and $9,317,000, respectively.
(2) Includes residential, construction and commercial real estate loans.
(3) In addition to loans 90 days or more past due, and nonaccrual loans, prior
to 1993 management classified as nonperforming "potential problem loans"
which were current as to principal and interest payments under original or
restructured agreements, but were expected to have insufficient future cash
flows to service the loan in accordance with the original or restructured
provisions.
Interest income that would have been recorded under original terms of
nonaccrual and restructured loans and the interest income actually
recognized for the year ended December 31, 1995 was $939,000 and $475,000,
respectively.
6
<PAGE>
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
This table summarizes the Company's loan and lease loss experience for the
years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan and lease losses, beginning of
year............................................... $ 7,558 $ 7,952 $ 8,392 $ 7,327 $ 5,373
Allowance of acquired subsidiaries.................. -- -- 13 -- --
Allowance acquired through regulatory-assisted
transactions....................................... -- -- -- 350 167
Loans charged-off:
Real estate (1)................................... 785 681 1,828 1,628 1,190
Commercial, financial and agricultural............ 940 379 1,758 678 660
Consumer and other................................ 157 195 336 346 413
----------- ----------- ----------- ----------- -----------
Total loans charged-off......................... 1,882 1,255 3,922 2,652 2,263
----------- ----------- ----------- ----------- -----------
Recoveries on amounts previously charged-off:
Real estate (1)................................... 103 178 249 84 35
Commercial, financial and agricultural............ 140 144 78 47 4
Consumer and other................................ 146 102 82 83 46
----------- ----------- ----------- ----------- -----------
Total recoveries................................ 389 424 409 214 85
----------- ----------- ----------- ----------- -----------
Net loans charged-off............................... 1,493 831 3,513 2,438 2,178
Provision for loan and lease losses (2)............. 1,624 437 3,060 3,153 3,965
----------- ----------- ----------- ----------- -----------
Allowance for loan and lease losses, end of year.... $ 7,689 $ 7,558 $ 7,952 $ 8,392 $ 7,327
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loans charged-off to average loans
outstanding........................................ 0.2% 0.1% 0.6% 0.4% 0.4%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Includes residential, construction and commercial real estate loans.
(2) The amount charged to operations and the related balance in the allowance
for loan and lease losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loan and lease loss experience, and management's
estimation of future potential losses. The higher provision for loan and
lease losses in 1992 and 1991 were consistent with the relative balance of
nonperforming loans and leases of $12,313,000 and $15,724,000 for the
respective years. The economy during this timeframe was very weak with real
estate values in the Bank's operating areas declining and creating asset
quality problems. In 1993, real estate values had stabilized and the
economic environment had returned to a growth mode. The consumer confidence
index was at its highest point since 1989 and the unemployment rate in New
Hampshire was the lowest it had been since 1990. Despite the positive trend,
a large provision was necessary for losses incurred as a result of the
earlier real estate decline as well as for the deep discounted losses
incurred in conjunction with a bulk sale of nonperforming assets totaling
$6,600,000 to a private investor. The amount of loss recognized on this sale
was $2,473,000 which was based on liquidation value, not fair value. The
combination of this bulk sale and a general economic strengthening evidenced
during 1994 allowed the Company to provide substantially less to the
allowance for loan and lease losses. In 1995, the provision was increased as
the loan and lease portfolio had significantly grown and the level of
charge-offs proportionally increased.
7
<PAGE>
ALLOWANCE FOR LOAN AND LEASE LOSS ALLOCATION
This table shows an allocation of the allowance for loan and lease losses as
of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992
------------------------ ------------------------ ---------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate.............. $ 4,982 81.18% $ 4,007 83.96% $ 3,514 86.02% $ 2,148 84.88%
Commercial, financial,
and agricultural........ 1,389 9.35 1,322 9.89 2,035 8.88 2,679 10.26
Consumer and other....... 568 9.47 356 6.15 318 5.10 347 4.86
Unallocated.............. 750 1,873 2,085 3,218
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
$ 7,689 100.00% $ 7,558 100.00% $ 7,952 100.00% $ 8,392 100.00%
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
1991
------------------------
PERCENT OF
LOANS IN
EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- -----------
<S> <C> <C>
Real estate.............. $ 1,929 83.75%
Commercial, financial,
and agricultural........ 1,612 10.94
Consumer and other....... 478 5.31
Unallocated.............. 3,308
----------- -----------
$ 7,327 100.00%
----------- -----------
----------- -----------
</TABLE>
DEPOSITS
The average daily amount of deposits and of rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits................ $ 48,854 -- % $ 38,539 -- % $ 29,665 -- %
Regular savings deposits........................... 122,472 3.03 133,233 2.70 135,873 2.87
NOW and money market deposits...................... 175,963 2.19 208,532 2.29 211,521 2.65
Time deposits...................................... 321,621 5.54 239,392 4.52 254,747 4.77
----------- ----------- -----------
Total............................................ $ 668,910 4.09% $ 619,696 3.09% $ 631,806 3.43%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Maturities of time certificates of deposit and other time deposits of
$100,000 or more outstanding at December 31, 1995, are summarized as follows:
<TABLE>
<CAPTION>
TIME
CERTIFICATES OTHER
OF TIME
DEPOSITS (1) DEPOSITS TOTAL
------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
3 months or less........................................................... $ 9,435 $ 6,163 $ 15,598
Over 3 through 6 months.................................................... 10,176 2,646 12,822
Over 6 through 12 months................................................... 6,363 7,179 13,542
Over 12 months............................................................. 100 9,375 9,475
------------- --------- ---------
Total.................................................................... $ 26,074 $ 25,363 $ 51,437
------------- --------- ---------
------------- --------- ---------
</TABLE>
- ------------------------
(1) Time deposits with a minimum required balance of $100,000.
8
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of the
Company for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Return on:
Average total assets........................................................... 0.90% 0.66% 0.79%
Average total shareholders' equity............................................. 8.78 6.60 7.15
Average common shareholders' equity............................................ 8.90 6.89 7.47
Average total shareholders' equity to average total assets ratio............... 10.20 10.00 11.02
Common dividend payout ratio................................................... 76.92 59.26 44.71
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings are borrowed funds with an original maturity of one
year or less. Securities sold under repurchase agreements generally mature with
180 days. The details of these borrowings for the years 1995 and 1994 are
presented below:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Securities sold under repurchase agreements:
Balance at year end............................................................... $ 31,735 $ 27,316
Average amount outstanding........................................................ 31,989 16,475
Maximum amount outstanding at any month end....................................... 32,893 34,754
Average interest rate for the year................................................ 5.42% 3.79%
Average interest rate on year-end balance......................................... 5.06% 5.83%
Advances from Federal Home Loan Bank of Boston:
Balance at year end............................................................... $ 100,613 $ 92,000
Average amount outstanding........................................................ 73,107 94,759
Maximum amount outstanding at any month end....................................... 100,613 114,216
Average interest rate for the year................................................ 6.28% 4.57%
Average interest rate on year-end balance......................................... 6.15% 6.21%
</TABLE>
SUBSIDIARIES
CFX Bank owns two subsidiary companies -- CFX Capital Systems, Inc., ("CFX
Capital") and CFX Financial Services, Inc. ("CFX Financial"). CFX Capital is a
service corporation which owns CFX Mortgage, Inc. ("CFX Mortgage") and certain
investment securities. CFX Financial owns 51% of CFX Funding L.L.C., a company
which facilitates lease financing and securitization.
Owning 100% of CFX Mortgage allows CFX Bank to fully integrate mortgage
banking into the retail banking franchise, providing the retail lending units
(mortgage and consumer) with a strong sales-oriented culture and a larger
variety of products. CFX Mortgage makes available to borrowers in its primary
consumer market area a full range of residential loans, including FHA-insured
and VA-guaranteed loans, conventional fixed-rate loans for terms of 15 or 30
years, and adjustable-rate mortgage loans (ARMs). ARMs are advantageous to the
Company because adjustable rates retained in the Company's loan portfolio better
match its natural liability base. However, CFX Mortgage's ability to originate
ARMs in lieu of fixed-rate loans has varied in response to changes in market
interest rates.
Under the Company's current ARMs Program, the borrower may choose among
loans that have the initial interest rate fixed for one, three, five, or seven
years before the adjustment begins. Currently, ARMs are indexed to the 1-year
Treasury Securities Index and have annual caps of 2 percent.
All of CFX Mortgage's residential mortgage lending is subject to
non-discriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the
9
<PAGE>
secondary market. Residential loans are originated using standard Federal
National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation
(FHLMC) applications and appraisal forms. All loans are subject to underwriting
review and approval by various levels of CFX Mortgage personnel, depending on
the size of the loan. Residential loan applications come in through various
channels, including the Company's bank branches and loan production offices.
In addition, CFX Mortgage originates 50% of its lending volumes through a
correspondent network located in New Hampshire, Maine, Vermont, and
Massachusetts. The majority of CFX Mortgage's correspondent network consists of
community banks with the remaining consisting of mortgage bankers and mortgage
brokers.
CFX Bank provides CFX Mortgage with warehouse and working capital funding.
The warehouse line of credit, which is secured by mortgage loans originated,
bought and packaged for sale by CFX Mortgage, allowed CFX Mortgage to borrow up
to $30,000,000 during 1995, with advances on December 31, 1995 of $20,013,000.
In addition, CFX Bank has provided CFX Mortgage with secured lines of credit for
working capital purposes, allowing CFX Mortgage to borrow up to $6,000,000 with
no advances taken in 1995. All such loans are made on substantially the same
terms as those prevailing at the time for comparable transactions with
non-affiliated borrowers. CFX Mortgage maintains a deposit relationship with CFX
Bank in connection with these funding arrangements.
CFX Funding engages in the facilitation of lease financing and
securitization. Through its national securitization program (the Program), CFX
Funding establishes relationships with lessors who are selected by CFX Funding
to participate in the Program based on a variety of factors, including the
lessor's demonstrated portfolio performance, underwriting criteria, experience
in the leasing industry, and credit history. CFX Funding arranges for short-term
warehouse lines of credit with CFX Bank based on the credit of the participating
leasing company. The warehouse lines of credit enable the Program participants
to originate leases for portfolio sale or securitization. Upon securitization,
CFX Funding functions as the Master Servicer with respect to the lease
receivables.
Orange Savings Bank owns OSB Securities Corp. which principally holds
investment securities.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiaries had 342 full-time
and 138 part-time employees. The employees of the Company and its subsidiaries
are not represented by any collective bargaining unit. Relations between
management and employees are considered good.
REGULATION
GENERAL
As a bank holding company, the Company is subject to regulation by the
Federal Reserve Board. CFX Bank is a New Hampshire state-chartered bank; as
such, it is subject to regulation by bank regulators in New Hampshire. Orange
Savings Bank is a Massachusetts state-chartered bank; as such it is subject to
regulation by the Massachusetts Commissioner of Banks. The deposits of the Banks
are insured by the Bank Insurance Fund ("BIF") of the FDIC, and therefore, are
subject to FDIC supervision and regulation. The Company is also subject to
limitations on the scope of their activities and to continuing regulation,
supervision and examination by the Federal Reserve Board under the Bank Holding
Company Act of 1956 and related federal statutes. As a New Hampshire
corporation, the Company must comply with the general corporation laws of New
Hampshire.
Although the Northeast is gradually recovering from the severe recession of
the late 1980's and early 1990's, the banking environment continues to be
affected by a slow recovery of commercial real estate values and substantial
increases in regulatory requirements as a result of the failure of numerous
banking and thrift institutions. In addition to the Company's own monitoring
activities, the credit quality of the assets held by the Banks is subject to
periodic review by the state and federal bank regulatory agencies noted above.
While the Company believes its present allowance for loan and lease losses is
adequate in light of prevailing economic conditions or regulatory environment,
there
10
<PAGE>
can be no assurance that the Banks will not be required to make certain
adjustments to their allowance for loan and lease losses and charge-off policies
in response to changing economic conditions or regulatory examinations.
Neither the Company nor any of its subsidiaries has entered into formal
written agreements with state or federal regulators. The Company and its
subsidiaries continue to evaluate and refine oversight and reporting systems and
procedures to enhance the ability of such companies to respond to current
economic conditions.
In addition to extensive existing government regulation, federal and state
statutes and regulations are subject to changes that may have significant impact
on the way in which banks may conduct business. The likelihood and potential
effects of any such changes cannot be predicted. Legislation enacted in recent
years has substantially increased the level of competition among commercial
banks, thrift institutions and nonbanking institutions, including insurance
companies, brokerage firms, mutual funds, investment banks, and major retailers.
In addition, the enactment of banking legislation such as the Financial
Institutions Reform Recovery and Enforcement Act ("FIRREA") and the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") have affected
the banking industry by, among other things, broadening the regulatory powers of
the federal banking agencies in a number of areas and restricting the powers of
state-chartered banks. The following summary is qualified in its entirety by the
text of the relevant statutes and regulations.
As a result of the enactment of FIRREA, any or all of the Company's
subsidiary banks can be held liable for any loss incurred by, or reasonably
expected under so-called "cross-guarantee" provisions to be incurred by the FDIC
in connection with (a) the default of any other of the Company's subsidiary
banks or (b) any assistance provided by the FDIC to any other of CFX's
subsidiary banks in danger of default. "Default" is defined generally as the
appointment of a conservator or receiver and "in danger of default" is defined
generally as the existence of certain conditions indicating that a "default" is
likely to occur without regulatory assistance.
FEDERAL DEPOSIT INSURANCE CORPORATION
CFX and Orange Savings Bank's deposits are insured by the BIF up to a
maximum of $100,000 per depositor. The FDIC issues regulations, conducts
periodic examinations, imposes minimum capital requirements, requires the filing
of reports and generally supervises the operations of its insured banks. The
approval of the FDIC is required prior to any merger or consolidation, or the
establishment or relocation of an office. Such supervision and regulation is
intended primarily for the protection of depositors.
Any insured bank which does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for non-compliance.
For example, proceedings may be instituted against any insured bank or any
director, officer or employee of such bank who engages in unsafe and unsound
practices, including the violation of applicable laws and regulations.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
provides for, among other things, increased funding for BIF and expanded
regulation of depository institutions and their affiliates, including parent
holding companies. A summary of certain provisions of FDICIA and its
implementing regulations is described below.
RISK BASED DEPOSIT INSURANCE ASSESSMENTS
A significant portion of the additional funding to the BIF is in the form of
borrowings to be repaid by insurance premiums assessed on BIF members. In
addition, FDICIA provides for an increase in the ratio of the reserves to
insured deposits of the BIF to 1.25% by the end of the 15 year period that began
with the semi-annual assessment period ending December 31, 1991, also to be
financed by insurance premiums. The BIF surpassed its reserve requirement ratio
of 1.25% of insured deposits during the month of May, 1995. As a result of, BIF
insurance assessments were reduced substantially in 1995.
11
<PAGE>
FDICIA also provides authority for special assessments against insured deposits
and for the development of a general risk-based assessment system. Each
financial institution is assigned to one of three capital groups; "well
capitalized"; "adequately capitalized"; or "undercapitalized"; and further
assigned to one of three subgroups within each capital group, on the basis of
supervisory evaluations by the institution's primary federal and, if applicable,
state supervisors and other information relevant to the institution's financial
condition and the risk posed to the insurance fund. For purpose of the risk-
based assessment system, a well-capitalized institution is one that has a total
risk-based capital ratio of 10% or more, a Tier 1 risk-based capital of 6% or
more, and a leverage ratio of 5% or more. An adequately capitalized institution
has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital
ratio of 4% or more, and a leverage ratio of 4% or more. An undercapitalized
institution is one that does not meet either of the foregoing definitions. The
actual assessment rate applicable to a particular institution, therefore,
depends in part upon the risk assessment classification so assigned to the
institution by the FDIC.
PROMPT CORRECTIVE ACTION
FDICIA also provides the federal banking agencies with broad powers to take
prompt corrective action to resolve problems of insured depository institutions,
depending upon a particular institution's level of capital. FDICIA established
five tiers of capital measurement for regulatory purposes ranging from
"well-capitalized" to "critically undercapitalized". Under prompt corrective
action regulation adopted by the federal banking agencies, a depository
institution is (a) "well-capitalized" if it has a total risk-based capital ratio
of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, a leverage
ratio of 5% or more and is not subject to any written agreement, order or
capital measure; (b) "adequately capitalized" if it has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio 4% or more and a
leverage ratio of 4% or more (3% if the bank is rated composite I under the
CAMEL rating system in its most recent examination and is not experiencing or
anticipating significant growth) and does not qualify as "well-capitalized"; (c)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage ratio
that is less than 4% (3% if the bank is rated composite I under the CAMEL rating
system in its most recent examination and is not experiencing or anticipating
significant growth); (d) "significantly undercapitalized" if the bank has a
total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3% or a leverage ratio that is less than 3%; and (e)
"critically undercapitalized" if the depository institution has a tangible
equity to total assets ratio that is equal to or less than 2% of total assets,
or otherwise fails to meet certain established critical capital levels. A
depository institution may be in a capitalization category that is lower than is
indicated by its actual capital position under certain circumstances. At
December 31, 1995, CFX Bank and Orange Savings Bank were classified as
"well-capitalized" under the prompt corrective action regulations described
above.
Any depository institution that is undercapitalized and which fails to meet
regulatory capital requirements specified in FDICIA must submit a capital
restoration plan guaranteed by the bank holding company controlling such
institution. The regulatory agencies may place limits on the asset growth and
restrict activities of the institution (including transactions with affiliates),
and require the institution to raise additional capital, dispose of subsidiaries
or assets or be acquired and, ultimately, require the appointment of a receiver.
The guarantee of a controlling bank holding company under FDICIA of performance
of a capital restoration plan is limited to the lower of 5% of an
undercapitalized banking subsidiary's assets or the amount required for the bank
to be classified as adequately capitalized. Federal banking agencies may not
accept a capital restoration plan without determining, among other things, that
the plan is based on realistic assumptions and is likely to succeed in restoring
the depository institution's capital. If a depository institution fails to
submit an acceptable plan within the time required (generally 45 days after
receiving notice that the institution is undercapitalized, significantly
undercapitalized or critically undercapitalized), it is treated as if it were
significantly undercapitalized. If the controlling bank holding company fails to
fulfill its guaranty obligations under FDICIA and files (or has filed against
it) a petition under Federal Bankruptcy Code, the
12
<PAGE>
applicable regulatory agency would have a claim as a general creditor of the
bank holding company and, if the capital restoration plan were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, the claim
would be entitled to a priority in such bankruptcy proceedings over unsecured
third party creditors of the bank holding company.
In addition to the requirement of mandatory submission of a capital
restoration plan, under FDICIA, an undercapitalized institution may not pay
management fees to any person having control of the institution nor may an
institution, except under certain circumstances and with prior regulatory
approval, make any capital distribution if, after making such payment or
distribution, the institution would be undercapitalized. Further,
undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve System.
Undercapitalized and significantly undercapitalized depository institutions
may be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cessation of receipt of deposits from correspondent
banks. In addition, significantly undercapitalized depository institutions also
are prohibited from awarding bonuses or increasing compensation of senior
executive officers until approval of a capital restoration plan. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
BROKERED DEPOSIT AND PASS THROUGH DEPOSIT INSURANCE LIMITATION
Under FDICIA, a depository institution that is not well-capitalized is
generally prohibited from accepting brokered deposits and offering interest
rates on deposits "significantly higher" than the prevailing rate in its market.
A depository institution that is adequately capitalized may accept brokered
deposits if it obtains the prior approval of the FDIC. Effective in November
1993, the FDIC modified the definitions of "well-capitalized" and "adequately
capitalized" to conform to the definitions described above for prompt corrective
action. In addition, "pass-through" insurance coverage may not be available for
certain employee benefit accounts. In the Company's opinion, these limitations
do not have a material effect on the Company.
SAFETY AND SOUNDNESS STANDARDS / OTHER REGULATIONS
The Federal Deposit Insurance Act, as amended by FDICIA and as further
amended by the Reigle Community Development and Regulatory Improvement Act of
1994, directs each federal banking agency to prescribe standards for insured
depository institutions relating to, among other things, asset quality, earnings
and stock valuation, as well as compensation standards (but not dollar levels of
compensation). Each of the federal banking agencies has issued regulations and
interagency guidelines implementing these standards. The current rules
contemplate that each federal banking agency would determine compliance with
these rules through the examination process and, if necessary to correct
weaknesses, require an institution to file a written safety and soundness plan.
The ultimate cumulative effect of these standards cannot currently be forecast.
FDICIA also contains a variety of other provisions that may affect the
Company's operations, including new reporting requirements, regulatory standards
for real estate lending, "truth in savings" provisions, and the requirement that
a depository institution give 90 days prior notice to customers and regulatory
authorities before closing any branch. Many of the provisions in FDICIA have
recently been or will be implemented through the adoption of regulations by the
various federal banking agencies and, therefore, the precise impact on the
Company cannot be assessed at this time.
CAPITAL GUIDELINES
The Federal Reserve Board and the FDIC have issued risk-based capital
guidelines for bank holding companies, state-chartered member banks and
state-chartered non-member banks. Under these guidelines, the minimum ratio of
total capital to risk-adjusted assets (including certain off-balance-sheet
items, such as standby letters of credit) is 8%. At least half of the total
capital is to be comprised of common equity, retained earnings, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of perpetual preferred stock, less goodwill ("Tier 1 capital").
13
<PAGE>
The remainder may consist of perpetual debt, mandatory convertible debt
securities, a limited amount of subordinate debt, other preferred stock and a
limited amount of loan loss reserves (supplementary capital). In addition, the
Federal Reserve Board and the FDIC have adopted a leverage ratio (Tier 1 capital
to total assets, net of goodwill) of 3% for bank holding companies and banks
that meet certain specified criteria, including that they have the highest
regulatory rating. The rule indicates that the minimum leverage ratio should be
1% to 2% higher for holding companies and banks undertaking major expansion
programs or that do not have the highest regulatory rating.
FDICIA required each federal banking agency to revise its risk-based capital
standards, among other things, to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risks of
non-traditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. As a result, the federal
banking agencies have revised the risk-based capital guidelines described above
to take account of concentration of credit risk and risk of non-traditional
activities. In addition, the Federal Reserve Board and the FDIC have amended
their capital standards, effective September 1, 1995, to include explicitly a
bank's exposure to declines in the economic value of its capital due to changes
in interest rates as a factor to be considered in evaluating a bank's capital
adequacy. This rule does not codify a measurement framework for assessing the
level of a bank's interest rate exposure. The Company understands that the
Federal Reserve Board and the FDIC are continuing to review the issue of
interest rate risk and at some future date intend to implement such a
measurement framework.
As of December 31, 1995, the Company and the Banks had capital ratios on a
historical basis which exceeded all minimum regulatory capital requirements.
Failure to meet the minimum regulatory capital requirements could subject a
banking institution to a variety of enforcement remedies available to federal
regulatory authorities, including the termination of deposit insurance by the
FDIC and seizure of the institution.
STATE BANKING DEPARTMENTS
As state-chartered institutions, the Banks are subject to the applicable
provisions of their respective state's banking law. The Banks derive their
lending and investment powers from these laws and are subject to periodic
examination and reporting requirements by the State Bank Commissioner who also
has specific statutory jurisdiction over certain banking activities such as
mergers and the creation of new powers.
FEDERAL RESERVE BOARD
The Federal Reserve Board requires banks to maintain reserves against its
transaction accounts, and non-personal time deposits based on the amount of the
banks' deposits.
The Company is a "bank holing company" within the meaning of the Bank
Holding Company Act. Under the Bank Holding Company Act, a bank holding company
is required to file annually with the Federal Reserve Board a report of its
operations and, with its subsidiaries, is subject to examination by the Federal
Reserve Board. The Bank Holding Company Act prohibits a bank holding company
from acquiring direct or indirect ownership or control of more than 5% of the
voting share of any bank, or increasing such ownership or control of any bank,
without prior approval of the Federal Reserve Board. No approval under the Act
is required, however, for a bank holding company already owning or controlling
over 50% of the voting shares of a bank to acquire additional shares of such
bank.
The Bank Holding Company Act further precludes a bank holding company, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any non-banking entity engaged in any
activities other than those which the Federal Reserve Board has determined to be
closely related to banking or managing and controlling banks so as to be a
proper incident thereto. The Federal Reserve Board has determined that certain
activities, including, but not
14
<PAGE>
limited to, mortgage banking, operating small loan companies, discount brokerage
activities, factoring, certain data processing operations, providing investment
and financial advice and leasing personal property on a full payout basis are
closely related, and a proper incident to banking. A bank holding company and
its subsidiaries are also prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of
property or furnishing of services.
INTERSTATE BANKING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal"), effective September 29, 1995 existing restrictions under
the Bank Holding Company Act which prevent the acquisition by a bank holding
company of banks located outside the bank holding company's home state unless
authorized by the state law of the target bank were eliminated. State law
restrictions regarding deposit concentrations will continue to apply, provided
that such restrictions do not discriminate against out-of-state bank holding
companies. The New Hampshire 20 percent deposit concentration limitation applies
to acquisitions by both in-state and out-of-state bank holding companies. Such
acquisitions will be subject to approval by the Federal Reserve Board.
Interstate banking legislation has been enacted in New Hampshire which
permits out-of-state banks and bank holding companies to establish new banks or
to affiliate with existing banks and bank holding companies in New Hampshire.
The legislation establishes the procedures for the creation of new banks in New
Hampshire and the acquisition of 5% or more of a New Hampshire bank or bank
holding company. Application for an affiliation certificate must be made to the
Board of Trust Company Incorporation ("BTCI") and the Commissioner is charged
with promulgating the rules relating to the application procedures and the
standards to be applied to the application by the BTCI. The Commissioner has the
further responsibility of monitoring certificate holders, new banks and bank
holding companies affiliated under the law and of adopting rules to carry out
this responsibility. Violation of the legislation may result in the imposition
of a fine of up to $5,000 per day for each day the violation continues and the
divestiture of any prohibited affiliation.
Under the legislation, no bank holding company may acquire ownership or
control of the voting stock of any bank if upon such acquisition (1) the bank
holding company would have more than 12 affiliates in New Hampshire; or (2) the
dollar amount of the total deposits of the bank holding company and all its
affiliates in New Hampshire would exceed 20 percent of the dollar volume of
total deposits in New Hampshire of all state and federal banks. This 20 percent
deposit concentration limitation is subject to waiver by the Commissioner in
cases involving troubled institutions.
Under Riegle-Neal, effective June 1, 1997, banks will have the ability,
subject to certain restrictions, including state opt-out provisions, to
consolidate with one another or to acquire by acquisition or merge branches
outside their home states. In addition, banks may establish new interstate
branches in state that specifically permit it. Although states may affirmatively
opt in to these transactions before June 1, 1997, New Hampshire has enacted
legislation that becomes effective on the 1997 date. The New Hampshire statute
does not permit the opening of new interstate branches in New Hampshire. The
Company understands that legislation to permit interstate branching is pending
currently in Massachusetts. Such mergers and the establishment of branches will
continue to be subject to state deposit concentration restrictions and
conditions that may be imposed by New Hampshire regulatory authorities, provided
that such restrictions and conditions do not discriminate against out-of-state
banks. The resulting New Hampshire and Massachusetts banks and branches will
continue to be subject to regulation by applicable state regulatory authorities
provided that such regulations do not discriminate against out-of-state banks.
FEDERAL HOME LOAN BANK SYSTEM
CFX Bank and Orange Savings Bank are members of the Federal Home Loan Bank
of Boston (the "FHLB"), which is one of twelve regional Federal Home Loan Banks.
The FHLB serves as a reserve or central bank for its members. It makes advances
to members in accordance with policies and procedures established by the Board
of Directors of the FHLB. As a member of the FHLB, the Banks are
15
<PAGE>
required to purchase and hold stock in the FHLB. As of December 31, 1995, CFX
Bank held stock in the FHLB in the amount of $6,471,000 and Orange Savings Bank
held stock in the FHLB in the amount of $917,000.
SECURITIES AND EXCHANGE COMMISSION
The Company has registered its common stock with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended. As a
result of such registration, the proxy and tender offer rules, periodic
reporting requirements, and insider trading restrictions and reporting
requirements, as well as certain other requirements, of such Act are applicable
to the Company.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
Under the New Hampshire Business Corporation Act, a distribution including
dividends and the purchase or redemption of a corporation's own shares, must be
authorized by the Board of Directors and may not be paid if the corporation,
after the payment is made, would not be able to pay its debts as they become due
in the usual course of business, or the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed, if
the corporation were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution.
Dividends from the Banks constitute the principal source of income to the
Company. The Banks are subject to various statutory and regulatory restrictions
on their ability to pay dividends to the Company. Under these restrictions, the
amount available for payment of dividends by the Banks totaled $38,595,000 at
December 31, 1995. In addition, bank regulators may have authority to prohibit a
bank subsidiary from paying dividends, depending on the subsidiary's financial
condition, if such payment is deemed to constitute and unsafe or unsound
practice. The ability of the Banks to pay dividends in future is presently, and
could be further, influenced by bank regulatory and supervisory policies.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the current income tax rates on the amount used.
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY
The acquisition of more than 10% of the Company's outstanding shares may, in
certain circumstances, be subject to the provisions of the Change in Bank
Control Act of 1978, and the acquisition of control of the Company by any
company would be subject to regulatory approval under the Bank Holding Company
Act of 1956.
COMMUNITY REINVESTMENT ACT
Bank holding companies and their subsidiary banks are subject to the
provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under
the terms of the CRA, each subsidiary bank's record in meeting the credit needs
of the communities served by that bank, including low- and moderate-income
neighborhoods, is regularly assessed by that bank's primary regulatory
authority. A bank's record in meeting community needs currently is evaluated as
part of the examination process, as well as when an institution applies to
undertake a merger or acquisition or to open a branch facility. When a bank
holding company applies for approval to acquire a bank or other bank holding
company, the Federal Reserve Board will review the CRA assessment of each
subsidiary bank of the applicant bank holding company and such assessment may be
the basis for denying the application. At December 31, 1995, CFX Bank was rated
"Outstanding" and Orange Savings Bank was rated "Satisfactory" with respect to
CRA.
AFFILIATE TRANSACTION RESTRICTIONS
The Banks are subject to federal laws that limit the transactions by the
Banks with or on behalf of the Company and with or on the behalf of any nonbank
subsidiaries. Such transactions are limited to
16
<PAGE>
10% of a Bank's capital and surplus with respect to any one covered affiliate
and an aggregate of 20% of capital and surplus with respect to all such
affiliates. Further, covered extensions of credit generally are required to be
secured by eligible in specified amounts. Federal law also prohibits bank
subsidiaries of holding companies from purchasing "low quality" assets from any
affiliates.
OTHER REGULATIONS
The policies of regulatory authorities, including the Federal Reserve Board
and the FDIC, have had a significant effect on the operating results of
financial institutions in the past and are expected to do so in the future. An
important function of the Federal Reserve Board is to regulate aggregate
national credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. Policies of these agencies may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States government. Supervision, regulation or examination of the Company
by these regulatory agencies is not intended for the protection of the Company's
shareholders.
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further deregulation of
both banks and other financial institutions. Such legislation could relax or
eliminate geographic restrictions on banks and bank holding companies and could
place the Company in more direct competition with other financial institutions,
including mutual funds and securities brokerage firms. No assurance can be given
as to whether any additional legislation will be enacted or as to the effect of
such legislation on the business of the Company.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Not applicable.
ITEM 2. PROPERTIES
The Company neither owns nor leases any real property. It utilizes the
premises and equipment of CFX Bank with no payment of any rental fee to CFX
Bank. However, the management fees charged to CFX Bank by the Company are
reduced by, among other things, an occupancy factor.
CFX Bank owns its main office and two branch offices in Keene, New
Hampshire. The Bank also owns branches in Jaffrey, Troy, Greenville, New
Ipswich, Peterborough, Hillsborough, Henniker and Allenstown, New Hampshire
while leasing other branches in Rindge, Hinsdale, Manchester, Gilford, and
Loudon, New Hampshire. In addition, to these location, CFX Bank also owns
several smaller properties used for administrative purposes. The total book
value of the bank premises owned and the book value of the leasehold
improvements on the bank premises leased by CFX Bank at December 31, 1995, were
$6,317,000 and $1,074,000, respectively. The Bank also owns 50 automated teller
and remote service units located in New Hampshire and operates five
"mini-ranches" at various retail establishments in its market area. CFX Mortgage
owns an office in Amherst, New Hampshire with a book value of $1,368,000 at
December 31, 1995.
Orange Savings Bank owns its main office, located in Orange Massachusetts,
and leases a branch facility in Athol, Massachusetts. At December 31, 1995, the
book values of this building and leasehold's improvement were $362,000 and
$69,000, respectively.
At December 31, 1995, the total net book value of the Company's premises and
equipment was $13,548,000.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party or
any of its property is the subject. There are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of banking, to which the Banks are a party or of which the Banks' property is
subject. There are no material pending legal proceedings to which any director,
officer or affiliate of the Company, any owner of record or beneficially of more
than five percent (5%) of the common stock
17
<PAGE>
of the Company, or any associate of any such director, officer, affiliate of the
Company or any security holder is a party adverse to the Company or has a
material interest adverse to the Company or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for the Company's common equity and
related stockholder matters on page 63 of the Annual Report to Shareholders for
the fiscal year ended December 31, 1995 is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information relating to selected financial data on page 1 of the Annual
Report to Shareholders for the fiscal year ended December 31, 1995 is
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 10-24 inclusive of the Annual Report to Shareholders for the
fiscal year ended December 31, 1995 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X
Information relating to financial statements on pages 25-57 inclusive of the
Annual Report to Shareholders for the fiscal year ended December 31, 1995 is
incorporated herein by reference. The opinions of Deloitte & Touche, L.L.P. and
KPMG Marwick LLP for the years ended 1994 and 1993, respectively, pertaining to
Orange Savings Bank follow:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Orange Savings Bank
We have audited the accompanying consolidated balance sheet of Orange
Savings Bank and subsidiary as of December 31, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies at December
31, 1994, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
/S/ Deloitte & Touche L.L.P.
January 27, 1995
Boston, MA
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Orange Savings Bank:
We have audited the consolidated statements of operations, shareholders'
equity, and cash flows of Orange Savings Bank and subsidiaries for the year
ended December 31, 1993. These consolidated financial statements, which are
not presented separately herein, are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows or Orange Savings Bank and subsidiaries for the year ended December
31, 1993, in conformity with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 4, 1994
(B) SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 57 of the
Annual Report to Shareholders for the fiscal year ended December 31, 1995 is
incorporated herein by reference.
(2) Information About Oil and Gas Producing Activities
Not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant
under the caption "Proposal I - Election of Directors" of the Proxy Statement
for the 1996 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation under the caption "Proposal I
- -- Election of Directors" of the Proxy Statement for the 1996 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management under the caption "Proposal I -- Election of Directors" of the Proxy
Statement for the 1996 Annual Meeting of Shareholders is incorporated herein by
reference.
19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions under
the caption "Proposal I -- Election of Directors" of the Proxy Statement for the
1996 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are incorporated herein by reference
from The Annual Report to Shareholders for the year ended December 31, 1995 at
Item 8.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE REFERENCES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Consolidated Balance Sheets.................................................. 25
Consolidated Statements of Income............................................ 26
Consolidated Statements of Shareholders' Equity.............................. 27
Consolidated Statements of Cash Flows........................................ 28
Notes to Consolidated Financial Statements................................... 29-57
Report of Independent Auditors............................................... 59
</TABLE>
(2) Financial Statement Schedules
See Item 14 (d)
(3) Exhibits Required by Item 601
See Item 14 (c)
(B) REPORTS ON FORM 8-K
On January 16, 1996, a Form 8-K was filed announcing the Company entered
into a definitive agreement for the acquisition of The Safety Fund Corporation,
headquartered in Fitchburg, Massachusetts.
On February 16, 1996, a Form 8-K was filed announcing the Company entered
into a definitive agreement for the acquisition of Milford Co/operative Bank,
headquartered in Milford, New Hampshire.
(C) EXHIBITS
The exhibits listed below are filed herewith or are incorporated herein by
reference to other filings.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------
<C> <S>
2.1(1) Agreement and Plan of Merger dated January 16, 1996 between CFX Corporation and The Safety Fund
Corporation.
2.2(2) Agreement and Plan of Merger dated February 16, 1996 between CFX Corporation, and Milford
Co/operative Bank, and CFX Bank.
3 (5) Articles of Incorporation and By-Laws of CFX Corporation, as amended.
10.1(7) 1992 CFX Corporation Profit Sharing/Bonus Plan.
10.2(9) 1986 CFX Corporation Stock Option Plan.
10.3(8) CFX Corporation 1992 Employee Stock Purchase Plan.
10.4(6,10) Employment Agreement dated as of January 1, 1991 between CFX Corporation and Peter J. Baxter, as
amended.
10.5(4,10) Change of Control Agreement dated December 31, 1992 between CFX Corporation and Mark A. Gavin.
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.6(4,10) Employment Agreement dated September 1, 1993 between CFX Corporation and Paul D. Spiess.
10.7(6,10) Change of Control Agreement dated June 5, 1991 between CFX Bank and William H. Dennison.
10.8(6,10) Change of Control Agreement dated June 5, 1991 between CFX Bank and Peter T. Whittemore.
10.9 Change of Control Agreement dated January 2, 1995 between CFX Bank and Lee K. Robator.
10.10(4,10) Employment Agreement dated September 1, 1993 between CFX Mortgage, Inc. and Paul T. Pouliot.
10.11(3) 1995 CFX Corporation Stock Option Plan.
11 CFX Corporation Computation of Equivalent Shares and Per Share Earnings.
13 CFX Corporation Annual Report to Shareholders for fiscal year ended December 31, 1995.
21 Subsidiaries -- Reference is made to Item 1.
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Deloitte & Touche, L.L.P.
23.3 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99.1(1) Stock Option Agreement dated January16, 1996 between CFX Corporation and The Safety Fund
Corporation.
99.2(2) Stock Option Agreement dated February 16, 1996 between CFX Corporation and Milford Co/operative
Bank.
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the Exhibits to the Form 8-K of CFX
Corporation filed on January 16, 1996.
(2) Incorporated herein by reference to the Exhibits to the Form 8-K of CFX
Corporation filed on February 16, 1996.
(3) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX Corporation No. 33-61787 effective in 1995
(4) Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K of CFX Corporation for the year ended December 31, 1994.
(5) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-4 of CFX Corporation No. 33-56875 effective in 1994.
(6) Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K of CFX Corporation for the year ended December 31, 1993.
(7) Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K of CFX Corporation for the year ended December 31, 1992.
(8) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX Corporation No. 33-52598 effective in 1992.
(9) Incorporated herein by reference to the Exhibits to the Registration
Statement on Form S-8 of CFX Corporation No. 33-17071 effective in 1987.
(10) Exhibits refer to compensatory agreements with executives of CFX
Corporation and its subsidiaries.
(D) FINANCIAL STATEMENT SCHEDULES
Schedules to the Consolidated Financial Statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CFX CORPORATION
<TABLE>
<S> <C>
Date: March 28, 1996 By: /s/ PETER J. BAXTER
--------------------------------------------
Peter J. Baxter,
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ RICHARD F. ASTRELLA
------------------------------------------- Director March 28, 1996
Richard F. Astrella
/s/ RICHARD B. BAYBUTT
------------------------------------------- Director March 28, 1996
Richard B. Baybutt
/s/ PETER J. BAXTER
------------------------------------------- President and Director March 28, 1996
Peter J. Baxter (Principal Executive Officer)
/s/ CHRISTOPHER V. BEAN
------------------------------------------- Director March 28, 1996
Christopher V. Bean
/s/ CALVIN L. FRINK
------------------------------------------- Director March 28, 1996
Calvin L. Frink
/s/ EUGENE E. GAFFEY
------------------------------------------- Director March 28, 1996
Eugene E. Gaffey
/s/ MARK A. GAVIN
------------------------------------------- Chief Financial Officer March 28, 1996
Mark A. Gavin (Principal Financial Officer)
/s/ ELIZABETH SEARS HAGER
------------------------------------------- Director March 28, 1996
Elizabeth Sears Hager
</TABLE>
22
<PAGE>
<TABLE>
<C> <S> <C>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ DOUGLAS S. HATFIELD, JR.
------------------------------------------- Director March 28, 1996
Douglas S. Hatfield, Jr.
/s/ PHILIP A. MASON
------------------------------------------- Director March 28, 1996
Philip A. Mason
/s/ EMERSON H. O'BRIEN
------------------------------------------- Director March 28, 1996
Emerson H. O'Brien
/s/ WALTER R. PETERSON
------------------------------------------- Director March 28, 1996
Walter R. Peterson
/s/ L. WILLIAM SLANETZ
------------------------------------------- Director March 28, 1996
L. William Slanetz
/s/ GREGG R. TEWKSBURY
------------------------------------------- Corporate Controller (Principal March 28, 1996
Gregg R. Tewksbury Accounting Officer)
</TABLE>
23
<PAGE>
EXHIBIT 10.9
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 2nd day of January, 1995 between CFX CORPORATION,
a New Hampshire corporation (hereinafter "Company") and Lee K. Robator, residing
at Keene, N.H. (hereinafter "Executive").
WHEREAS the Company wishes to assure the continued availability of the
Executive's services and to create an environment which will promote the
Executive's giving impartial and objective advice in any circumstances resulting
from the possibility of Change of Control of the Company (as herein defined),
and
WHEREAS the Company and the Executive wish to provide the Executive with
financial protection in the event significant changes in the Executive's
employment status occur following a Change of Control of the Company (as herein
defined);
NOW THEREFORE, the Company and the Executive, in consideration of the terms
and conditions set forth herein and other valuable consideration, receipt of
which is hereby acknowledged, mutually covenant and agree as follows:
1. TERM.
The term of this Agreement shall commence on the date hereof and terminate
on the date three years from the date hereof unless the Executive's employment
is sooner terminated as provided in Section 13 hereof (the "Term"). On each
December 31st thereafter, the Term shall automatically be extended for an
additional calendar year unless either party gives written notice to the other,
by no later than the preceding November 30th, that he or it does not concur in
such extension.
2. PAYMENTS UPON CHANGE OF CONTROL AND TERMINATION EVENT.
The Company shall make payments to the Executive as provided for in
paragraph 4 hereof upon the occurrence of both a Change of Control of the
Company and a Termination Event, as such terms are defined in paragraph 3
hereof.
3. DEFINITIONS.
(a) "Base Amount" shall mean an amount equal to the average annual
compensation payable by the Company, or any subsidiary in which the Company owns
more than fifty (50) percent of the outstanding shares, to the Executive and
includable by the Executive in gross income for the most recent five (5) taxable
years, or such shorter period as the Executive shall have been employed by the
Company, ending before the date on which the Change of Control occurred.
(b) A "Change of Control" shall be deemed to have occurred if any of the
following have occurred:
(i) any individual, corporation (other than the Company), partnership,
trust, association, pool, syndicate, or any other entity or any group of
persons acting in concert becomes the beneficial owner, as that concept is
defined in Rule 13d-3 promulgated by the Securities Exchange Commission
under the Securities Exchange Act of 1934, as the result of any one or more
securities transactions (including gifts and stock repurchases but excluding
transactions described in subdivision (ii) following) of securities of the
Company possessing fifty-one percent (51%) or more of the voting power for
the election of directors of the Company;
(ii) there shall be consummated any consolidation, merger or stock-for
stock exchange involving securities of the Company in which the holders of
voting securities of the Company immediately prior to such consummation own,
as a group, immediately after such consummation, voting securities of the
Company (or if the Company does not survive such transaction, voting
securities of the corporation surviving such transaction) having less than
fifty percent (50%) of the total voting power in an election of directors of
the Company (or such other surviving corporation), excluding securities
received by any members of such group which represent disproportionate
percentage increases in their shareholdings vis-a-vis the other members of
such group;
<PAGE>
(iii) "approved directors" shall constitute less than a majority of the
entire Board of Directors of the Company, with "approved directors" defined
to mean the members of the Board of Directors of the Company as of the date
of this Agreement and any subsequently elected members of the Board of
Directors of the Company who shall be nominated or approved by a majority of
the approved directors on the Board of Directors of the Company prior to
such election; or
(iv) there shall be consummated any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions, excluding
any transaction described in subdivision (ii) above), of all, or
substantially all, of the assets of the Company or its subsidiaries to a
party which is not controlled by or under common control with the Company.
(c) A "Termination Event" shall be deemed to have occurred if, within the
thirty-six month period following a Change of Control, the Executive experiences
the loss of his position by reason of discharge or demotion, for other than
termination for good cause, or the Executive's voluntary termination following
the substantial withholding, substantial adverse alteration or substantial
reduction of responsibility, authority, or compensation (including any
compensation or benefit plan in which the Executive participates or substitute
plans adopted prior to the Change of Control) to which the Executive was charged
or empowered with or entitled to immediately prior to a Change of Control of the
Company or to which he would normally be charged or empowered with or entitled
to from time to time by reason of his office, for other than good cause.
(d) TERMINATION FOR GOOD CAUSE.
"Termination for good cause" means termination:
(i) based on the willful and continued failure by the Executive to
perform his duties for the Company or a subsidiary (other than such failure
resulting from the Executive's incapacity due to physical or mental
illness), after a written demand for performance is delivered to the
Executive by the Board of Directors of the Company which specifically
identifies the manner in which the Board believes the Executive has not
performed his duties; an act or acts of dishonesty taken by the Executive;
or an act or acts intended to result in his personal enrichment at the
expense of the Company or a subsidiary; or an act or acts of willful
misconduct which are materially injurious to the Company. Termination shall
be by written notice to the Executive identifying the cause; or
(ii) If the Executive shall have been absent from the full-time
performance of his duties with the Company for six consecutive months as the
result of the Executive's incapacity due to physical or mental illness, and
the Executive shall not have returned to full-time performance of his duties
within thirty days after written notice of proposed termination, the
Executive's employment may be terminated by the Company on or after the
expiration of such thirty day period for disability. Termination shall be by
written notice to the Executive. Termination of the Executive's employment
based on retirement shall mean termination in accordance with the Company's
generally applicable retirement policy or with any retirement arrangement
established with the Executive's consent.
4. CASH PAYMENTS.
Upon the occurrence of both a Change of Control of the Company and a
Termination Event, the Company shall, during the period commencing on the date
of the Termination Event and over a period of 12 months (the "Pay-Out Period"),
make equal monthly payments to the Executive in an amount such that the present
value of all such payments, determined as of the date of the Termination Event,
equals 1.00 times the Base Amount.
5. ADVANCE PAYMENTS FOR FINANCIAL HARDSHIP.
If at any time during the Pay-Out Period the Company's Board of Directors in
its sole discretion shall concur, upon application of the Executive, the Company
shall make available to the Executive, in one (l) lump sum, an amount up to but
not greater than the present value of all monthly payments remaining to be paid
to him in the Pay-Out Period, calculated with the Federal Funds rate in effect
as of the date of such Board concurrence. If (a) the lump sum amount thus made
available is less than (b) the present value of all such remaining monthly
payments, the Company shall continue to pay to the Executive monthly payments
for the duration of the Pay-Out Period, but from such date forward
<PAGE>
such monthly payments will be in a reduced amount such that the present value of
such payments will equal the difference between (b) and (a), above. The
Executive may elect to waive any or all payments due him under this
subparagraph.
6. DEATH OF EXECUTIVE.
If the Executive dies before receiving all payments payable to him under
this Agreement, the Company shall pay to the Executive's spouse, or if the
Executive leaves no spouse, to the estate of the Executive, one (1) lump sum
payment in an amount equal to the present value of all such remaining unpaid
payments, determined as of the date of death of the Executive.
7. REIMBURSEMENT OF EXPENSES.
In the event a Change of Control of the Company and a Termination Event
occur and any action, suit or proceeding is brought by the Company or the
Executive for the enforcement, performance or construction of this Agreement,
the Company agrees to reimburse the Executive for all costs and expenses
reasonably incurred by him in such action, suit or proceeding, including
reasonable attorneys' and accountants' fees and expenses, unless the Executive
shall have been substantially unsuccessful, on the merits or otherwise, in such
action, suit or proceeding.
8. NO DUTY TO SEEK OTHER EMPLOYMENT.
Amounts payable to the Executive under this Agreement shall not be reduced
by the amount of any compensation received by the Executive from any other
employer or source during the Pay-Out Period, and the Executive shall not be
under any obligation to seek other employment or gainful pursuit during such
Pay-Out Period as a result of this Agreement.
9. NON-COMPETITION, FUTURE SERVICES AND COMPENSATION.
(a) During such period as the Executive is receiving cash payments under
this Agreement, the Executive agrees:
(i) that he shall not, without the prior approval of the Board of
Directors of the Company, certified to him by the Secretary or Acting
Secretary of the Company, become an officer, employee, agent, partner, or
director of any other business in substantial competition with the Company,
its subsidiaries or any other company or bank affiliated with the Company,
including any branch or office of any of the foregoing. Such restriction
shall apply to any such other business doing business in any county in the
State of New Hampshire in which the Company, its subsidiaries or any such
other company or bank is then conducting any material business or into
which, to the knowledge of the Executive at the time of such termination,
any such entity has immediate plans to expand its activities in material
respects; and
(ii) to provide such consulting services as may be requested by the
Company.
(b) As compensation to the Executive for his promises in (a) of this
paragraph, the Bank agrees to maintain, during such period, the Executive's
eligibility for and participation in any health and life insurance plans, in
which the Executive was eligible to participate prior to the Termination Event.
10. REDUCTION OF PAYMENTS.
In the event any of the payments made under this Agreement would be
considered an "excess parachute payment" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended, then there shall be a reduction in
the amount otherwise payable under this Agreement such that all payments are
deductible by the Company.
11. WITHHOLDING.
Distribution of any payments under this Agreement shall be reduced for the
amount required to be withheld pursuant to any law or regulation with respect to
taxes or similar provisions.
12. PAYMENT OF COMPENSATION TO TERMINATION DATE.
In addition to any other payments payable to the Executive hereunder, the
Company shall pay the Executive full compensation and all other amounts and
benefits to which the Executive is entitled through the termination of his
employment.
13. NO RIGHT TO CONTINUED EMPLOYMENT.
This Agreement shall not confer upon the Executive any right with respect to
continuance of employment by the Company or any subsidiary, nor shall it
interfere in any way with the right of his
<PAGE>
employer to terminate his employment at any time. No payments hereunder shall be
required except upon the occurrence of both a Change of Control of the Company
and a Termination Event as set forth in Section 3 herein. Thus, except as
specifically provided in Section 2 herein, no payments hereunder shall be made
on account of termination of the Executive's employment (i) upon the Executive's
death, disability or retirement, (ii) by the Company with or without cause or
(iii) upon the Executive's voluntary termination.
14. WAIVER OF BREACH.
Waiver by any party of a breach of any provision of this Agreement shall not
operate as or be construed as a waiver by such party of any subsequent breach
hereof.
15. INVALIDITY.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision, which shall
remain in full force and effect.
16. ENTIRE AGREEMENT; WRITTEN MODIFICATION; TERMINATION.
This Agreement contains the entire agreement between the parties concerning
the matters covered hereby. No modification, amendment or waiver of any
provision hereof shall be effective unless in writing specifically referring
hereto and signed by the party against whom such provision as modified or
amended or such waiver is sought to be enforced. This Agreement shall terminate
as of the time the Company makes the final payment which it may be obligated to
pay hereunder or provides the final benefit which it may be obligated to provide
hereunder.
17. COUNTERPARTS.
This Agreement may be made and executed in counterparts, each of which may
be considered an original for all purposes.
18. GOVERNING LAW.
This Agreement is governed by and is to be construed and enforced in
accordance with the laws of the State of New Hampshire.
19. AUTHORIZATION.
The Company represents and warrants that the execution of this Agreement has
been duly authorized by resolution of the Board of Directors of the Company.
IN WITNESS WHEREOF, the undersigned parties have executed or caused to be
executed this Agreement as of the day and year first above written.
CFX CORPORATION
By: /s/
--------------------------------------
Peter J. Baxter
ITS DULY AUTHORIZED PRESIDENT AND CEO.
"EXECUTIVE"
/s/
--------------------------------------
Lee K. Robator
<PAGE>
EXHIBIT 11
CFX CORPORATION
COMPUTATION OF EQUIVALENT EARNINGS AND PER SHARE EARNINGS
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
EARNINGS PER SHARE -- PRIMARY
Equivalent shares:
Average shares outstanding....................................................... 7,315 7,001 6,948
Additional shares due to stock options........................................... 219 -- --
--------- --------- ---------
Total equivalent shares........................................................ 7,534 7,001 6,948
--------- --------- ---------
--------- --------- ---------
Earnings per share:
Net income....................................................................... $ 7,946 $ 5,906 $ 6,171
Less: Preferred stock dividends.................................................. 89 268 270
--------- --------- ---------
Net income available to common stock............................................. $ 7,857 $ 5,638 $ 5,901
--------- --------- ---------
--------- --------- ---------
Total equivalent shares........................................................ 7,534 7,001 6,948
--------- --------- ---------
--------- --------- ---------
Earnings per common share.......................................................... $ 1.04 $ 0.81 $ 0.85
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE -- ASSUMING FULL DILUTION
Equivalent shares:
Average shares outstanding....................................................... 7,315 7,001 6,948
Additional shares due to stock options........................................... 260 -- --
--------- --------- ---------
Total equivalent shares........................................................ 7,575 7,001 6,948
--------- --------- ---------
--------- --------- ---------
Earnings per share:
Net income....................................................................... $ 7,946 $ 5,906 $ 6,171
Less: Preferred stock dividends.................................................. 89 268 270
--------- --------- ---------
Net income available to common stock............................................. $ 7,857 $ 5,638 $ 5,901
--------- --------- ---------
--------- --------- ---------
Total equivalent shares........................................................ 7,575 7,001 6,948
--------- --------- ---------
--------- --------- ---------
Earnings per common share.......................................................... $ 1.04 $ 0.81 $ 0.85
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR YEARS ENDED DECEMBER 31 (1)
-------------------------------------------------------------------------
1995 1994 1993 (2,3) 1992 1991 (5)
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net interest and dividend income.......... $ 32,881 $ 31,304 $ 29,673 $ 28,311 $ 25,251
Provision for loan and lease losses....... 1,624 437 3,060 3,153 3,965
Net income (loss) available to common
stock.................................... 7,857 5,638 5,901 3,049 1,636
Common earnings (loss) per share (6)...... 1.04 .81 .85 .44 .24
Common dividends declared per share (4)... .80 .48 .38 .32 .37
Preferred dividends declared per share.... .4625 1.3875 1.3875 1.3875 1.3875
Balance Sheet Data:
Total assets.............................. 900,549 839,204 817,070 742,365 736,095
Net loans and leases...................... 691,283 632,849 535,376 540,116 534,724
Investments (7)........................... 125,491 130,393 199,580 127,654 138,158
Deposits.................................. 665,723 625,429 623,599 648,455 628,538
Advances from Federal Home Loan Bank of
Boston................................... 100,814 92,201 46,801 -- 20,500
Total shareholders' equity................ 89,954 86,573 84,007 80,455 79,251
Common shareholders' equity............... 89,954 83,194 80,629 77,052 75,653
Common shareholders' equity per share
(4)...................................... 11.98 11.77 11.53 11.09 10.95
Average Balance Data:
Total assets.............................. 877,146 854,293 749,132 753,256 707,115
Interest earning assets................... 810,013 771,126 694,377 699,038 660,273
Loans and leases (net of unearned
income).................................. 662,893 592,106 555,963 545,914 546,522
Interest bearing liabilities.............. 725,353 692,592 629,340 640,556 597,268
Common shareholders' equity............... 88,301 81,864 78,993 76,371 75,925
Financial Ratios:
Return on average common shareholders'
equity................................... 8.90% 6.89% 7.47% 3.99% 2.15%
Return on average assets.................. .90% .66% .79% .40% .23%
</TABLE>
- ------------------------
(1) On April 28, 1995, the Company acquired Orange Savings Bank, a Massachusetts
chartered savings bank in stock form. The transaction was accounted for as a
pooling-of-interests, and each of Orange's 724,412 outstanding shares of
common stock was converted into .8075 shares of the Company's common stock.
Accordingly, all print period balances have been restated to reflect this
transaction. (See Note B of the "Notes to Consolidated Financial
Statements").
(2) During 1993, the Company merged together its three banking subsidiaries,
Cheshire County Savings Bank, The Monadnook Bank and The Valley Bank. The
resulting consolidated bank, Cheshire County Savings Bank, changed its name
to CFX Bank on November 15, 1993.
(3) On September 1, 1993, the Company, through its subsidiary, Cheshire County
Savings Bank, acquired the remaining 52.4% of Colonial Mortgage, Inc.
(renamed CFX Mortgage, Inc.). Previously, the Company owned 47.6% and as a
result of the purchase Colonial became a wholly-owned subsidiary. The
transaction was accounted for by the purchase method of accounting. (See
Note B of the "Notes to Consolidated Financial Statements").
(4) Common per share data has been restated to reflect the Company's 5% stock
dividend declared on December 12, 1995.
(5) On September 7, 1991, the Company, through its subsidiary, The Valley Bank,
acquired certain assets and assumed all deposits of The Family Bank and
Trust. The Family Bank and Trust had been declared insolvent by the New
Hampshire Bank Commissioner and placed into Federal Deposit Insurance
Corporation receivership on September 6, 1991.
(6) Statement of Financial Standards No. 100, "Accounting for Income Taxes", was
adopted by the Company effective January 1, 1991. The cumulative effect of
the change in accounting principle on years prior to 1991 was to increase
1991 net income available to common stock by $1,603,000, or $.27 per share.
(7) Investments include training securities, investment securities, Federal Home
Loan Bank of Boston stock, and interest bearing deposits with other banks.
[GRAPH] [GRAPH] [GRAPH] [GRAPH] [GRAPH]
<PAGE>
FINANCIAL CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<C> <S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................................ 10
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................................................... 25
Consolidated Statements of Income......................................................................... 26
Consolidated Statements of Shareholders' Equity........................................................... 27
Consolidated Statements of Cash Flows..................................................................... 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Significant Accounting Policies.................................................................. 29
B. Mergers and Acquisitions......................................................................... 34
C. Restrictions on Cash and Due From Bank Accounts.................................................. 35
D. Trading Securities............................................................................... 35
E. Investment Securities............................................................................ 35
F. Loans and Leases................................................................................. 38
G. Allowance for Loan and Lease Losses.............................................................. 38
H. Premises and Equipment........................................................................... 39
I. Foreclosed Real Estate........................................................................... 39
J. Deposits......................................................................................... 40
K. Short-Term Borrowed Funds........................................................................ 41
L. Advances from Federal Home Loan Bank of Boston................................................... 41
M. Preferred Stock.................................................................................. 42
N. Income Taxes..................................................................................... 42
O. Pension and 401(k) Plans......................................................................... 45
P. Stock Option Plan................................................................................ 46
Q. Employee Stock Purchase Plan..................................................................... 46
R. Restrictions on Subsidiary Dividends, Loans and Advances......................................... 47
S. Commitments and Contingencies.................................................................... 47
T. Loans to Related Parties......................................................................... 48
U. Financial Instruments............................................................................ 48
V. Fair Value of Financial Instruments.............................................................. 50
W. Financial Instruments with Off-Balance-Sheet Risk................................................ 52
X. Subsequent Events................................................................................ 53
Y. Segment Information.............................................................................. 54
Z. CFX Corporation (Parent-Company-Only) Condensed Financial Statements............................. 55
AA. Quarterly Results of Operations (Unaudited)...................................................... 57
REPORT OF MANAGEMENT -- ASSESSMENT OF INTERNAL CONTROLS OVER FINANCIAL REPORTING............................ 58
REPORTS OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS....................................................... 59 & 60
DIRECTORS AND OFFICERS OF CFX CORPORATION................................................................... 61
TRUSTEES AND BANKING PARTNERS OF CFX BANK................................................................... 61
DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC................................................ 62
MANAGEMENT OF CFX FUNDING L.L.C............................................................................. 62
DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK....................................................... 62
INFORMATION ON COMMON STOCK................................................................................. 63
CORPORATE INFORMATION....................................................................................... 64
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
All information within this section should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report and the tables appearing throughout the discussion and analysis.
All references in the discussion to financial condition and to results of
operations are to the consolidated position and results of CFX Corporation and
its subsidiaries (the Company) 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. The information within this section as of December 31,
1994 and for the years ended December 31, 1994 and 1993 has been restated to
reflect the pooling-of-interests with Orange Savings Bank that occurred on April
28, 1995.
The Bank's direct subsidiaries, both of which are wholly-owned, are CFX
Capital Systems Inc., (CFX Capital) and CFX Financial Services, Inc. (CFX
Financial). CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. which
engages in mortgage banking. CFX Financial owns 51% of CFX Funding L.L.C., which
engages in the facilitation of lease financing and securitization.
On February 9, 1996 and on January 5, 1996, respectively, the Company
entered into separate definitive agreements for the acquisitions of the Milford
Co/operative Bank, headquartered in Milford, New Hampshire and The Safety Fund
Corporation, headquartered in Fitchburg, Massachusetts. As a result of these
acquisitions, the Company will take a special charge in 1996 of approximately
$3.8 million on an after-tax basis to earnings 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 pertain to the following
areas: data processing, $100,000; personnel, $1,000,000; and other, $2,700,000.
Data processing costs consist primarily of write-offs due to duplication of
computer hardware, software, and certain telecommunications equipment. Personnel
costs consist primarily of charges related to employee severance and employment
outplacement assistance. Other costs include investment banking fees, legal and
accounting fees, due diligence costs, proxy registration/filing fees and mailing
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 is the possibility of
a special assessment to certain savings institutions. Presently, Congress is
considering a bill recommending that savings institutions (i.e. Milford) which
have deposits insured by the Federal Deposit Insurance Corporation's Savings
Association Fund 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 would result for Milford of approximately $1.1 million.
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
taxes.
FINANCIAL CONDITION
LOANS AND LEASES
The table below sets forth the composition of the Company's loan portfolio
at the dates indicated. Loan categories are presented net of unearned income and
net deferred origination costs.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1995 1994
------------------------ ------------------------
% OF % OF
BALANCES PORTFOLIO BALANCES PORTFOLIO
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate:
Residential.............................................. $ 474,015 67.82% $ 447,458 69.87%
Construction............................................. 5,902 .84 7,761 1.21
Commercial............................................... 87,469 12.51 82,468 12.88
Commercial, financial, and agricultural.................... 52,462 7.51 48,020 7.50
Warehouse lines of credit to leasing companies............. 12,906 1.85 15,339 2.39
Other consumer............................................. 41,819 5.98 39,055 6.10
Consumer lease financing................................... 24,399 3.49 306 .05
----------- ----------- ----------- -----------
698,972 100.00% 640,407 100.00%
----------- -----------
----------- -----------
Less: Allowance for loan and lease losses.................. 7,689 7,558
----------- -----------
Net loans................................................ $ 691,283 $ 632,849
----------- -----------
----------- -----------
</TABLE>
Total loans and leases were $698,972,000 or 78% or total assets, at December
31, 1995, compared with $640,407,000, or 76% or total assets, at December 31,
1994. Total loans and leases have increased by $58,565,000 since December 31,
1994, primarily due to $24, 093,000 in indirect automobile leases generated by
the Company's consumer lending unit and $35,954,000 in residential real estate
loans purchased from several brokers in the fourth quarter of 1995. Moreover,
CFX Mortgage and CFX Funding also increased the Company's lending volumes in
1995.
10
<PAGE>
CFX MORTGAGE
CFX Mortgage makes available to borrowers in its primary consumer market
area a full range of residential loans, including FHA-insured and VA-guaranteed
loans, conventional fixed-rate loans for terms of 15 or 30 years, and adjustable
rate mortgage loans (ARMs). ARMs are advantageous to the Company because
adjustable-rates retained in the Company's loan portfolio better match its
natural liability base. However, CFX Mortgage's ability to originate ARMs in
lieu of fixed-rate loans has varied in response to changes in market interest
rates.
Under the Company's current ARMs Programs, the borrower may choose among
loans that have the initial interest rate fixed for one, three, five, or seven
years before the adjustment begins. Currently, ARMs are indexed to the 1-year
Treasury Securities Index and have annual caps of 2 percent.
All of CFX Mortgage's residential mortgage lending is subject to
non-discriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the secondary market.
Residential loans are originated using standard Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
applications and appraisal forms. All loans are subject to underwriting review
and approval by various levels of CFX Mortgage personnel, depending on the size
of the loan. Residential loan applications originate through various channels,
including the Company's bank branches and loan production offices.
In addition, CFX Mortgage originates 50% of its lending volumes through a
correspondent network located in New Hampshire, Maine, Vermont and
Massachusetts. The majority of CFX Mortgage's correspondent network consists of
community banks with the remaining consisting of mortgage bankers and mortgage
brokers.
Originations in 1993, early 1994, and late 1995 included significant
refinancing activity that was generated by low market rates. Higher interest
rates in 1994 and early 1995 curtailed refinancing activity. A summary of
lending volumes generated by CFX Mortgage for the past two years is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total residential mortgage loans originated and purchased........................... $ 133,209 $ 199,991
Total residential mortgage loans sold to CFX Bank................................... 42,226 99,660
Total residential mortgage loans sold to secondary market........................... 92,724 108,963
</TABLE>
Please refer to Note Y of the "Notes to Consolidated Financial Statements"
for more information on CFX Mortgage.
CFX FUNDING
Through its national securitization program (the Program), CFX Funding
establishes relationships with lessors who are selected by CFX Funding to
participate in the Program based on a variety of factors, including the lessor's
demonstrated portfolio performance, underwriting criteria, experience in the
leasing industry, and credit history. CFX Funding arranges for short-term
warehouse lines of credit with CFX Bank based on the credit of the participating
leasing company. The warehouse lines of credit enable the Program participants
to originate leases for portfolio sale or securitization. Upon sale or
securitization, CFX Funding functions as the Master Servicer with respect to the
lease receivables.
During 1995, CFX Funding facilitated two lease portfolio securitizations
(rated A + by Duff & Phelps). The leases securitized in 1995 totaled
approximately $36,019,000 with outstanding loan balances of approximately
$28,013,000. In addition to the two lease portfolio securitizations in 1995, CFX
Funding sold lease portfolios that totaled approximately $12,957,000 with
outstanding loan balances of approximately $10,328,000.
Included in the January 1995 securitization was the Company's guarantee to
fund a portion of the trust asset reserve account in the amount of $711,000
through a letter of credit arrangement for the benefit of an insurance company
insuring losses on the lease receivables. The Company's guarantee is well
secured by the equipment giving rise to the securitization and will reduce by
approximately $10,000 monthly as servicing fees are added to the cash paid. The
Company's guarantee ceases within 24 months and earns the Company a 6% fee over
the life of the contract.
11
<PAGE>
RISK ELEMENTS
The Company operates principally in New Hampshire and north central
Massachusetts. Economic conditions in these areas were adversely affected during
the last national recession (1990-1991). Since the recession, unemployment rates
have fallen, inflation pressures have moderated, personal income has risen, and
the housing market has rebounded. These positive economic developments have
allowed the Company's overall loan portfolio to strengthen in recent years.
Management expects that these positive economic indicators will continue to have
a positive impact on the Company. However, management can give no assurance that
the Company will not experience an increase in nonperforming assets and
charge-offs in future years.
All loans past due 90 days or more as to principal or interest are placed on
nonaccrual status. In addition, a loan (including a loan impaired under SFAS No.
114, defined below) is generally classified as nonaccrual when management
determines that significant doubt exists as to the collectibility of principal
or interest. An impaired loan may remain on accrual status if it is guaranteed
or well secured. Interest accrued but not received on loans placed on nonaccrual
status is reversed and charged against current income. Interest on nonaccrual
loans is recognized when received. Loans are restored to accrual status when the
borrower has demonstrated the ability to make future payments of principal and
interest, as scheduled. Prior to 1995, certain loans past due 90 days or more
originated by Orange Savings Bank, remained on accrual status if, in
management's judgement, they were fully secured and in the process of
collection.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans 90 days or more past due, still accruing............................. $ -- $ 221
Nonaccrual loans........................................................... 7,844 6,913
----------- -----------
Total nonperforming loans................................................ 7,844 7,134
Foreclosed real estate..................................................... 1,179 2,310
Valuation allowance on foreclosed real estate.............................. (50) (325)
----------- -----------
Total nonperforming assets............................................... $ 8,973 $ 9,119
----------- -----------
----------- -----------
Nonperforming loans as a percent of total loans............................ 1.12% 1.11%
----------- -----------
----------- -----------
Nonperforming assets as a percent of total assets.......................... 1.00% 1.09%
----------- -----------
----------- -----------
</TABLE>
The following table provides the composition of the Company's nonperforming
loans and assets at the dates indicated. Included in foreclosed real estate for
1994 were loans previously classified as in-substance foreclosures totaling
$438,000 and $358,000 for residential and construction real estate categories,
respectively. The valuation allowance relating to these in-substance
foreclosures totaled $131,000 at December 31, 1994.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1995 1994
------------------------ ------------------------
% OF % OF
BALANCES PORTFOLIO BALANCES PORTFOLIO
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential........................................ $ 5,097 65.0% $ 4,658 65.3%
Commercial......................................... 1,487 19.0 1,442 20.2
Commercial, financial, and agricultural.............. 1,161 14.8 1,007 14.1
Consumer and other................................... 99 1.2 27 .4
----------- ----- ----------- -----
7,844 100.0% 7,134 100.0%
----------- ----- ----------- -----
----- -----
Foreclosed real estate:
Real estate:
Residential........................................ 728 64.5% 1,271 64.0%
Construction....................................... 128 11.3 330 16.6
Commercial......................................... 323 28.6 709 35.7
Valuation allowance.................................. (50) (4.4) (325) (16.3)
----------- ----- ----------- -----
1,129 100.0% 1,985 100.0%
----------- ----- ----------- -----
----- -----
Total nonperforming assets........................... $ 8,973 $ 9,119
----------- -----------
----------- -----------
</TABLE>
12
<PAGE>
The following table provides a rollforward of the Company's foreclosed real
estate at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year, net............................................. $ 1,985 $ 3,810
Reclassification to nonperforming loans to reflect adoption of SFAS No. 114
(See Note A to "Notes to the Consolidated Financial Statements")............. (665) --
Additions..................................................................... 2,528 1,358
Provision for losses.......................................................... -- (207)
Pay-offs/sales/other.......................................................... (2,719) (2,976)
--------- ---------
Balance at end of year, net................................................... $ 1,129 $ 1,985
--------- ---------
--------- ---------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses realized, and recoveries received, are charged
or credited directly to the allowance. The Company's management determines the
level of the allowance for loan and lease losses based upon a review of the
Company's loan and lease portfolio. This review identifies specific problem
loans and leases requiring allocations of the allowance and also estimates an
allocation for potential loan and lease losses based on current economic
conditions and historical experience.
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................... $ 7,558 $ 7,952 $ 8,392
Allowance of acquired subsidiaries......................... -- -- 13
Provision for loan and lease losses........................ 1,624 437 3,060
Loans charged-off.......................................... (1,882) (1,255) (3,922)
Recoveries of loans previously charged-off................. 389 424 409
----------- ----------- -----------
Balance at end of year..................................... $ 7,689 $ 7,558 $ 7,952
----------- ----------- -----------
----------- ----------- -----------
Allowance for loan and lease losses as a percent of total
loans and leases.......................................... 1.10% 1.18% 1.48%
----------- ----------- -----------
----------- ----------- -----------
Allowance for loan and lease losses as a percent of total
nonperforming loans....................................... 98.02% 105.94% 100.21%
----------- ----------- -----------
----------- ----------- -----------
</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.
13
<PAGE>
TRADING SECURITIES AND INVESTMENT SECURITIES
Trading securities and investment securities consist of the following at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Trading securities........................................................ $ -- $ 236
----------- -----------
Investment securities:
Securities available for sale........................................... 98,047 8,234
Securities held to maturity............................................. 19,729 111,285
----------- -----------
Total investment securities........................................... 117,776 119,519
----------- -----------
Total trading and investment securities............................... $ 117,776 $ 119,755
----------- -----------
----------- -----------
</TABLE>
In November 1995, the FASB issued guidance allowing a one-time reassessment
of an entity's investment classifications during the period November 15, 1995 to
December 31, 1995. As a result, the Company reclassified the following debt
securities from held to maturity to available for sale.
<TABLE>
<CAPTION>
AMORTIZED COST
--------------
<S> <C>
Corporate bonds..................................................................... $ 5,359
Federal agency mortgage pass-through securities..................................... 56,268
Collateralized mortgage obligations (CMO's)......................................... 14,701
--------------
$ 76,328
--------------
--------------
</TABLE>
Included in the trading portfolio for 1994 was the Company's wholesale
leverage program. The Company began this program in October 1993, and authorized
$100 million to be invested in the program. The objective of this program was to
enhance the Company's earnings and return on equity through leveraging the
balance sheet. However, as a result of significant loan growth experienced in
1994, and anticipated loan growth in the future, the wholesale leverage program
was liquidated as of October 31, 1994. Management does not anticipate using this
program in the foreseeable future.
14
<PAGE>
DEPOSITS AND BORROWED FUNDS
The following table shows the various components of average deposits and
borrowed funds and the respective rates paid for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1995 1994
------------------------ ------------------------
AMOUNT RATES AMOUNT RATES
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits........................... $ 48,854 -- $ 38,539 --
Regular savings deposits...................................... 122,472 3.03% 133,233 2.70%
NOW and money market deposits................................. 175,963 2.19 208,532 2.29
Time deposits................................................. 294,059 5.47 239,392 4.52
----------- -----------
Total retail deposits....................................... 641,348 3.68 619,696 3.09
Brokered time deposits........................................ 27,562 6.30 -- --
----------- -----------
Total deposits.............................................. $ 668,910 3.79% $ 619,696 3.09%
----------- --- ----------- ---
----------- --- ----------- ---
Borrowed Funds:
Advances from Federal Home Loan Bank of Boston................ $ 73,308 6.27% $ 94,960 4.57%
Other borrowed funds.......................................... 31,989 5.42 16,475 3.79
----------- -----------
Total borrowed funds........................................ $ 105,297 6.01% $ 111,435 4.45%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
During 1995, the Company increased average demand deposits by $10,315,000
and average interest bearing retail deposits by $11,337,000. The majority of the
increase in overall retail 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 (time deposits).
The increase in brokered deposits funded asset growth and offset a decline
in advances from the Federal Home Loan Bank of Boston. 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 more favorable cost of funds.
15
<PAGE>
SHAREHOLDERS' EQUITY
The following table summarizes shareholders' equity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1995 1994
-------------------- --------------------
AMOUNT SHARES AMOUNT SHARES
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<S> <C> <C> <C> <C>
Common shareholders' equity......................................... $ 89,954 7,510 $ 83,007 7,052
Preferred shareholders' equity...................................... -- -- 3,566 335
--------- --------- --------- ---------
Total shareholders' equity........................................ $ 89,954 7,510 $ 86,573 7,387
--------- --------- --------- ---------
--------- --------- --------- ---------
Common shareholders' equity per share............................... $ 11.98 $ 11.77
--------- ---------
--------- ---------
Preferred shareholders' equity per share............................ $ -- $ 10.64
--------- ---------
--------- ---------
Shareholders' equity per share, assuming conversion of all preferred
shares to common................................................... $ 11.98 $ 11.72
--------- ---------
--------- ---------
</TABLE>
Note: Prior year shares and per share data have been restated to reflect the
Company's 3-for-2 stock split declared on June 13, 1995 and the Company's
5% stock dividend declared on December 12, 1995.
Shareholders' equity increased by $3,381,000 as of December 31, 1995 from
$86,573,000 at December 31, 1994 to $89,954,000 at December 31, 1995. The
increase was due to $7,946,000 in net income, issuance of $35,000 in common
stock under the employee stock purchase plan, issuance of $825,000 in common
stock under the stock option plan, issuance of $327,000 in common stock under
the dividend reinvestment program, a $268,000 decrease in net unrealized losses
on securities available for sale; offset by $18,000 paid for fractional shares
on the 3-for-2 stock split, and $5,913,000 and $89,000 in common and preferred
cash dividends, respectively.
16
<PAGE>
RESULTS OF OPERATIONS
GENERAL
The Company's involvement in mergers and acquisitions has impacted the
Company's financial statements for the past two years. All references to merger
and acquisition activity should be read in conjunction with Note B of the "Notes
to Consolidated Financial Statements."
The following table sets forth comparisons of average interest earning
assets and interest bearing liabilities, and interest income and interest
expense expressed as a percentage of the related asset or liability. In order to
reflect the economic impact of the Company's investments in state and municipal
securities and to present data on a comparative basis, the income from yields on
these securities has been restated to a tax-equivalent basis (using a 38.62%,
38.62% and 38.95% tax rate, respectively, for the years ended December 31, 1995,
1994, and 1993). The tax-equivalent adjustments are $630,000, $533,000, and
$185,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
These adjustments, however, are for comparison purposes only and have no impact
on reported net income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend earning assets:
Loans and leases (1).................. $662,893 $56,908 8.58% $592,106 $46,068 7.78% $555,963 $45,056 8.10%
Taxable securities (2)................ 110,272 5,851 5.31 143,593 7,684 5.35 112,180 5,865 5.23
Tax-exempt securities (3)............. 22,605 1,632 7.22 21,326 1,380 6.47 6,630 475 7.16
Other................................. 14,243 814 5.72 14,101 844 5.99 19.604 814 4.15
-------- ------- -------- ------- -------- -------
Total interest earning assets........... 810,013 65,205 8.05 771,126 55,976 7.26 694,377 52,210 7.52
------- ------- -------
Noninterest earning assets.............. 67,133 83,167 54,755
-------- -------- --------
Total................................. $877,146 $854,293 $749,132
-------- -------- --------
-------- -------- --------
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings deposits...................... $298,435 7,553 2.53 $341,765 8,359 2.45 $347,394 9,482 2.73
Time deposits......................... 321,621 17,809 5.54 239,392 10,818 4.52 254,747 12,150 4.77
Advances from Federal Home Loan Bank
of Boston............................ 73,308 4,598 6.27 94,960 4,338 4.57 7,821 246 3.15
Other borrowed funds.................. 31,989 1,734 5.42 16,475 624 3.79 19.378 474 2.45
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities...... 725,353 31,694 4.37 692,592 24,139 3.49 629,340 22,352 3.55
------- ------- -------
Noninterest bearing liabilities:
Demand deposits....................... 48,854 38,539 29,665
Other................................. 13,493 37,719 7,538
Shareholders' equity.................... 89,446 85,443 82,589
-------- -------- --------
Total................................. $877,146 $854,293 $749,132
-------- -------- --------
-------- -------- --------
Net interest and dividend income........ $33,511 $31,837 $29,858
------- ------- -------
------- ------- -------
Interest rate spread.................... 3.68% 3.77% 3.97%
Net interest margin..................... 4.14% 4.13% 4.30%
</TABLE>
- ------------------------------
(1) For the purpose of these computations, nonaccrual loans are included in
loans.
(2) Taxable securities include trading securities and investment securities.
(3) Tax-exempt securities are included within investment securities.
17
<PAGE>
The following table presents changes in interest and dividend income,
interest expense, and net interest and dividend income which are attributable to
changes in the average amounts of interest earning assets and interest bearing
liabilities and/or changes in rates earned or paid thereon. The net changes
attributable to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
1995 VS 1994 1994 VS 1993
------------------------------- -------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividends earned on:
Loans and leases................................... $ 5,827 $ 5,013 $ 10,840 $ 2,843 $ (1,831) $ 1,012
Taxable investments................................ (1,776) (57) (1,833) 1,679 138 1,817
Tax-exempt investments............................. 86 166 252 955 (50) 905
Other.............................................. 9 (39) (30) (268) 300 32
--------- --------- --------- --------- --------- ---------
Total interest and dividend income............... $ 4,146 $ 5,083 $ 9,229 $ 5,209 $ (1,443) $ 3,766
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Interest paid on:
Savings deposits................................... $ (1,076) $ 270 $ (806) $ (153) $ (907) $ (1,123)
Time deposits...................................... 4,219 2,772 6,991 (712) (620) (1,332)
FHLB advances...................................... (1,128) 1,388 260 3,933 159 4,092
Other borrowings................................... 763 347 1,110 (79) 229 150
--------- --------- --------- --------- --------- ---------
Total interest expense........................... $ 2,778 $ 4,777 $ 7,555 $ 2,989 $ (1,202) $ 1,787
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Change in net interest and dividend income....... $ 1,368 $ 306 $ 1,674 $ 2,220 $ (241) $ 1,979
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF YEARS 1995 AND 1994
In 1995 the Company earned $7,857,000, or $1.04 per share, compared to
earnings of $5,638,000, or $.81 per share, for the prior year.
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 $59 million, or 9.14%,
increase in loans and leases over the past twelve months, and an increased focus
on the generation of non-interest income. However, a portion of the increase was
offset by a $1,187,000 increase in the provision for loan and lease losses and
by $341,000 in pretax losses incurred in the first half of 1995 from the sale of
bank premises. Total core earnings were $42,302,000 for 1995 compared to
$37,820,000 for 1994.
NET INTEREST AND DIVIDEND INCOME
Taxable-equivalent net interest and dividend income was $33,511,000 in 1995,
up 5.26% from $31,837,000 in 1994. The $1,674,000 increase in net interest and
dividend income was due to an increase in average interest earning assets in
1995, offset by a decline in the Company's interest rate spread from 3.77% in
1994 to 3.68% in 1995.
The increase in average interest earning assets resulted from an increase in
loans and leases (see "Financial Condition -- Loans and Leases" section of this
"Management's Discussion and Analysis").
Offsetting the increase in loans and leases was a decline in taxable
securities (see "Financial Condition -- Trading and Investment Securities"
section of this "Management's Discussion and Analysis").
The interest rate spread in the 1995 period declined from the 1994 period
principally as a result of increases in the cost of deposits and borrowed funds.
In addition to interest rates paid for certificates of deposit increasing over
the last year, the Company's deposit customers have shifted funds from variable
rate deposits (savings, NOW, and money market accounts) to the higher rate time
deposits. Although the interest rate spread declined in 1995, the net interest
margin remained constant in the 1995 period compared to the 1994 period as a
result of the increase in demand deposits in 1995 compared to 1994.
18
<PAGE>
Falling short-term interest rates are causing, and are anticipated over the
near term to continue to cause, compression with the Company's interest rate
spread and net interest margin due to interest earning assets repricing more
rapidly than interest bearing liabilities. This expectation is based on the fact
that one year adjustable rate mortgages will begin repricing to lower market
rates while deposit rates are not likely to decrease as rapidly in a lower
interest rate environment. However, short-term borrowed funds repricing to lower
market rates would help mitigate the potential compression in deposit rates. In
addition, with fully indexed adjustable rate mortgage loans carrying higher
interest rates than new 30-year fixed rate mortgage loans, the Company may
experience higher prepayments from adjustable rate mortgages refinancing to
fixed rate mortgages, and therefore, requiring the Company to reinvest the cash
flows at lower yields. The Company includes these possibilities in its regular
assessment of interest rate risk exposure. Policy guidelines in this area are
designed to maintain relatively stable interest margins in rising and falling
interest rate environments.
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 1995 was $1,624,000, compared to
$437,000 in 1994. The higher provision for loan and lease losses in 1995 is
principally the result of continued growth in the loan portfolio, the change in
loan mix toward consumer loans and leases, and the higher net charge-offs in
1995 compared to 1994. Total net charge-offs amounted to $1,493,000 for 1995,
compared to $831,000 for 1994.
At December 31, 1995, nonperforming loans stood at $7,844,000, or 1.12% of
total loans and leases, compared to $7,134,000, or 1.11% of total loans and
leases, as of December 31, 1994. The allowance for loan and lease losses as a
percentage of nonperforming loans as of December 31, 1995 and December 31, 1994
amounted to 98.02% and 105.94%, respectively.
OTHER INCOME
Other income for 1995 totaled $9,421,000 compared to $6,516,000 for 1994.
The net gains (losses) on trading securities between the 1995 and 1994
periods are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Wholesale leverage program........................................................................... $ -- $ (528)
Other trading activities............................................................................. 1,092 271
--------- ---------
$ 1,092 $ (257)
--------- ---------
--------- ---------
</TABLE>
For a discussion of the Company's wholesale leverage program, see the
"Financial Condition -- Trading and Investment Securities" section of this
"Management's Discussion and Analysis". Other trading activities represents
capital gains realized from an investment in a money market mutual fund. These
capital gains offset capital loss carryforwards. (See Note N of the "Notes to
Consolidated Financial Statements").
The increased income from service charges on deposit accounts is due to an
increase in fees and enhanced collection practices. Lower loan servicing fee
income in 1995 is the result of a $58,900,000 sale of residential mortgage
servicing rights in the fourth quarter of 1994. The higher gains on the sale of
loans in 1995 is the result of the implementation of SFAS No. 122, "Accounting
for Mortgage Servicing Rights". (See Note A of the "Notes to Consolidated
Financial Statements"). The Company adopted SFAS No. 122 as of January 1, 1995,
which resulted in a $484,000 (pretax) increase in gains on the sales of loans.
The increase in other income from leasing activities is due principally to fees
generated by CFX Funding and the amortization of deferred credits relating to an
investment in leasehold residuals.
19
<PAGE>
OTHER EXPENSE
Other expense for 1995 totaled $28,397,000, compared to $27,929,000 for
1994. The increase in other expense was primarily attributable to the increase
in salaries and employee benefits, losses on the sale of real estate investment
properties in the first and second quarters of 1995, and costs incurred in
connection with the acquisition of Orange Savings Bank. The higher salaries and
employee benefits are the result of normal salary adjustments, higher medical
costs, higher profit sharing, and lower deferred salary cost in CFX Mortgage
pertaining to loan origination. In addition, contributing to the higher salary
and employee benefits was an increase in staff in both commercial and consumer
lending, along with new employees hired for the de novo New Hampshire branches
opened in Gilford (December 1994) and Manchester (June 1995).
However, the above increase in other expense was offset by lower insurance
premiums from the Federal Deposit Insurance Corporation (FDIC). The FDIC's Bank
Insurance Fund (BIF) surpassed its congressionally mandated reserve ratio of
1.25 percent of insured deposits during the month of May, 1995. The new
assessment rate schedule for the BIF, which substantially lowered rates for most
banks, thus became effective June 1, 1995, enabling the FDIC to refund excess
premiums already paid by BIF-insured institutions for the four-month period from
June 1, 1995 to September 30, 1995 and charge lower premiums for the fourth
quarter of 1995. It is estimated that the reduced insurance premium on an annual
basis will save the Company approximately $1.2 million (pretax).
TAXES
Income taxes for 1995 were 35.30% of pretax income, compared to 37.53% of
pretax income for 1994. The effective tax rates for 1995 were lower because of
higher tax-exempt income, tax credits pertaining to low-income housing and the
reversal of a $125,000 valuation allowance relating to Orange Savings Bank's
capital loss carryforward.
COMPARISON OF YEARS 1994 AND 1993
In 1994 the Company earned $5,638,000, or $.81 per share, compared to
earnings of $5,901,000, or $.85 per share, for the prior year.
Income taxes for the prior year were reduced (and thus earnings increased)
through the recognition of several special tax adjustments in connection with
the Statement of Financial Accounting Standards No. 109. Without these tax
adjustments, the previous year's earnings would have been $4,726,000, or $.68
per share.
Earnings for 1994 were positively affected by stronger core earnings (net
interest and dividend income and other income) and lower credit costs (provision
for loan and lease losses and the operation of foreclosed real estate) as a
result of a significantly lower level of nonperforming assets carried on the
Company's balance sheet during 1994 compared to 1993. Total core earnings were
$37,820,000 for 1994, compared to $36,216,000 for 1993.
NET INTEREST AND DIVIDEND INCOME
Taxable-equivalent net interest and dividend income was $31,837,000 in 1994,
up 6.63% from $29,858,000 in 1993. The $1,979,000 increase in net interest and
dividend income was due to an increase in average interest earning assets in
1994, offset by a decline in the Company's interest rate spread from 3.97% in
1993 to 3.77% in 1994.
The increase in average interest earning assets resulted from an increase in
taxable securities (see "Financial Condition -- Trading Securities and
Investment Securities" section of this "Management's Discussion and Analysis")
and loans and leases (see "Financial Condition -- Loans and Leases" section of
this "Management's Discussion and Analysis").
The interest rate spread and net interest margin decline in 1994 from the
1993 levels was partially the result of the Company's wholesale leverage program
(liquidated in October 1994) which earned a considerably lower interest rate
spread than the Company's retail banking activities. Excluding leverage program
assets and other trading securities, the Company's interest rate spread and net
interest margin for the year ended December 31, 1994 were 3.85% and 4.21%,
respectively.
The remaining decline in the interest rate spread and net interest margin is
due to increases in the cost of borrowed funds and the relatively low interest
rates (teaser rates) offered on newly originated adjustable rate mortgage loans.
The Company's portfolio of residential mortgages consists predominantly of
adjustable rate mortgages (most of which bear interest at rates based on
one-year Treasury securities with the balance at rates based on three-and
five-year Treasury securities).
20
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is determined by management through
its continual review of the Company's loan portfolio. This review includes an
assessment of problem loans and potential unknown losses based on current
economic conditions, the regulatory environment and historical experience.
The provision for loan and lease losses in 1994 was $437,000, compared to
$3,060,000 in 1993. The lower provision for loan and lease losses in 1994 was
the result of lower charge-offs and significantly improved asset quality over
the previous year, partially offset by provisions for new loan growth. A
combination of an improving economy, increased efforts to resolve problem
assets, and a $6.6 million bulk sale of nonperforming assets in the fourth
quarter of 1993, allowed the Company to significantly reduce nonperforming
assets.
At December 31, 1994, nonperforming loans stood at $7,134,000, or 1.11% of
total loans and leases, compared to $7,935,000, or 1.48% of total loans and
leases, as of December 31, 1993. The allowance for loan and lease losses as a
percentage of nonperforming loans as of December 31, 1994 and 1993 amounted to
105.94% and 100.21%, respectively. Net charge-offs for 1994 amounted to
$831,000, compared to $3,513,000 for 1993.
OTHER INCOME
Other income for 1994 totaled $6,516,000 compared to $6,543,000 for 1993.
The net gains (losses) on trading securities between the 1994 and 1993
periods are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Wholesale leverage program............................................... $ (528) $ (83)
Other trading activities................................................. 271 399
--------- ---------
$ (257) $ 316
--------- ---------
--------- ---------
</TABLE>
For a discussion on the Company's wholesale leverage program, see the
"Financial Condition -- Trading Securities and Investment Securities" section of
this "Management's Discussion and Analysis". Other trading activities represents
capital gains realized from an investment in a money market mutual fund. These
capital gains offset capital loss carryforwards. (See Note N of the "Notes to
Consolidated Financial Statements").
Income from investment securities transactions was significantly higher
during 1993 compared to 1994 as a result of restructuring the securities
portfolios during 1993 to better manage the Company's interest rate risk
exposure, particularly in a rising interest rate environment.
The increase in loan servicing fees, net gains on sale of loans and other
income are primarily from CFX Mortgage, Inc. (formerly Colonial Mortgage, Inc.,
acquired as of September 1, 1993). CFX Mortgage's operations are included in the
Company's consolidated statements of income for the full 1994 year compared to
four months for 1993.
As a result of favorable market conditions (higher interest rates and lower
prepayment speeds), the Company sold $58,900,000 in residential mortgage
servicing rights as of December 21, 1994. This sale resulted in a pretax gain of
$677,000.
OTHER EXPENSE
Other expense for 1994 totaled $27,929,000, compared to $25,654,000 for
1993. The increase in other expenses was primarily attributable to the inclusion
of CFX Mortgages (acquired September 1, 1993) and CFX Funding's (commenced
operations December 7, 1993) operations for the full 1994 year. Also
contributing to higher expense in 1994 were increased salary costs, increased
severance costs, higher medical costs, costs associated with changing the names
of the Company and its subsidiaries, and costs incurred in connection with the
pending acquisition of Orange Savings Bank. (Please refer to "Note B" of the
"Notes to Consolidated Financial Statements" for more detail on the Company's
acquisition of Orange Savings Bank). Offsetting these expenses for 1994 was a
reduction of $2,806,000 in costs associated with the operation of foreclosed
real estate. This decrease was a result of a reduction in holdings of foreclosed
real estate in 1994 compared to 1993 and the recognition in 1993 results of a
$1,395,000 loss on the bulk sale of foreclosed real estate.
21
<PAGE>
TAXES
Income taxes for the year ended December 31, 1994 and 1993 were 37.53% and
17.74%, of pretax income, respectively. The effective tax rate was lower during
1993 because of the realization of several special tax adjustments in connection
with Statement of Financial Accounting Standards No. 109. The special tax
adjustments related to the recognition of a deferred tax asset for New Hampshire
Business Profits Taxes and the realization of previously unrecognized deferred
tax benefits applicable to capital loss transactions.
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 is required to satisfy certain capital adequacy guidelines
relating to the risk nature of an institution's assets. These guidelines,
established by the Federal Reserve Board and the Federal Deposit Insurance
Corporation (FDIC), are applicable to bank holding companies and state chartered
non-member banks, respectively. Under the "risk-based" capital rules, banks and
bank holding companies are required to have a level of Tier 1 capital equal to
4% of total risk-weighted assets, as defined. Banks and bank holding companies
are also required to have total capital (composed of Tier 1 plus "supplemental"
or Tier 2 capital, the latter being composed primarily of 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 December 31, 1995, the Company's Tier 1 leverage capital ratio was
8.99%. In addition, the Company's Tier 1 risk-based capital ratio and total
risk-based capital ratio were 14.71% and 15.99%, respectively.
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 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.
22
<PAGE>
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.
The following table summarizes the timing of the Company's anticipated
maturities or repricing of interest earning assets and interest bearing
liabilities as of December 31, 1995. This table has been generated using certain
assumptions which the Company believes fairly and accurately represent repricing
volumes in a dynamic interest rate environment. Specifically, contractual
maturities are used on all time deposits and investments other than asset-backed
securities. For asset-backed securities and loans, contractual maturities,
repricing and prepayment assumptions are used. The prepayment assumptions are
based on current experience and industry statistics. The gap maturity categories
for savings deposits (including NOW, savings, and money market accounts) are
based on management's philosophy of repricing core deposits in reaction to
changes in the interest rate environment. Repricing frequencies will vary at
different points in the interest cycle and as supply and demand for credit
change.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------------
0-3 4-12 1-5 5-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
----------- ----------- ----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits with other
banks..................................... $ 34 $ 293 $ -- $ -- $ -- $ 327
Federal Home Loan Bank of Boston stock..... 7,388 -- -- -- -- 7,388
Investment securities...................... 7,138 23,317 56,875 29,843 603 117,776
Loans and leases........................... 138,414 321,441 195,051 28,149 22,471 705,526
----------- ----------- ----------- --------- --------- ---------
Total interest earning assets................ 152,974 345,051 251,926 57,992 23,074 831,017
----------- ----------- ----------- --------- --------- ---------
Interest bearing liabilities:
Savings and time deposits.................. 122,190 236,895 207,501 51,285 -- 617,871
Advances from Federal Home Loan Bank of
Boston.................................... 59,113 41,500 -- 201 -- 100,814
Short-term borrowed funds.................. 31,735 -- -- -- -- 31,735
----------- ----------- ----------- --------- --------- ---------
Total interest bearing liabilities........... 213,038 278,395 207,501 51,486 -- 750,420
----------- ----------- ----------- --------- --------- ---------
Periodic gap................................. $ (60,064) $ 66,656 $ 44,425 $ 6,506 $ 23,074 $ 80,597
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Cumulative gap............................... $ (60,064) $ 6,592 $ 51,017 $ 57,523 $ 80,597 $ --
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
</TABLE>
The ability to assess interest rate risk using gap analysis is limited. Gap
analysis does not capture the impact of cash flow or balance sheet mix changes
over a forecasted future period and it does not measure the amount of price
change expected to occur in the various asset and liability categories. Thus,
management does not use gap analysis exclusively in its assessment of interest
rate risk. The Company's interest rate risk exposure is also measured by the
forecasted net income and discounted cash flow market value sensitivities
referred to above.
23
<PAGE>
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 December 31, 1995, interest bearing
deposits with other banks totaled $327,000 and trading and available for sale
securities totaled $98,047,000.
Because the Company's subsidiaries, CFX Bank and Orange Savings Bank,
maintain large residential mortgage 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 $10,713,000 as of December 31, 1995, comprised of $2,743,000 in cash
and due from banks and interest bearing deposits with bank subsidiaries and
notes receivable from bank subsidiaries of $7,970,000.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
data herein have been presented in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Inflation can
affect the Company in a number of ways, including increased operating costs and
interest rate volatility. Management attempts to minimize the effects of
inflation by maintaining an approximate match between interest rate sensitive
liabilities and, where practical, by adjusting service fees to reflect changing
costs.
24
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and due from banks....................................................................... $ 28,766 $ 21,625
Federal funds sold............................................................................ -- 1,125
----------- -----------
Cash and Cash Equivalents................................................................. 28,766 22,750
Interest bearing deposits with other banks.................................................... 327 3,250
Federal Home Loan Bank of Boston stock........................................................ 7,388 7,388
Trading securities............................................................................ -- 236
Securities available for sale................................................................. 98,047 8,234
Securities held to maturity................................................................... 19,729 111,285
Mortgage loans held for sale.................................................................. 6,554 8,295
Loans and leases.............................................................................. 698,972 640,407
Less allowance for loan and lease losses.................................................... 7,689 7,558
----------- -----------
Net Loans and Leases...................................................................... 691,283 632,849
Premises and equipment........................................................................ 13,548 14,278
Mortgage servicing rights..................................................................... 4,373 4,207
Goodwill and deposit base intangibles......................................................... 9,884 10,476
Foreclosed real estate........................................................................ 1,129 1,985
Other assets.................................................................................. 19,521 13,971
----------- -----------
$ 900,549 $ 839,204
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing............................................................................ $ 617,872 $ 585,587
Noninterest bearing......................................................................... 47,851 39,842
----------- -----------
Total Deposits............................................................................ 665,723 625,429
Short-term borrowed funds................................................................... 31,735 27,316
Advances from Federal Home Loan Bank of Boston.............................................. 100,814 92,201
Other liabilities........................................................................... 12,323 7,685
----------- -----------
Total Liabilities......................................................................... 810,595 752,631
----------- -----------
Shareholders' Equity
Preferred stock, 7.5% Series A Cumulative Convertible, par value $1.00 per share -- issued
and outstanding 192,769 shares in 1994..................................................... -- 193
Common stock, par value $.66 2/3 per share -- authorized 22,500,000 shares, issued 7,509,921
shares in 1995 and 7,582,259 shares in 1994................................................ 5,007 5,055
Paid-in capital............................................................................. 65,763 65,740
Retained earnings........................................................................... 19,422 23,289
Net unrealized losses on securities available for sale, after tax effects................... (238) (506)
Cost of 865,898 shares of common stock in treasury.......................................... -- (7,198)
----------- -----------
Total Shareholders' Equity................................................................ 89,954 86,573
----------- -----------
$ 900,549 $ 839,204
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
25
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases....................................................... $ 56,908 $ 46,068 $ 45,056
Interest on investment securities:
Taxable.......................................................................... 5,596 5,742 5,355
Tax-exempt....................................................................... 1,002 847 290
--------- --------- ---------
6,598 6,589 5,645
Interest and dividends on trading securities....................................... 6 1,725 468
Dividends on marketable equity securities.......................................... 249 217 42
Other.............................................................................. 814 844 814
--------- --------- ---------
Total Interest and Dividend Income............................................. 64,575 55,443 52,025
--------- --------- ---------
Interest expense:
Interest on deposits............................................................... 25,362 19,177 21,632
Interest on borrowings:
Short-term....................................................................... 6,322 4,952 711
Long-term........................................................................ 10 10 9
--------- --------- ---------
Total Interest Expense......................................................... 31,694 24,139 22,352
--------- --------- ---------
Net Interest and Dividend Income............................................... 32,881 31,304 29,673
Provision for loan and lease losses.................................................. 1,624 437 3,060
--------- --------- ---------
Net Interest and Dividend Income After Provision for Loan and Lease Losses..... 31,257 30,867 26,613
--------- --------- ---------
Other income:
Service charges on deposit accounts................................................ 2,202 1,589 1,567
Loan servicing fees................................................................ 1,656 1,862 323
Net gains (losses) on trading securities........................................... 1,092 (257) 316
Net gains on investment securities................................................. 158 86 2,603
Net gain on sale of loan servicing rights.......................................... -- 677 --
Net gains on sales of loans........................................................ 634 529 398
Leasing activities................................................................. 1,967 381 --
Other.............................................................................. 1,712 1,649 1,336
--------- --------- ---------
9,421 6,516 6,543
--------- --------- ---------
Other expense:
Salaries and employee benefits..................................................... 13,845 13,502 10,957
Occupancy and equipment............................................................ 3,936 3,718 3,049
Professional fees.................................................................. 1,388 1,274 1,109
Marketing.......................................................................... 791 654 446
Operation of foreclosed real estate................................................ 374 267 3,073
FDIC deposit insurance............................................................. 749 1,406 1,510
Goodwill and deposit base intangible amortization.................................. 714 757 708
Other.............................................................................. 6,600 6,351 4,802
--------- --------- ---------
28,397 27,929 25,654
--------- --------- ---------
Income Before Income Taxes..................................................... 12,281 9,454 7,502
Income taxes......................................................................... 4,335 3,548 1,331
--------- --------- ---------
Net Income..................................................................... 7,946 5,906 6,171
Preferred stock dividends............................................................ 89 268 270
--------- --------- ---------
Net Income Available to Common Stock........................................... $ 7,857 $ 5,638 $ 5,901
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding........................................... 7,534 7,001 6,948
--------- --------- ---------
--------- --------- ---------
Earnings per common share............................................................ $ 1.04 $ .81 $ .85
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
26
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED NET UNREALIZED
LOSSES ON LOSSES ON
MARKETABLE SECURITIES
PREFERRED COMMON PAID-IN RETAINED EQUITY AVAILABLE
STOCK STOCK CAPITAL EARNINGS SECURITIES FOR SALE
----------- ----------- --------- ----------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.......... $ 194 $ 4,620 $ 58,755 $ 24,161 $ (77) $ --
Net income.......................... -- -- -- 6,171 -- --
Common cash dividends declared --
$.38 per share..................... -- -- -- (2,643) -- --
Preferred cash dividends declared --
$1.3875 per share.................. -- -- -- (270) -- --
Issuance of common stock under
employee stock option plan......... -- 21 285 -- -- --
Issuance of common stock under
employee stock purchase plan....... -- 7 81 -- -- --
5% common stock dividend............ -- 174 2,952 (3,137) -- --
Decrease in net unrealized losses on
marketable equity securities....... -- -- -- -- 63 --
Change in method of accounting for
investment securities.............. -- -- -- -- 14 (166)
----------- ----------- --------- ----------- ------ ------
Balance at December 31, 1993.......... 194 4,822 62,073 24,282 -- (166)
Net income.......................... -- -- -- 5,906 -- --
Common cash dividends declared --
$.48 per share..................... -- -- -- (3,386) -- --
Preferred cash dividends declared --
$1.3875 per share.................. -- -- -- (268) -- --
Issuance of common stock under stock
option plan........................ -- 33 427 -- -- --
Issuance of common stock under
employee stock purchase plan....... -- 11 139 -- -- --
Insuance of common stock under
dividend reinvestment program...... -- 4 60 -- -- --
Preferred stock converted to common
stock.............................. (1) 1 -- -- -- --
5% common stock dividend............ -- 184 3,041 (3,245) -- --
Increase in net unrealized losses on
securities available for sale...... -- -- -- -- -- (340)
----------- ----------- --------- ----------- ------ ------
Balance at December 31, 1994.......... 193 5,055 65,740 23,289 -- (506)
Net income.......................... -- -- -- 7,946 -- --
Common cash dividends declared --
$.80 per share..................... -- -- -- (5,913) -- --
Preferred cash dividends declared --
$.4625 per share................... -- -- -- (89) -- --
Issuance of common stock under stock
option plan........................ -- 62 763 -- -- --
Issuance of common stock under
employee stock purchase plan....... -- 3 32 -- -- --
Issuance of common stock under
dividend reinvestment plan......... -- 15 312 -- -- --
Preferred stock converted to common
stock.............................. (193) 212 (19) -- -- --
Fractional shares from 3 for 2 stock
split.............................. -- (1) (17) -- -- --
5% common stock dividend............ -- 238 5,573 (5,811) -- --
Decrease in net unrealized losses on
securities available for sale...... -- -- -- -- -- 268
Retirement of treasury shares....... -- (577) (6,621) -- -- --
----------- ----------- --------- ----------- ------ ------
Balance at December 31, 1995.......... $ -- $ 5,007 $ 65,763 $ 19,422 $ -- $ (238)
----------- ----------- --------- ----------- ------ ------
----------- ----------- --------- ----------- ------ ------
<CAPTION>
TREASURY
STOCK TOTAL
----------- ---------
<S> <C> <C>
Balance at December 31, 1992.......... $ (7,198) $ 80,455
Net income.......................... -- 6,171
Common cash dividends declared --
$.38 per share..................... -- (2,643)
Preferred cash dividends declared --
$1.3875 per share.................. -- (270)
Issuance of common stock under
employee stock option plan......... -- 306
Issuance of common stock under
employee stock purchase plan....... -- 88
5% common stock dividend............ -- (11)
Decrease in net unrealized losses on
marketable equity securities....... -- 63
Change in method of accounting for
investment securities.............. -- (152)
----------- ---------
Balance at December 31, 1993.......... (7,198) 84,007
Net income.......................... -- 5,906
Common cash dividends declared --
$.48 per share..................... -- (3,386)
Preferred cash dividends declared --
$1.3875 per share.................. -- (268)
Issuance of common stock under stock
option plan........................ -- 460
Issuance of common stock under
employee stock purchase plan....... -- 150
Insuance of common stock under
dividend reinvestment program...... -- 64
Preferred stock converted to common
stock.............................. -- --
5% common stock dividend............ -- (20)
Increase in net unrealized losses on
securities available for sale...... -- (340)
----------- ---------
Balance at December 31, 1994.......... (7,198) 86,573
Net income.......................... -- 7,946
Common cash dividends declared --
$.80 per share..................... -- (5,913)
Preferred cash dividends declared --
$.4625 per share................... -- (89)
Issuance of common stock under stock
option plan........................ -- 825
Issuance of common stock under
employee stock purchase plan....... -- 35
Issuance of common stock under
dividend reinvestment plan......... -- 327
Preferred stock converted to common
stock.............................. -- --
Fractional shares from 3 for 2 stock
split.............................. -- (18)
5% common stock dividend............ -- --
Decrease in net unrealized losses on
securities available for sale...... -- 268
Retirement of treasury shares....... 7,198 --
----------- ---------
Balance at December 31, 1995.......... $ -- $ 89,954
----------- ---------
----------- ---------
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
27
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1995 1994 1993
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net income...................................................................... $ 7,946 $ 5,906 $ 6,171
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization................................................. 3,053 3,012 2,398
Amortization of deferred credit on leasehold residual......................... (1,347) -- --
Provision for loan and lease losses........................................... 1,624 437 3,060
Provision for foreclosed real estate losses................................... -- 207 673
Loans originated and acquired for sale........................................ (90,983) (100,331) (81,635)
Principal balance of loans sold............................................... 92,724 108,963 64,708
Net (gain) loss on sale of portfolio loans.................................... -- (91) 172
Net (gain) loss on sale of foreclosed real estate............................. 8 (225) 1,338
Net gains on investment securities............................................ (158) (86) (2,603)
Net decrease (increase) in trading securities................................. 236 39,595 (28,861)
Net deferred income tax provision (benefit)................................... 3,330 (63) (498)
Other......................................................................... (6,784) (1,999) 1,313
---------- ------------ ----------
Net Cash Provided (Used) by Operating Activities............................ 9,649 55,325 (33,764)
---------- ------------ ----------
Investing Activities
Purchase of CFX Mortgage, Inc., net of cash and cash equivalents acquired....... -- -- (4,831)
Proceeds from sales of securities available for sale............................ 1,788 20,386 --
Proceeds from maturities of securities available for sale....................... 5,361 2,137 --
Purchase of securities available for sale....................................... (20,091) (24,755) --
Proceeds from maturities of securities held to maturity......................... 23,647 30,385 --
Purchase of securities held to maturity......................................... (8,816) (37,776) --
Purchase of investment securities............................................... -- -- (138,443)
Proceeds from sale of investment securities..................................... -- -- 101,980
Proceeds from the maturity of investment securities............................. -- -- 28,001
Proceeds from the sale of, or payments on, foreclosed real estate............... 1,154 1,553 7,282
Proceeds from the sale of portfolio loans....................................... 250 999 27,228
Purchase of Federal Home Loan Bank of Boston stock.............................. -- (2,881) (1,106)
Proceeds from the sale of Federal Home Loan Bank of Boston stock................ -- -- 245
Net decrease in interest bearing deposits with other banks...................... 2,923 7,714 235
Net increase in loans and leases................................................ (58,954) (97,529) (23,003)
Purchases of premises and equipment............................................. (1,093) (3,893) (3,265)
---------- ------------ ----------
Net Cash Used by Investing Activities....................................... (53,831) (103,660) (5,677)
---------- ------------ ----------
Financing Activities
Net increase (decrease) in noninterest bearing deposits and savings accounts.... (25,034) (17,020) 1,317
Net increase (decrease) in time certificates of deposit......................... 65,328 18,310 (25,633)
Net increase in short-term borrowings........................................... 4,419 6,434 11,426
Proceeds from Federal Home Loan Bank of Boston advances with maturities in
excess of three months......................................................... 66,500 -- 201
Payment of Federal Home Loan Bank of Boston advances with maturities in excess
of three months................................................................ (3,000) -- --
Net increase (decrease) in Federal Home Loans Bank of Boston advances with
maturities of three months or less............................................. (54,887) 45,400 46,600
Common cash dividends paid...................................................... (4,226) (3,297) (2,430)
Preferred cash dividends paid................................................... (89) (268) (270)
Proceeds from issuance of common stock under stock option plan.................. 825 460 306
Proceeds from issuance of common stock under employee stock purchase plan....... 35 150 88
Proceeds from issuance of common stock under dividend reinvestment plan......... 327 64 --
---------- ------------ ----------
Net Cash Provided by Financing Activities................................... 50,198 50,233 31,605
---------- ------------ ----------
Increase (Decrease) in Cash and Cash Equivalents............................ 6,016 1,898 (7,836)
Cash and cash equivalents at beginning of year.................................... 22,750 20,852 28,688
---------- ------------ ----------
Cash and Cash Equivalents at End of Year.................................... $ 28,766 $ 22,750 $ 20,852
---------- ------------ ----------
---------- ------------ ----------
Supplementary information
Interest paid on deposit accounts............................................... $ 24,925 $ 19,152 $ 21,763
Interest paid on borrowed funds................................................. 5,988 4,669 609
Income taxes paid............................................................... 1,986 2,086 3,017
Increase (decrease) in due to broker............................................ -- (33,254) 32,230
Increase in due from broker..................................................... -- -- 1,514
Transfer from securities available for sale to securities held to maturity...... -- 15,810 --
Transfer from securities held to maturity to securities available for sale...... 76,328 -- --
Transfers from loans to foreclosed real estate.................................. 971 1,380 4,262
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
28
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of CFX Corporation (the Company) and its
wholly-owned subsidiaries, which provide banking services primarily in New
Hampshire and north central Massachusetts, are as follows:
PRINCIPLES OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of CFX
Corporation and its wholly-owned subsidiaries, CFX Bank and Orange Savings Bank
(collectively referred to as "Banks") as well as CFX Bank's wholly-owned
subsidiaries, CFX Capital Systems, Inc. (CFX Capital) and CFX Financial
Services, Inc. (CFX Financial), and Orange Savings Bank's wholly-owned
subsidiary, OSB Securities Corp. Also included are the accounts of CFX Capital's
wholly-owned subsidiary, CFX Mortgage, Inc., which engages in mortgage banking,
and CFX Financial's 51% ownership of CFX Funding L.L.C., which engages in the
facilitation of lease financing and securitization. All significant intercompany
accounts and transactions are eliminated upon consolidation. (See Note B --
"Mergers and Acquisitions".)
USE OF ESTIMATES
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with general
practices within the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and income and expenses for the period. Actual results could differ
significantly from these estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowances for loans and
leases, foreclosed real estate and deferred tax assets.
BUSINESS
The Corporation, through its bank subsidiaries, serves as a financial
intermediary, attracting deposits from, and making loans to, consumers and small
to-mid-sized businesses through its 23 full service offices and two loan
production offices in New Hampshire and north central Massachusetts.
RECLASSIFICATIONS AND RESTATEMENTS
The consolidated financial statements as of December 31, 1994 and for the
years ended December 31, 1994 and 1993 have been restated to reflect the
pooling-of-interests with Orange Savings Bank. (See Note B -- "Mergers and
Acquisitions."). In addition, certain amounts have been reclassified in the 1994
and 1993 consolidated financial statements to conform to the 1995 presentation.
Prior period common per share data has been restated to reflect the
pooling-of-interests with Orange Savings Bank, the Company's 3 for 2 stock split
declared on June 13, 1995 to shareholders of record on June 23, 1995, and the
Company's 5% stock dividend declared on December 12, 1995 to shareholders of
record on December 22, 1995. In connection with the 3 for 2 stock split, the par
value of the Company's common stock was reduced from $1.00 to $.66 2/3.
CASH FLOW INFORMATION
Cash equivalents include amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
29
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRADING AND INVESTMENT SECURITIES
Effective December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". (See Note E -- "Investment
Securities".) The Statement establishes standards for all debt securities and
for equity securities that have readily determinable fair values.
SFAS No. 115 requires that investments in debt securities, that management
has the positive intent and ability to hold to maturity, be classified as "held
to maturity" and reflected at amortized cost. Investments that are purchased and
held principally for the purpose of selling them in the near term are classified
as "trading securities" and reflected on the balance sheet at fair value, with
unrealized gains and losses included in earnings. Investments not classified as
either of the above are classified as "available for sale" and reflected on the
balance sheet at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. The
cumulative effect of the change in accounting principle at December 31, 1993 was
to decrease shareholders' equity by $152,000 net of related income tax effects.
There was no effect on net income for the year ended December 31, 1993 relating
to the adoption of SFAS No. 115.
Prior to December 31, 1993, debt securities that management had the intent
and ability to hold until maturity were reflected at amortized cost. Marketable
equity securities and securities held for sale were stated at the lower of
aggregate cost or fair value. Net unrealized losses applicable to marketable
equity securities were reflected as a charge to shareholders' equity, net of tax
effects, while write-downs applicable to securities held for sale were reflected
in earnings. Marketable equity securities held for trading were stated at the
lower of aggregate cost or fair value, with changes in fair value reflected in
trading gains and losses within the consolidated statements of income.
For all years presented, purchase premiums and discounts are amortized to
earnings by a method which approximates the interest method over the terms of
the investments. Declines in the value of investments that are deemed to be
other than temporary are reflected in earnings when identified. Gains and losses
on disposition of investments are computed by the specific identification
method.
Federal Home Loan Bank stock is carried at cost.
FINANCIAL INSTRUMENTS
INTEREST RATE SWAP AGREEMENTS: Interest rate swap agreements designated as
hedges against future fluctuations in the interest rates of specifically
identified assets or liabilities are accounted for on the same basis as the
underlying asset or liability. Accordingly, interest rate swaps designated as
hedges against floating rate loan portfolios (carried at historical cost) are
reflected at cost. Interest rate swaps which hedge the Company's trading
securities portfolio (carried at fair value) are marked to fair value through
net gains (losses) on trading securities included in the consolidated statements
of income. The net interest paid or received under swap agreements is recorded
in the interest income or expense account related to the asset or liability
being hedged.
FINANCIAL FUTURES CONTRACTS: Interest rate futures contracts have been
entered into by the Company as hedges against interest rate risk in its trading
securities portfolio. These instruments are marked to fair value through net
gains (losses) on trading securities included in the consolidated statements of
income. No such contracts were in effect during 1995.
FINANCIAL OPTION CONTRACTS: Option premiums paid or received, and
designated as hedges against future fluctuations in the interest rates of
specifically identified assets or liabilities, are accounted for on the same
basis as the underlying asset or liability. Accordingly, option contracts
designated as hedges against mortgage loans held for sale are carried at the
lower of cost or estimated fair value in the aggregate. Option contracts which
hedge the Company's trading securities portfolio (carried at fair value) are
marked to fair value through net gains (losses) on trading securities included
in the consolidated statements of income.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated or purchased and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized in a valuation allowance by
charges to the consolidated statements of income when applicable.
30
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND LEASES
All loans past due 90 days or more as to principal or interest are placed on
nonaccrual status. In addition, a loan (including a loan impaired under SFAS No.
114, defined below) is generally classified as nonaccrual when management
determines that significant doubt exists as to the collectibility of principal
or interest. An impaired loan may remain on accrual status if it is guaranteed
or well secured. Interest accrued but not received on loans placed on nonaccrual
status is reversed and charged against current income. Interest on nonaccrual
loans is recognized when received. Cash received on impaired loans is generally
allocated to principal and interest based on the contractual terms of the note,
unless management believes such receipt should be applied directly to principal
based on collection concerns. Loans are restored to accrual status when the
borrower has demonstrated the ability to make future payments of principal and
interest, as scheduled. Prior to the third quarter of 1993, and during 1993 and
1994 for certain loans originated by Orange Savings Bank, loans past 90 days or
more remained on accrual status if, in management's judgement, they were fully
secured and in the process of collection.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the related
loan's yield using the interest method. The Company is generally amortizing
these amounts over the contractual life of the related loans.
Consumer lease financing loans are carried at the amount of minimum lease
payments plus residual values, less unearned income which is amortized into
interest income using the interest method.
In May 1993, the Financial Accounting Standards Board issued Statement No.
114 "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), which was
amended in October, 1994 by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan, Income Recognition and Disclosure" ("SFAS 118"). The
Company adopted SFAS No. 114 and 118 on January 1, 1995. Under this Statement, a
loan is considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of the shortfall in relation to the principal and interest owed. The
Statement is not applicable to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, and loans that are measured at
fair value or the lower of cost or fair value. The Company measures impairment
on a loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loans obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent. Collateralized loans are generally measured by fair value of existing
collateral, unless market prices or discounted cash flow information is deemed
to be more current and reflective of the economies of the lending relationship.
At December 31, 1995, the Company had $2,981,000 in impaired loans of which
approximately 65% were measured by the fair value of collateral, 20% by market
price, and 15% by discounted cash flow analysis.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. Accordingly, upon adoption of SFAS No. 114,
the Company transferred $796,000 of loans previously classified as in-substance
foreclosures and $131,000 of the valuation allowance for foreclosed real estate
losses to nonperforming loans.
The adoption of SFAS No. 114 had no effect on the Company's assessment of
the overall adequacy of the allowance for loan and lease losses. The restatement
of previously issued financial statements to conform with SFAS No. 114 is
expressly prohibited.
Loan losses, including those applicable to impaired loans, are charged
against the allowance for loan and lease losses when management believes the
collectibility of the loan balance is unlikely. The allowance is an estimate and
is increased by charges to current income in amounts sufficient to maintain the
adequacy of the allowance. The adequacy is determined by management's evaluation
of the extent of existing risk in the loan portfolio and prevailing economic
conditions.
31
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to income as incurred, and
the costs of major additions and improvements are capitalized.
The provision for depreciation and amortization is computed on the
straight-line method based on the estimated useful lives of the assets or the
terms of the leases, if shorter.
MORTGAGE SERVICING RIGHTS
Effective January 1, 1995, the Company prospectively adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights", whereby rights to service mortgage
loans for others are capitalized as separate assets, whether acquired through
purchase or origination, if such loans are sold or securitized with servicing
rights retained. Accordingly, the total cost of the mortgage loan is allocated
to the related servicing right and to the loan based on their relative fair
values if it is practicable toestimate those fair values. The Company estimates
fair value based on the present value of estimated expected future cash flows
using prepayment speeds and discount rates commensurate with the risks involved.
Prior to the adoption of SFAS No. 122, the capitalization of originated mortgage
servicing rights was not allowed under generally accepted accounting principles.
The effect of the accounting change for the year ended December 31, 1995 was to
increase net income by $265,000 or $.04 per share.
Capitalized mortgage servicing rights are amortized to servicing revenue in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. For purposes of measuring impairment, the rights are stratified
based on the following predominant risk characteristics of the underlying loans:
loan type (fixed rate, variable rate or state housing programs) and note rate.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum. No such impairment was recognized during 1995.
INVESTMENTS IN LEASEHOLD RESIDUALS
Assets acquired in connection with leasehold residual positions have been
accounted for using the purchase method of accounting. Resultant deferred
credits are amortized to leasing activities income over the period of, and in
proportion to, the related tax benefits realized. At December 31, 1995,
leasehold residual positions of $1,972,000 and deferred credits of $4,596,000
are included in other assets and other liabilities, respectively, in the
consolidated balance sheet.
INTANGIBLE ASSETS
Deposit base intangibles, which represent the value attributable to the
capacity of deposit accounts of purchased bank subsidiaries to generate future
income, are included in other assets and are being amortized on a straight-line
basis over a period of five years. The excess of the cost of purchased
subsidiaries over the fair value of tangible and intangible net assets acquired
has been allocated to goodwill and is being amortized on a straight-line basis
over 25 years for banking operations and 15 years for mortgage banking
operations. (See Note B -- "Mergers and Acquisitions".)
The accumulated amortizations of deposit base intangibles and goodwill were
$1,548,000 and $3,491,000, respectively, as of December 31, 1995.
FORECLOSED REAL ESTATE
Foreclosed real estate consists of properties that the Company has formally
received title to, or has taken possession of, in partial or total satisfaction
of loans. Loan losses arising from the write-down of properties to fair value at
the time of foreclosure are charged against the allowance for loan and lease
losses.
Valuations are periodically performed by management, and an allowance for
losses is established through a charge to operations if the carrying value of a
property exceeds its fair value less estimated costs to sell.
In prior years, the Company classified certain loans meeting the
in-substance foreclosure criteria as foreclosed real estate. Upon the adoption
of SFAS No. 114, the Company reclassified all in-substance foreclosed assets
that were not in its possession to loans.
Operating expenses of foreclosed real estate and gains and losses upon
disposition are reported in earnings.
32
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION AND 401(K) PLANS
The Company and its subsidiaries have defined benefit pension plans which
cover substantially all full-time employees. The benefits are based on years of
service and the employee's compensation during the years immediately preceding
retirement. The Company's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
The Company maintains a Section 401(k) savings plan for employees of the
Company, CFX Bank and CFX Bank's subsidiaries. Under the plan, the Company makes
a matching contribution of one-third of the amount contributed by each
participating employee, up to 6% of the employee's yearly salary. The plan also
allows for supplementary profit sharing contributions by the Company, at its
discretion, for the benefit of participating employees.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Income taxes are allocated to each
entity in the consolidated group based on its share of taxable income.
PARENT-COMPANY-ONLY CONDENSED FINANCIAL STATEMENTS
In the parent-company-only condensed financial statements, the investment in
bank subsidiaries is stated at cost plus equity in the undistributed earnings of
the subsidiary.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding and common share
equivalents with a dilutive effect. Common share equivalents are shares which
may be issuable to employees and non-employee directors upon exercise of
outstanding stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment. If the carrying
amount of the asset exceeds its fair value, an impairment loss shall be
recognized. This Statement applies to financial statements for fiscal years
beginning after December 15, 1995. Early adoption is permissible. It is
anticipated that adoption of this accounting standard will not have a material
impact on the Company's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Entities electing to remain with the accounting in
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value based method of accounting had been applied.
Generally, stock options issued under the Corporation's stock option plan
have no intrinsic value at the grant date, and under Opinion No. 25 no
compensation cost is recognized for them. The accounting requirements of this
Statement are generally effective for transactions entered into in fiscal years
that begin after December 15, 1995. The disclosure requirements of this
Statement are generally effective for financial statements for fiscal years
beginning after December 15, 1995. It is anticipated that the Corporation will
continue its current accounting treatment for stock options and make the pro
forma disclosures prescribed by this Statement.
33
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- MERGERS AND ACQUISITIONS
On April 28, 1995, the Company acquired Orange Savings Bank (Orange), a
Massachusetts-chartered savings bank, headquartered in Orange, Massachusetts.
Before adjustments for the 1995 stock split and 5% stock dividend, each of
Orange's 724,412 outstanding shares of common stock was converted into .8075
shares of the Company's common stock, resulting in the issuance of 584,963
shares of the Company's common stock to Orange shareholders. In addition, the
holders of the outstanding Orange stock options (representing the right to
purchase 81,049 shares of Orange common stock) received options to purchase
65,447 shares of CFX common stock in exchange.
The acquisition was accounted for as a pooling-of-interest and, accordingly,
the consolidated financial statements have been restated to include the
consolidated accounts of Orange for all periods presented. Separate financial
information for CFX Corporation and Orange periods prior to the acquisition is
as follows:
<TABLE>
<CAPTION>
PERIOD ENDED APRIL 28, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
CFX CORP. ORANGE CFX CORP. ORANGE CFX CORP. ORANGE
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net interest and dividend income................... $ 9,431 $ 1,181 $ 28,049 $ 3,255 $ 26,457 $ 3,216
Provision for loan and lease losses................ 265 (30) 425 12 2,970 90
Other income....................................... 2,716 65 6,225 291 6,267 276
Other expense...................................... 9,069 779 25,162 2,767 23,492 2,162
Income taxes....................................... 1,049 199 3,214 334 1,240 91
Net income......................................... 1,764 298 5,473 433 5,022 1,149
Preferred dividends................................ 67 -- 268 -- 270 --
Net income available to common stock............... $ 1,697 $ 298 $ 5,205 $ 433 $ 4,752 $ 1,149
</TABLE>
On September 1, 1993, the Company, through its bank subsidiary, purchased
the remaining 52.4% of Colonial Mortgage, Inc. (Colonial), a mortgage banking
company headquartered in Amherst, New Hampshire, for $5,187,000, including
$80,000 in acquisition costs. The Company previously owned 47.6% and as a result
of the purchase Colonial became a wholly-owned subsidiary. The transaction was
accounted for by the purchase method of accounting, and, accordingly, the
results of operations of Colonial have been included in the Company's
consolidated statements of income commencing September 1, 1993. Prior to the
acquisition on September 1, 1993, 47.6% of the results of operations of Colonial
was included in the Company's consolidated statements of income through the
equity method of accounting. In connection with the acquisition, the excess
($2,023,000) of the purchase price over 52.4% of the fair value of the net
assets acquired has been allocated to goodwill and is being amortized over 15
years on a straight-line basis. The fair value of the assets (including
goodwill) and liabilities acquired amounted to $11,151,000 and $5,964,000,
respectively. On November 15, 1993, Colonial was renamed CFX Mortgage, Inc.
34
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Federal Reserve Bank requires the Banks to maintain average reserve
balances. The average amounts of these reserve balances for the years ended
December 31, 1995 and 1994 were approximately $15,857,000 and $14,540,000,
respectively.
NOTE D -- TRADING SECURITIES
Trading securities consisted of money market funds of $236,000 at December
31, 1994. There were no trading securities at December 31, 1995. For the years
ended December 31, 1995, 1994 and 1993, the decrease in the net unrealized
holding gain on trading securities included in the consolidated statements of
income amounted to $0, $46,000 and $126,000, respectively.
NOTE E -- INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities, with
gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
United States Treasury and agency obligations....................... $ 19,511 $ 68 $ 5 $ 19,574
Corporate bonds..................................................... 5,002 70 -- 5,072
Federal agency mortgage pass-through securities..................... 55,654 28 274 55,408
Collateralized mortgage obligations (CMO's)......................... 14,939 50 242 14,747
Marketable equity securities.......................................... 3,332 24 110 3,246
----------- ----- ----- ---------
Total securities available for sale............................... $ 98,438 $ 240 $ 631 $ 98,047
----------- ----- ----- ---------
----------- ----- ----- ---------
Securities held to maturity:
Debt securities:
United States Treasury and agency obligations....................... $ 500 $ -- $ 2 $ 498
State and municipal................................................. 19,229 154 38 19,345
----------- ----- ----- ---------
Total securities held to maturity................................. $ 19,729 $ 154 $ 40 $ 19,843
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
35
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
United States Treasury and agency obligations.................... $ 3,234 $ -- $ 62 $ 3,172
Corporate bonds.................................................. 150 -- -- 150
Marketable equity securities:
Money market funds............................................... 1,056 -- -- 1,056
Other marketable equity securities............................... 3,893 87 124 3,856
----------- --- ----------- -----------
Total securities available for sale............................ $ 8,333 $ 87 $ 186 $ 8,234
----------- --- ----------- -----------
----------- --- ----------- -----------
Securities held to maturity:
Debt securities:
United States Treasury and agency obligations.................... $ 1,754 $ -- $ 41 $ 1,713
State and municipal.............................................. 23,498 2 815 22,685
Corporate bonds.................................................. 5,932 8 137 5,803
Asset-backed..................................................... 173 -- 1 172
Federal agency mortgage pass-through securities.................. 62,966 -- 5,354 57,612
Collateralized mortgage obligations (CMO's)...................... 16,962 -- 353 16,609
----------- --- ----------- -----------
Total securities held to maturity.............................. $ 111,285 $ 10 $ 6,701 $ 104,594
----------- --- ----------- -----------
----------- --- ----------- -----------
</TABLE>
At December 31, 1995, the Company pledged debt securities with an amortized
cost of $55,420,000, and a fair value of $55,229,000, as collateral to secure
public funds and repurchase agreements (See Note K -- "Short-Term Borrowed
Funds").
36
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Within one year................................................ $ 4,066 $ 4,079 $ 5,760 $ 5,760
After one year through five years.............................. 10,306 10,429 7,982 8,063
After five years through ten years............................. 10,141 10,138 5,987 6,020
----------- --------- ----------- ---------
24,513 24,646 19,729 19,843
Pass-through securities and CMO's.............................. 70,593 70,155 -- --
----------- --------- ----------- ---------
$ 95,106 $ 94,801 $ 19,729 $ 19,843
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Proceeds from the sale of securities available for sale during the years
ended December 31, 1995 and 1994 were $1,788,000 and $20,386,000, respectively.
Gross gains of $177,000 and $86,000, respectively, were recognized on such
sales. Gross losses of $19,000 were realized in 1995. There were no realized
losses in 1994. In November 1995, the FASB issued guidance allowing a one-time
reassessment of an entity's investment classifications during the period
November 15, 1995 to December 31, 1995. As a result, securities held to maturity
with an amortized cost of $76,328,000 and a net unrealized loss of $250,000 were
transferred to securities available for sale. In 1994, securities available for
sale with an amortized cost of $16,575,000 had been transferred to securities
held to maturity at their fair value of $15,810,000 resulting in a net
unrealized loss of $765,000 at the date of transfer. The net unrealized loss was
being amortized to interest income using the interest method over the terms of
the investments until the aforementioned transfer of 1995.
Proceeds from the sale of debt securities during the year ended December 31,
1993 were $89,184,000. Gross gains of $3,212,000 and gross losses of $588,000
were recognized on such sales.
37
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- LOANS AND LEASES
Loans and leases consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Real estate:
Residential............................................................. $ 473,339 $ 447,094
Construction............................................................ 5,906 7,778
Commercial.............................................................. 87,684 82,668
Commercial, financial and agricultural.................................... 52,401 48,004
Warehouse lines of credit to leasing companies............................ 12,906 15,339
Consumer lease financing.................................................. 27,457 348
Other consumer............................................................ 41,898 39,062
----------- -----------
701,591 640,293
Less: Unearned income..................................................... (3,602) (45)
Deferred origination costs, net...................................... 983 159
----------- -----------
$ 698,972 $ 640,407
----------- -----------
----------- -----------
</TABLE>
At December 31, 1995, the recorded investment in impaired loans (See Note A
- -- "Significant Accounting Policies") totaled $2,981,000, of which $993,000
related to loans with no valuation allowance and $1,988,000 related to loans
with a corresponding valuation allowance of $853,000.
For the year ended December 31, 1995, the average recorded investment in
impaired loans amounted to $5,474,000. The Company recognized $362,000 of
interest income on impaired loans, during the period that they were impaired, of
which $332,000 was on a cash basis.
Nonaccrual loans and restructured loans totaled $7,844,000 and $187,000,
respectively, at December 31, 1995 and $6,913,000 and $1,824,000, respectively,
at December 31, 1994. Included in nonaccrual loans at December 31, 1995 were
impaired loans amounting to $2,176,000, and residential and consumer loans
amounting to $5,196,000.
Interest income that would have been recorded under the original terms of
such nonaccrual and restructured loans and the interest income actually
recognized for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income that would have been recorded.................................. $ 939 $ 557 $ 701
Interest income recognized..................................................... 475 255 483
--------- --------- ---------
Interest income foregone....................................................... $ 464 $ 302 $ 218
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company is not committed to lend additional funds to borrowers whose
loans have been modified in connection with troubled debt restructurings or
whose loans have been classified as impaired.
The primary geographic concentration of credit risk for loans originated by
the Company is the State of New Hampshire and north central Massachusetts. The
remainder of the portfolio is distributed principally throughout the other New
England states.
NOTE G -- ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year......................................... $ 7,558 $ 7,952 $ 8,392
Allowance of acquired subsidiaries................................... -- -- 13
Provision for loan and lease losses.................................. 1,624 437 3,060
Loans charged-off.................................................... (1,882) (1,255) (3,922)
Recoveries of loans previously charged-off........................... 389 424 409
--------- --------- ---------
Balance at end of year............................................... $ 7,689 $ 7,558 $ 7,952
--------- --------- ---------
--------- --------- ---------
</TABLE>
38
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................................... $ 2,019 $ 2,173
Buildings and leasehold improvements......................................... 12,074 12,028
Furniture and equipment...................................................... 8,706 8,808
--------- ---------
22,799 23,009
Less accumulated depreciation and amortization............................... 9,251 8,731
--------- ---------
$ 13,548 $ 14,278
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense was $1,823,000, $1,649,000 and
$1,336,000, for the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE I -- FORECLOSED REAL ESTATE
Foreclosed real estate is presented net of a valuation allowance as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Foreclosed real estate....................................................... $ 1,179 $ 1,514
In-substance foreclosures.................................................... -- 796
--------- ---------
1,179 2,310
Less allowance for losses.................................................... 50 325
--------- ---------
$ 1,129 $ 1,985
--------- ---------
--------- ---------
</TABLE>
An analysis of the allowance for losses on foreclosed real estate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................................ $ 325 $ 384 $ 307
Reclassification to non-performing loans upon adoption of SFAS No.
114.................................................................... (131) -- --
Provision for losses.................................................... -- 207 673
Charge-offs, net of recoveries.......................................... (144) (266) (596)
--------- --------- ---------
Balance at end of year.................................................. $ 50 $ 325 $ 384
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table presents the components of the operation of foreclosed
real estate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses, net of rental income................................ $ 366 $ 285 $ 1,062
Provision for losses.................................................... -- 207 673
Net loss (gain) on sales of real estate................................. 8 (225) 1,338
--------- --------- ---------
$ 374 $ 267 $ 3,073
--------- --------- ---------
--------- --------- ---------
</TABLE>
39
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J -- DEPOSITS
Total deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Noninterest bearing....................................................... $ 47,851 $ 39,842
Savings:
Regular savings......................................................... 121,545 121,630
NOW accounts............................................................ 87,734 87,875
Money market accounts................................................... 78,627 111,444
----------- -----------
Total savings......................................................... 287,906 320,949
Time certificates of deposit............................................ 329,966 264,638
----------- -----------
Total deposits........................................................ $ 665,723 $ 625,429
----------- -----------
----------- -----------
</TABLE>
Time deposits with a minimum balance of $100,000 at December 31, 1995 and
1994 totaled approximately $51,437,000 and $30,327,000, respectively.
A summary of term certificates, by maturity, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1995 1994
------------------------- -------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within one year............................................... $ 231,375 5.73% $ 147,805 4.37%
After one year through three years............................ 68,827 5.89 89,711 5.48
After three years through five years.......................... 29,764 6.03 27,122 5.63
----------- -----------
$ 329,966 5.79% $ 264,638 4.87%
----------- -----------
----------- -----------
</TABLE>
40
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- SHORT-TERM BORROWED FUNDS
The following summarizes short-term borrowed funds:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Securities sold under agreement to repurchase:
Retail..................................................................... $ 17,471 $ 5,603
Wholesale -- 6.35% (fixed rate) due January 13, 1995....................... -- 7,120
Wholesale -- 6.05% (fixed rate) due January 20, 1995....................... -- 14,593
Wholesale -- 5.83% (fixed rate) due February 21, 1996...................... 6,662 --
Wholesale -- 5.83% (fixed rate) due March 21, 1996......................... 7,602 --
--------- ---------
Total short-term borrowed funds.............................................. $ 31,735 $ 27,316
--------- ---------
--------- ---------
</TABLE>
Retail securities sold under agreement to repurchase at December 31, 1995
were due to mature by January 7, 1996 at a weighted average interest rate of
4.43%. At December 31, 1994, such agreements were due to mature by January 11,
1995 at a weighted average interest rate of 4.58%.
NOTE L -- ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances from the Federal Home Loan Bank of Boston (FHLBB) consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-Term:
5.90% (fixed rate) due January, 1995..................................... $ -- $ 50,000
6.39% (fixed rate) due March, 1995....................................... -- 10,000
6.65% (variable rate) due daily.......................................... -- 32,000
6.24% (fixed rate) due January, 1996..................................... 10,000 --
6.02% (fixed rate) due February, 1996.................................... 7,000 --
5.81% (fixed rate) due March, 1996....................................... 15,000 --
6.63% (fixed rate) due April, 1996....................................... 15,000 --
5.93% (fixed rate) due May, 1996......................................... 12,500 --
5.71% (fixed rate) due June, 1996........................................ 14,000 --
6.40% (variable rate) due daily.......................................... 27,113 --
----------- ---------
100,613 92,000
Long-Term:
5.00% (fixed rate) due January, 2003..................................... 201 201
----------- ---------
Total advances......................................................... $ 100,814 $ 92,201
----------- ---------
----------- ---------
</TABLE>
The Banks have available lines of credit with the FHLBB at an interest rate
that adjusts daily. Borrowings under the lines are limited to $16,091,000 as of
December 31, 1995. Additional credit may be available upon written request to
the FHLBB. All borrowings from the FHLBB are secured by a blanket lien on
certain qualified collateral, defined principally as 75% of the carrying value
of first mortgage loans on owner-occupied residential property.
41
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M -- PREFERRED STOCK
The Preferred Stock was converted on a basis of 1.1025 shares of common
stock for each share of Preferred Stock, (reflecting common stock dividends) on
April 30, 1995, the mandatory conversion date. Accordingly, a total of 212,528
shares of common stock were issued at the mandatory conversion date.
NOTE N -- INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax provision:
Federal............................................................ $ 967 $ 3,005 $ 1,634
State.............................................................. 38 606 195
--------- --------- ---------
Total current.................................................... 1,005 3,611 1,829
--------- --------- ---------
Deferred tax provision (benefit):
Federal............................................................ 2,815 (65) 701
State.............................................................. 630 (15) 8
Effect of tax law change............................................. 10 17 (436)
Effect of change in valuation reserve................................ (125) -- (771)
--------- --------- ---------
Total deferred................................................... 3,330 (63) (498)
--------- --------- ---------
Provision for income taxes..................................... $ 4,335 $ 3,548 $ 1,331
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the net deferred tax asset included in other assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Federal..................................................................... $ 8,340 $ 3,916
State....................................................................... 1,132 550
--------- ---------
Total deferred tax assets................................................. 9,472 4,466
--------- ---------
Deferred tax liabilities:
Federal..................................................................... (3,226) (1,840)
State....................................................................... (453) (260)
--------- ---------
Total deferred tax liabilities............................................ (3,679) (2,100)
--------- ---------
Net deferred tax asset.................................................. $ 5,793 $ 2,366
--------- ---------
--------- ---------
</TABLE>
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year....................................... $ 2,366 $ 2,131 $ 2,886
Deferred tax (provision) benefit................................. (3,330) 63 498
Purchase accounting effects of leasehold residual acquisition.... 6,907 -- --
Purchase accounting effects of Colonial Mortgage, Inc.
acquisition..................................................... -- -- (1,371)
Tax effects of net unrealized losses on investment securities
reflected in shareholders' equity............................... (150) 172 118
--------- --------- ---------
Balance at end of year............................................. $ 5,793 $ 2,366 $ 2,131
--------- --------- ---------
--------- --------- ---------
</TABLE>
42
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N -- INCOME TAXES (CONTINUED)
The tax effects of each type of income and expense item that give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses.......................................... $ 2,862 $ 2,855
Investment in leasehold residual............................................. 5,654 --
Capital loss carryforwards................................................... 141 567
Stock write-downs............................................................ 6 109
Net unrealized losses on trading and investment securities................... 153 303
Deferred point income........................................................ -- 88
Book reserves................................................................ 534 538
Other........................................................................ 122 210
--------- ---------
9,472 4,670
Valuation allowance for deferred tax assets.................................. -- (204)
--------- ---------
Total deferred tax assets, net............................................. 9,472 4,466
--------- ---------
Deferred tax liabilities:
Depreciation................................................................. 437 550
Deferred expenses............................................................ 253 --
Mortgage servicing rights.................................................... 1,041 1,036
Cash to accrual recapture.................................................... 55 110
Consumer lease financing..................................................... 1,379 --
Other........................................................................ 514 404
--------- ---------
Total deferred tax liabilities............................................. 3,679 2,100
--------- ---------
Net deferred tax asset................................................... $ 5,793 $ 2,366
--------- ---------
--------- ---------
</TABLE>
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. In prior years, the
Company believed that some uncertainty existed with respect to future
realization of a portion of its capital loss carryforwards. Therefore, the
Company had established a valuation allowance relating to capital loss
carryforwards. The valuation allowance was reversed to the extent that capital
gains were realized and as new tax planning strategies were developed to utilize
capital loss carryforwards.
The change in the valuation allowance applicable to deferred tax assets is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................................. $ 204 $ 180 $ 951
Benefits generated by current year's operations........................ (125) -- (771)
Benefits lost.......................................................... (79) -- --
Increase in loss carryforwards......................................... -- 24 --
--------- --------- ---------
Balance at end of year................................................... $ -- $ 204 $ 180
--------- --------- ---------
--------- --------- ---------
</TABLE>
43
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N -- INCOME TAXES (CONTINUED)
Prior to 1993, the Company was not obligated to pay New Hampshire Business
Profits Tax (NHBPT) as a result of significant income derived from state
tax-free sources and a credit allowed for New Hampshire Franchise Tax.
Therefore, prior to 1993 no deferred taxes had been recognized for NHBPT
purposes.
During 1993, as a result of the Franchise Tax being repealed by the New
Hampshire State legislature and the Company's significant reduction in income
derived from tax-free sources, the Company began to pay NHBPT. As a result of
becoming obligated to pay NHBPT in 1993, the Company fully recognized deferred
taxes for NHBPT in 1993.
CFX Bank and Orange Savings Bank qualify under provisions of the Internal
Revenue Code to deduct from taxable income, if any, a provision for loan and
lease losses based on a percentage of taxable income before such deduction (PTI
method). Under the Tax Reform Act of 1986, the loan loss deduction allowable is
limited to 8% of taxable income.
At December 31, 1995, retained earnings include a tax loan loss reserve of
approximately $7,038,000 at the base year for which no provision for income
taxes has been made. If, in the future, such amounts are used for any purpose
other than to absorb loan losses, or if either CFX Bank or Orange Savings Bank
ceases to qualify to utilize the PTI method under the Internal Revenue Code,
they will incur a tax liability at the current applicable income tax rates. The
Company anticipates that both banks will continue to meet the qualifying assets
test and that the $7,038,000 of retained earnings will not be used for any
purpose that would result in the payment of income taxes. The unrecognized
deferred tax liability on such amount as of December 31, 1995 is approximately
$2,800,000.
The following is a reconciliation of the statutory federal income tax rate
applied to pre-tax accounting income, with the effective income tax rate
provided in the consolidated statements of income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at the statutory rate..... $4,175 34% $3,214 34% $2,551 34%
Increase (decrease) resulting from:
Dividends received deduction............... (58) -- (44) -- (29) --
Tax-exempt interest income................. (285) (3) (252) (3) (91) (1)
Goodwill and deposit base intangible
amortization.............................. 212 1 232 3 215 3
Nondeductible merger expenses.............. 56 -- -- -- -- --
Reversal of book over tax basis from
investment in Colonial Mortgage, Inc...... -- -- -- -- (273) (4)
State income taxes, net of federal income
tax benefit............................... 451 4 393 4 (307) (4)
Low income housing tax credits............. (177) (1) -- -- -- --
Other, net................................. 86 1 5 -- 21 --
Change in valuation allowance.............. (125) (1) -- -- (756) (10)
-- -- --
------ ------ ------
Income tax expense........................... $4,335 35% $3,548 38% $1,331 18%
-- -- --
-- -- --
------ ------ ------
------ ------ ------
</TABLE>
44
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE O -- PENSION AND 401(K) PLANS
The Company's defined benefit pension plans and 401(k) savings plan are
summarized in the following tables:
PENSION PLANS
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $3,108,000 in 1995 and
$2,947,000 in 1994................................................................... $ (3,344) $ (3,022)
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date............................... $ 4,350 $ (3,752)
Plan assets at fair value, primarily invested in bank money market accounts, equities,
and group annuity contracts............................................................ 3,330 3,719
--------- ---------
Plan assets less than projected benefit obligation...................................... (1,020) (33)
Unrecognized net gain from past experience different from that assumed and effects of
changes in assumptions................................................................. (300) (1,153)
Prior service cost not yet recognized in net periodic pension cost...................... 114 128
Unrecognized net assets at end of year.................................................. (21) (76)
--------- ---------
Accrued pension cost included in other liabilities...................................... $ (1,227) $ (1,134)
--------- ---------
--------- ---------
</TABLE>
Net pension expense includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period............. $ 337 $ 404 $ 332
Interest cost on projected benefit obligation................. 301 316 279
Actual (return) loss on plan assets........................... 257 (125) (176)
Net amortization and deferral................................. (597) (163) (115)
--------- --------- ---------
Net pension expense......................................... $ 298 $ 432 $ 320
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation under the defined benefit pension plans, and the expected
long-term rate of return on plan assets, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------ ------------
<S> <C> <C> <C>
Weighted average discount rates.............. 7.25%-8.0% 8.0% 7.0%
Annual salary increases...................... 5.0%-6.0% 5.0%-6.0% 5.5%-6.0%
Expected return on plan assets............... 7.5%-8.0% 7.0%-7.5% 7.0%-7.5%
</TABLE>
401(K) PLAN
The following table sets forth the Company's 401(k) plan expense recognized:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Matching contribution............................................ $ 175 $ 82 $ 76
Supplemental profit sharing contribution......................... 318 328 106
--------- --------- ---------
$ 493 $ 410 $ 182
--------- --------- ---------
--------- --------- ---------
</TABLE>
45
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P -- STOCK OPTION PLAN
The Company has stock option plans (the Option Plan) whereby options may be
granted to certain key employees and directors of the Company and its
subsidiaries to purchase shares of common stock of the Company at a price not
less than fair value at the date of grant.
Both incentive stock options and nonqualified stock options may be granted
pursuant to the Option Plan. A total of 627,000 shares of authorized but
unissued common stock of the Company has been reserved for issuance pursuant to
incentive stock options granted under the Option Plan and 422,000 shares of
authorized but unissued common stock have been reserved for issuance pursuant to
nonqualified stock options granted. The options are exercisable over a period
not to exceed ten years from the date of grant.
Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
INCENTIVE STOCK OPTIONS NONQUALIFIED STOCK OPTIONS
------------------------------- -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PRICE PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............................ 318 373 304 248 149 198
Granted..................................................... 153 -- 96 142 100 --
Exercised @ $ 3.49.......................................... -- -- -- -- -- (22)
@ $ 5.33........................................... (3) -- (5) -- -- --
@ $ 5.97........................................... (5) -- -- -- -- --
@ $ 8.17........................................... (14) (16) -- -- -- --
@ $ 8.28........................................... (52) (38) (14) (3) (1) (19)
@ $10.08........................................... (21) -- -- -- -- --
Cancelled................................................... -- (1) (8) -- -- (8)
--------- --------- --------- --------- --------- ---------
Outstanding at end of year................................ 376 318 373 387 248 149
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Exercisable at end of year................................ 376 318 373 387 248 149
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
$ 5.33 $ 5.33 $ 5.33 $ 3.49 $ 3.49 $ 3.49
Price range of options outstanding.......................... $ 15.00 $ 10.08 $ 10.08 $ 14.29 $ 9.73 $ 9.73
Average price of options outstanding........................ $ 11.12 $ 8.44 $ 8.44 $ 10.28 $ 7.98 $ 7.11
</TABLE>
As provided for in the Option Plan, all option information has been restated
for stock dividends and the stock split declared.
NOTE Q -- EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (the Stock Purchase Plan)
whereby employees of the Company and its subsidiaries with more than one-half
year of continuous service, except for certain employees with substantial stock
interests in the Company or with substantial rights to purchase common stock,
may purchase up to an aggregate of 174,000 shares of the Company's common stock.
Eligible employees have the right to purchase common stock by authorizing
payroll deductions of up to seven percent of their base salary. The Stock
Purchase Plan provides for periodic offerings at a purchase price which would
not be less than the lesser of (1) 90% of the fair value per share on the
offering date or (2) 90% of the fair value per share on the date of exercise.
The Board of Directors of the Company may change the option price for subsequent
offerings by increasing the percentage of fair value to a percentage not greater
than 100% or decreasing the percentage of fair value to a percentage not less
than 85%.
46
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE R -- RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS AND ADVANCES
Certain restrictions exist regarding the ability of the Banks to transfer
funds to the Company in the form of cash dividends, loans and advances.
Applicable rules prohibit the payment of a cash dividend by the Banks if the
effect thereof would cause the net worth of the Banks to be reduced below
applicable net worth requirements.
Federal banking regulators require that the Company (on a consolidated
basis) and the Banks meet certain Tier 1 leverage capital and risk-based capital
ratio requirements. Generally, all but the most financially sound institutions
are required to maintain a minimum Tier 1 leverage capital ratio of not less
than 4.00% and a risk-based capital ratio of not less than 8.00%. Accordingly,
$35,747,000 of the Company's equity in the net assets of the Banks was
restricted at December 31, 1995. The Company and the Banks exceeded all minimum
regulatory requirements at December 31, 1995 and 1994.
Under Federal Reserve regulations, the Banks are also limited as to the
amount they may loan to the Company, unless such loans are collateralized by
specified obligations. At December 31, 1995, the maximum amount available for
transfer from the Banks to the Company in the form of loans approximated
$82,000,000.
NOTE S -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
The Company has entered into three-year employment agreements with its
President and Executive Vice President. Additionally, CFX Mortgage, Inc. has
entered into a three-year employment agreement with its President. The terms of
the agreements automatically extend for an additional year unless either party
elects to limit the agreement to its then existing term. The agreements
generally provide for a specified minimum annual compensation and the
continuation of benefits currently received, including provisions following a
"Change of Control". However, such employment may be terminated for cause, as
defined, without incurring any continuing obligations. In addition to the above
agreements, the Company has entered into special termination agreements with
certain additional senior executives. The agreements generally provide for
certain lump sum or periodic severance payments following a "Change in Control"
as defined in the agreements.
INVESTMENT IN LIMITED PARTNERSHIPS
At December 31, 1995, the Company was committed to invest $950,000 in two
real estate development limited partnerships.
LEASE SECURITIZATION
In connection with a lease securitization transaction completed by CFX
Funding, the Company guaranteed a portion of the loss reserve account in the
amount of $711,000 by executing a letter of credit arrangement with a third
party bank. The Company's guarantee and related letter of credit reduces monthly
and expires in April, 1996. The Company's guarantee is secured by the equipment
giving rise to the securitization.
OTHER CONTINGENCIES
Various legal claims also arise from time to time in the ordinary course of
business which, in the opinion of management, will have no material effect on
the Company's consolidated financial statements.
47
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE T -- LOANS TO RELATED PARTIES
In the ordinary course of business, the Company makes loans to subsidiary
affiliates, directors and officers and their associates and affiliated companies
(related parties) at substantially the same terms, including interest rates and
collateral, as those prevailing at the time of origination for comparable
transactions with other borrowers.
The total amounts due from directors, officers and their associates were
$5,754,000 and $7,636,000 at December 31, 1995 and 1994, respectively. During
the year ended December 31, 1995, new loans totaling $9,840,000 were made, and
repayments received totaled $11,722,000.
NOTE U -- FINANCIAL INSTRUMENTS
The Company uses certain financial instruments in managing the interest rate
risk included in the consolidated balance sheet. Futures and options contracts
are used explicitly for hedge purposes and are not undertaken for speculation.
The Company's intent and general practice is to liquidate (offset) futures and
options contract obligations before stated exercise or delivery dates through
established market transactions. The Company does not generally intend to
deliver or receive the securities underlying its futures and options contracts,
but may execute delivery or receipt if it is financially prudent to do so.
The detail on the specific financial instruments used is as follows:
INTEREST RATE SWAP AGREEMENTS
Commencing in 1993, the Company entered into agreements to exchange interest
rate cash flows with approved counterparties. There were no such agreements in
effect at December 31, 1995. The swap agreement outstanding at December 31, 1994
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------------------------
INTEREST INTEREST NOTIONAL MATURITY UNREALIZED
ASSETS HEDGED RECEIVED PAID AMOUNT DATE LOSS
- ---------------------- ------------------ ------------------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans held in
portfolio Fixed -- 4.37% Variable -- $ 25,000 11/23/96 $ (1,194)
6 mo. LIBOR
(Rate: 6.3125%)
</TABLE>
The effect of the $25,000,000 swap agreement was to lengthen the repricing
period of certain variable-rate mortgage loans. The agreement was terminated
during 1995 at a realized loss of $2,000.
48
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE U -- FINANCIAL INSTRUMENTS (CONTINUED)
FINANCIAL OPTION CONTRACTS
The Company periodically uses financial options to hedge interest rate
exposure generally on secondary mortgage market operations. At December 31,
1995, there were no outstanding options. At December 31, 1994, to hedge mortgage
loans held for sale, the Company held put options (the option to sell securities
at a stated price within a specified term) on 30-year Treasuries totaling
$6,000,000 extending through March 1995.
At December 31, 1995 and 1994, there were no derivatives held for trading
purposes as the overall program for which they were used was liquidated in
October, 1994. The average fair values for such instruments for 1994 were not
material to the consolidated financial statements.
Net gains (losses) on trading securities, included separately in the
consolidated statements of income, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities................................. $ -- $ (2,985) $ (323)
Other debt securities...................................... -- (4) 18
Equity securities.......................................... 1,092 271 300
Futures, options and swaps................................. -- 2,461 321
--------- --------- ---------
$ 1,092 $ (257) $ 316
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table provides a rollforward of the notional amounts of each
type of financial instrument used by the Company to manage interest rate risk
for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 AND 1994
--------------------------------------------
FINANCIAL FINANCIAL
INTEREST FUTURES OPTION
RATE CONTRACTS CONTRACTS
SWAP (SHORT (LONG
AGREEMENTS POSITION) POSITION)
----------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1993................ $ 52,000 $ (120,000) $ 336,000
Contracts:
New..................................... -- 858,000 975,300
Terminated.............................. (27,000) (738,000) (1,280,300)
Expired................................. -- -- (25,000)
----------- --------------- --------------
Balance at December 31, 1994................ 25,000 -- 6,000
Contracts:
New..................................... -- -- 39,000
Terminated.............................. (25,000) -- (14,000)
Expired................................. -- -- (31,000)
----------- --------------- --------------
Balance at December 31, 1995................ $ -- $ -- $ --
----------- --------------- --------------
----------- --------------- --------------
</TABLE>
In 1993 and 1994, as mortgage-backed securities were purchased for the
trading portfolio, the Company assessed the price volatility under varying
interest rates. A hedge using a combination of interest rate exchange
agreements, financial futures contracts and financial option contracts was
constructed to closely resemble the volatility of the underlying security. On an
ongoing basis, the Company monitored the effectiveness of the hedge position to
ensure appropriate matching of price volatility.
Derivative instruments are monitored regularly to assess market price
changes. On at least a monthly basis, rate change analyses are done in order to
assess potential market risk in changing interest rate environments. When the
price volatility of derivative instruments varies from the price volatility of
assets being hedged, positions are adjusted to maintain an appropriate match.
The Company includes all off-balance sheet and derivative positions in its
analysis of interest rate risk. Increases and decreases of both 100 and 200
basis points are analyzed in order to determine anticipated changes in earnings
and market values.
49
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE V -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of estimated fair values of all financial instruments where
it is practicable to estimate such values. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and short-term
instruments approximate fair values.
INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying values of interest
bearing deposits with other banks approximate fair values.
FEDERAL HOME LOAN BANK OF BOSTON STOCK: The carrying value of Federal Home
Loan Bank of Boston stock approximates fair value.
TRADING SECURITIES: Fair values for trading portfolio securities (including
off-balance-sheet instruments), which also are the amounts recognized in the
consolidated balance sheet, are based on quoted market prices.
INVESTMENT SECURITIES: Fair values of investment securities are based on
quoted market prices.
MORTGAGE LOANS HELD FOR SALE: Fair values of mortgage loans held for sale
are determined taking into consideration commitments on hand from investors and
prevailing market prices.
LOANS AND LEASES (LOANS): Fair values of variable-rate loans that reprice
frequently and have no significant change in credit risk, are based on carrying
values. Fair values for other loans are estimated using discounted cash flow
analyses which use interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
DEPOSITS: Fair values disclosed for demand deposits (non-interest bearing
deposits, savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
SHORT-TERM BORROWED FUNDS: The carrying amounts of borrowings under
repurchase agreements and other short-term borrowings approximate their fair
values.
ADVANCES FROM THE FEDERAL HOME LOAN BANK OF BOSTON: The carrying amounts of
advances from the Federal Home Loan Bank of Boston maturing within 90 days
approximate their fair values. The fair values of other advances are estimated
using discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of advances.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate fair
value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for options and swaps are based
on quoted market prices. Fair values for off-balance-sheet lending commitments
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing.
50
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE V -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values, and related carrying amounts or notional amounts,
of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................... $ 28,766 $ 28,766 $ 22,750 $ 22,750
Interest bearing deposits with other banks.............. 327 327 3,250 3,250
Federal Home Loan Bank of Boston stock.................. 7,388 7,388 7,388 7,388
Trading securities...................................... -- -- 236 236
Securities available for sale........................... 98,047 98,047 8,234 8,234
Securities held to maturity............................. 19,729 19,843 111,285 104,594
Mortgage loans held for sale............................ 6,554 6,665 8,295 8,321
Loans and leases, net................................... 691,283 696,898 632,849 630,178
Accrued interest receivable............................. 6,490 6,490 5,060 5,060
Financial liabilities:
Deposits................................................ 665,723 666,763 625,429 624,829
Short-term borrowed funds............................... 31,735 31,735 27,316 27,316
Advances from the Federal Home Loan Bank of Boston...... 100,814 100,877 92,201 92,201
Accrued interest payable................................ 1,446 1,446 665 665
<CAPTION>
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to originate and purchase loans............. 44,089 (145) 22,371 (120)
Standby letters of credit............................... 1,453 (15) 954 (9)
Unadvanced funds on lines of credit..................... 48,379 (304) 52,538 --
Interest-rate swap agreements........................... -- -- 25,000 (1,194)
Financial option contracts.............................. -- -- 6,000 31
</TABLE>
51
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE W -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, options written, standby
letters of credit and financial guarantees, interest-rate contracts, (caps,
floors, and interest-rate swaps) and futures contracts. These instruments
involve, to varying degrees, elements of credit and interest-rate risk in excess
of the amount recognized in the consolidated balance sheet. The contract or
notional amounts of these instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
specific instruments. The Company uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest-rate contracts, futures contracts, and options
contracts, the contract or notional amounts do not represent the Company's
exposure to credit loss. Rather, the credit loss exposure relates to the net
fair value to be received if such contracts were to be offset in the
marketplace. The Company controls the credit risk of such contracts through
credit approvals, limits, and monitoring procedures.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
At December 31, 1995 and 1994, the following financial instruments were
outstanding:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL
AMOUNT
------------------------
DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to originate and purchase loans............................. $ 44,089 $ 22,371
Unadvanced funds on lines of credit..................................... 48,379 52,538
Standby letters of credit............................................... 1,453 954
Financial instruments whose contract or notional amounts exceed the amount
of credit risk:
Outstanding forward delivery contracts.................................. 128,182 116,891
Interest-rate swap agreements........................................... -- 25,000
Financial options contracts (long position)............................. -- 6,000
</TABLE>
52
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE W -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
A commitment to extend credit is an agreement to provide financing to a
customer contingent upon compliance with all conditions established in the
contract. A commitment generally has a fixed expiration date or other
termination clause and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on an individual basis. The
amount of collateral obtained, if deemed necessary upon extension of credit, is
based on management's evaluation of the counterparty. The collateral held varies
but may include cash, accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties, and residential real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These commitments
are primarily issued to support private borrowing arrangements on a short-term
basis. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Forward delivery contracts are contracts for delayed delivery of mortgage
loans or mortgage-backed securities in which the seller agrees to make delivery
at a specified future date of a specified instrument, at a specified price or
yield. Credit risk to the Company arises from the possible inability of
counterparties to meet the terms of their contracts. In the event of
nonacceptance by the counterparty, the Company would be subject to the credit
risk of the loans retained. These loans would have been originated in the
ordinary course of business complying with the Company's standard credit
evaluation and collateral requirements. Failure to fulfill delivery requirements
for these contracts may result in payment of fees to certain investors.
The Company enters into a variety of interest-rate contracts including
interest-rate options, and interest-rate swap agreements, in its trading
portfolio, in its mortgage banking activity, and in managing the Company's
overall interest-rate exposure. Interest-rate options are contracts that allow
the holder of the option to purchase or sell a financial instrument at a
specified price within a specified period of time. For most options
transactions, the Company uses recognized and centralized exchanges for
execution. These exchanges act as the counterparty to all transactions, thereby
minimizingthe credit risk of market participants.
Interest-rate swap transactions generally involve the exchange of fixed and
floating-rate interest-payment obligations without the exchange of the
underlying principal amounts. The Company typically becomes a principal in the
exchange of interest payments between the parties and, therefore, is exposed to
loss should one of the parties default. The Company minimizes this risk by
performing normal credit reviews on its swap counterparties.
Entering into interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the contracts
but also the interest-rate risk associated with an unmatched position. Notional
principal amounts often are used to express the volume of these transactions,
but the amounts potentially subject to credit risk are much smaller.
NOTE X -- SUBSEQUENT EVENTS
On January 5, 1996, the Company signed a definitive agreement to acquire all
of the outstanding capital stock of The Safety Fund Corporation (Safety Fund), a
Massachusetts bank holding company, headquartered in Fitchburg, Massachusetts.
Pursuant to the definitive agreement and in the event that the transaction
is accounted for as a pooling-of-interests, each of Safety Fund's outstanding
shares of Common Stock has the potential to be converted into 1.7 shares of
CFX's Common Stock. The actual number of shares of CFX's Common Stock issuable
in the transaction is subject to adjustment based on the average price of CFX
Common Stock for the ten trading days immediately before CFX receives the last
regulatory approval required to consummate the transaction. In the event that
the average price of CFX Common Stock is below $12.43, the exchange ratio
becomes 1.806 shares; and if the average price of CFX Common Stock is above
$18.65, the exchange ratio becomes 1.629 shares. Safety Fund has the right to
terminate the agreement if the average price of CFX Common Stock is below $11.65
per share unless CFX agrees to increase the exchange ratio.
The transaction is tax free to the owners of Safety Fund and is subject to
regulatory approval and the approval of both CFX's and Safety Fund's
shareholders. It is anticipated that the transaction will be accounted for by
the pooling-of-interests method of accounting. However, if the transaction is
required to be accounted for under the purchase method of accounting, the stock
exchange ratio would be 1.52 shares, subject to adjustment based on the average
price of CFX Common Stock.
At December 31, 1995, Safety Fund had total assets of $287,483,000, deposits
of $252,788,000 and stockholders' equity of $21,387,000.
Safety's bank subsidiary, Safety Fund National Bank, operates 12 full
service offices and 11 automated teller machines in Worcester County and has a
trust division with approximately $350,000,000 (unaudited) in assets under
management.
53
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE X -- SUBSEQUENT EVENTS (CONTINUED)
On February 9, 1996, CFX Corporation signed a definitive agreement to
acquire all of the outstanding shares of Milford Co/operative Bank (Milford),
headquartered in Milford, New Hampshire.
Pursuant to the definitive agreement, each of Milford's outstanding shares
of common stock has the potential to be converted into 2.645 shares of the
Company's common stock. The actual number of shares of the Company's common
stock issuable in the transaction is subject to adjustment based on the average
price of the Company's common stock for the ten trading days immediately before
the Company receives the last regulatory approval required to consummate the
transaction. In the event that the average price of the Company's common stock
is below $12.59, the exchange ratio becomes 2.70 shares; and if the average
price of the Company's common stock is above $17.66, the exchange ratio becomes
2.61 shares. Milford has the right to terminate the agreement if the average
price of the Company's common stock is below $12.10 per share unless the Company
agrees to increase the exchange ratio.
The transaction is tax free to the shareholders of Milford and is subject to
regulatory approval and the approval of both the Company's and Milford's
shareholders. It is anticipated that the transaction will be accounted for by
the pooling-of-interests method of accounting.
At December 31, 1995, Milford Co/Operative Bank had (unaudited) total assets
of $156,848,000, deposits of $138,313,000, and stockholders' equity of
$15,692,000. Milford operates six branches located in Amherst, Brookline,
Milford, Mount Vernon, New Boston and Wilton/Lyndeborough, New Hampshire.
NOTE Y -- SEGMENT INFORMATION
Summarized data for the Company's mortgage banking operations for the years
ended December 31, 1995 and 1994 and the period from September 1, 1993 (See Note
B -- "Mergers and Acquisitions") to December 31, 1993 is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net interest and dividend income............................. $ 1,082 $ 804 $ 191
Loan servicing fees.......................................... 3,202 2,886 323
Net gain on sale of loan servicing rights.................... -- 677 --
Net gains on sale of loans................................... 634 413 595
Other income................................................. 248 378 160
----------- ----------- -----------
Total income............................................... 5,166 5,158 1,269
Depreciation expense......................................... 180 142 53
Other expense................................................ 4,168 3,790 1,304
----------- ----------- -----------
Income (loss) before income tax expense (benefit).......... 818 1,226 (88)
Income tax expense (benefit)................................. 371 516 (30)
----------- ----------- -----------
Net income (loss)........................................ $ 447 $ 710 $ (58)
----------- ----------- -----------
----------- ----------- -----------
Total assets............................................. $ 31,551 $ 25,764 $ 36,000
----------- ----------- -----------
----------- ----------- -----------
Total loans serviced for others.......................... $ 672,000 $ 645,000 $ 705,000
----------- ----------- -----------
----------- ----------- -----------
Additions to property, plant and equipment............... $ 77 $ 287 $ 1,502
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Substantially all loans serviced for others were sold without recourse
provisions.
The following is an analysis of the changes in mortgage servicing rights:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............................... $ 4,207 $ 4,557 $ 1,473
Purchase accounting adjustment............................. -- -- 3,463
----------- ----------- -----------
4,207 4,557 4,936
Additions.................................................. 682 406 112
Sales...................................................... -- (126) --
Amortization............................................... (516) (630) (491)
----------- ----------- -----------
Balance at end of period..................................... $ 4,373 $ 4,207 $ 4,557
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At December 31, 1995, the fair value of capitalized mortgage servicing
rights was $5,696,000 (See Note A -- "Significant Accounting Policies"). There
was no activity in the valuation allowances for mortgage servicing rights for
the year ended December 31, 1995.
54
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Z -- CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash and due from banks.................................................... $ 132 $ 100
Interest bearing deposits with bank subsidiaries........................... 2,611 11,386
Securities available for sale.............................................. -- 1,047
Securities held to maturity................................................ 577 595
Notes receivable from subsidiaries......................................... 7,970 --
Investment in bank subsidiaries............................................ 80,155 75,367
Other assets............................................................... 2,933 3,106
--------- ---------
$ 94,378 $ 91,601
--------- ---------
--------- ---------
Liabilities.................................................................. $ 4,424 $ 5,028
Shareholders' Equity......................................................... 89,954 86,573
--------- ---------
$ 94,378 $ 91,601
--------- ---------
--------- ---------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income........................................ $ 301 $ 277 $ 126
Dividends from subsidiaries......................................... 3,856 5,145 7,858
Trading securities gains............................................ -- -- 9
Gain on sale of investment securities............................... 28 -- --
--------- --------- ---------
4,185 5,422 7,993
General and administrative expenses................................. 870 1,013 919
--------- --------- ---------
Income before income taxes and equity in undistributed net income
(loss) of subsidiaries............................................. 3,315 4,409 7,074
Income tax benefit.................................................. (141) (345) (597)
--------- --------- ---------
Income before equity in undistributed net income (loss) of
subsidiaries....................................................... 3,456 4,754 7,671
Equity in undistributed net income (loss) of subsidiaries........... 4,490 1,152 (1,500)
--------- --------- ---------
Net Income........................................................ $ 7,946 $ 5,906 $ 6,171
--------- --------- ---------
--------- --------- ---------
</TABLE>
55
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Z -- CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL
STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net income................................................................ $ 7,946 $ 5,906 $ 6,171
Adjustments to reconcile net income to net cash provided by operating
activities:
Net deferred income tax provision (benefit)............................. 7 (111) (311)
Net decrease in trading securities...................................... -- -- 11
Gain on sale of investment securities................................... (28) -- --
Equity in undistributed net loss (income) of subsidiaries............... (4,490) (1,152) 1,500
Net change in other assets and other liabilities.......................... (2,173) 2,621 (15)
--------- --------- ---------
Net Cash Provided by Operating Activities............................... 1,262 7,264 7,356
--------- --------- ---------
Investing Activities
Capital contribution to subsidiary........................................ -- -- (750)
Net decrease (increase) in interest bearing deposits...................... 8,775 (3,630) (4,040)
Increase in note receivable from subsidiaries............................. (7,970) -- --
Purchases of securities available for sale................................ -- (1,027) --
Proceeds from sales of securities available for sale...................... 1,075 -- --
Purchases of securities held to maturity.................................. -- (3,002) --
Proceeds from maturities of securities held to maturity................... 18 3,275 --
Proceeds from sales and maturities of investment securities............... -- -- 2,695
Purchases of investment securities........................................ -- -- (2,855)
--------- --------- ---------
Net Cash Provided (Used) by Investing Activities...................... 1,898 (4,384) (4,950)
--------- --------- ---------
Financing Activities
Common cash dividends paid................................................ (4,226) (3,297) (2,430)
Preferred cash dividends paid............................................. (89) (268) (270)
Proceeds from issuance of common stock under stock option plan............ 825 460 306
Proceeds from issuance of common stock under employee stock purchase
plan..................................................................... 35 150 88
Proceeds from issuance of common stock under dividend reinvestment
program.................................................................. 327 64 --
--------- --------- ---------
Net Cash Used by Financing Activities................................. (3,128) (2,891) (2,306)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents...................... 32 (11) 100
Cash and cash equivalents at beginning of year.............................. 100 111 11
--------- --------- ---------
Cash and Cash Equivalents at End of Year.............................. $ 132 $ 100 $ 111
--------- --------- ---------
--------- --------- ---------
</TABLE>
56
<PAGE>
CFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE AA -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the consolidated quarterly results of
operations for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Interest and dividend income................................. $ 15,266 $ 16,065 $ 16,399 $ 16,845
Interest expense............................................. 7,375 7,947 8,140 8,232
--------- --------- --------- ---------
Net interest and dividend income........................... 7,891 8,118 8,259 8,613
Provision for loan and lease losses.......................... 150 480 345 649
Trading securities gains, net................................ 224 294 273 301
Investment securities gains, net............................. -- 114 44 --
Other income................................................. 1,840 2,168 2,173 1,990
Other expense (1)............................................ 7,307 7,220 6,941 6,929
Income before income taxes................................. 2,498 2,994 3,463 3,326
Income taxes................................................. 942 984 1,275 1,134
--------- --------- --------- ---------
Net income................................................. 1,556 2,010 2,188 2,192
Preferred stock dividends.................................... 67 22 -- --
--------- --------- --------- ---------
Net income available to common stock....................... $ 1,489 $ 1,988 $ 2,188 $ 2,192
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share.................................. $ .21 $ .27 $ .28 $ .28
--------- --------- --------- ---------
--------- --------- --------- ---------
1994
Interest and dividend income................................. $ 13,300 $ 13,260 $ 13,894 $ 14,989
Interest expense............................................. 5,549 5,736 6,148 6,706
--------- --------- --------- ---------
Net interest and dividend income............................. 7,751 7,524 7,746 8,283
Provision for loan and lease losses.......................... 12 -- 50 375
Trading securities gains (losses), net....................... (441) 49 11 124
Investment securities gains, net............................. -- 86 -- --
Other income (2)............................................. 1,460 1,464 1,459 2,304
Other expense (3)............................................ 6,693 6,544 6,771 7,921
--------- --------- --------- ---------
Income before income taxes................................. 2,065 2,579 2,395 2,415
Income taxes................................................. 810 990 843 905
--------- --------- --------- ---------
Net income................................................. 1,255 1,589 1,552 1,510
Preferred stock dividends.................................... 67 68 66 67
--------- --------- --------- ---------
Net income available to common stock....................... $ 1,188 $ 1,521 $ 1,486 $ 1,443
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share.................................. $ .17 $ .22 $ .21 $ .21
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) For the quarter ended September 30, 1995 the Company received a $424,000
insurance premium refund from the Federal Deposit Insurance Corporation
(FDIC). In addition, for the quarter ended December 31, 1995 the insurance
premiums paid to the FDIC were significantly reduced.
(2) Included in other income for the quarter ended December 31, 1994 was a
$677,000 gain from the sale of a $59,000,000 mortgage loan servicing
portfolio and a $87,000 gain from the sale of a $999,000 credit card
portfolio.
(3) Included in other expense for the quarter ended December 31, 1994 was
$594,000 in charges associated with a profit sharing accrual, a severance
accrual, and costs incurred in connection with the pending acquisition of
Orange Savings Bank.
57
<PAGE>
REPORT OF MANAGEMENT
ASSESSMENT OF INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting, including controls over the
safeguarding of assets, presented in conformity with both generally accepted
accounting principles and the Federal Financial Institutions Examination Council
instructions for Consolidated Reports of Condition and Income (call report
instructions). The structure contains monitoring mechanisms, and actions are
taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1995. This assessment
was based on criteria for effective internal control over financial reporting
described in "Internal Control -- Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 1995, CFX Corporation
and subsidiaries maintained an effective internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and call report instructions.
<TABLE>
<S> <C>
Peter J. Baxter Mark A. Gavin
PRESIDENT AND CHIEF CHIEF FINANCIAL OFFICER
EXECUTIVE OFFICER
</TABLE>
58
<PAGE>
REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of CFX Corporation
We have audited the accompanying consolidated balance sheets of CFX
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
The consolidated financial statements as of December 31, 1994, and for the
years ended December 31, 1994 and 1993 have been restated to reflect the pooling
of interests with Orange Savings Bank as described in Note B to the consolidated
financial statements. We did not audit the 1994 and 1993 financial statements of
Orange Savings Bank, which statements reflect total assets of $83,268,000 as of
December 31, 1994 and net interest and dividend income of $3,255,000 and
$3,216,000 for the years ended December 31, 1994 and 1993, respectively.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Orange Savings Bank as of December 31, 1994 and for the years ended December
31, 1994 and 1993, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CFX Corporation and subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights," effective January 1, 1995.
Boston, Massachusetts
January 18, 1996, except for Note X
as to which the date is February 9, 1996
59
<PAGE>
REPORT OF WOLF & COMPANY, P.C., INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of CFX Corporation
We have examined management's assertion that CFX Corporation and
subsidiaries maintained an effective internal control structure over financial
reporting, including controls over the safeguarding of assets, as of December
31, 1995, included in the accompanying report on ASSESSMENT OF INTERNAL CONTROLS
OVER FINANCIAL REPORTING, presented in conformity with both generally accepted
accounting principles and call report instructions.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure, and such other procedures as was considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assertion that CFX Corporation and subsidiaries
maintained an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
call report instructions as of December 31, 1995, is fairly stated, in all
material respects, based on INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
Boston, Massachusetts
January 18, 1996
60
<PAGE>
DIRECTORS AND OFFICERS OF CFX CORPORATION
<TABLE>
<S> <C> <C> <C>
DIRECTORS OFFICERS
EUGENE E. GAFFEY ELIZABETH SEARS HAGER PETER J. BAXTER DANIEL J. LAPLANTE
CHAIRMAN OF THE BOARD FORMER NEW HAMPSHIRE PRESIDENT AND CHIEF VICE PRESIDENT,
RETIRED JUSTICE, STATE REPRESENTATIVE EXECUTIVE OFFICER INVESTMENT MANAGER
HINSDALE DOUGLAS S. HATFIELD, PAUL D. SPIESS GREGG R. TEWKSBURY, CPA
MUNICIPAL COURT JR. EXECUTIVE VICE CORPORATE CONTROLLER
RICHARD F. ASTRELLA PRESIDENT AND PRESIDENT DONALD E. LEROUX, CPA
PRESIDENT, ORANGE TREASURER, MARK A. GAVIN, CPA DIRECTOR OF AUDIT
SAVINGS BANK HATFIELD, MORAN & CHIEF FINANCIAL OFFICER CAROL M. HARWOOD
PETER J. BAXTER BARRY, P.A WILLIAM H. DENNISON DIRECTOR OF MARKETING
PRESIDENT AND CHIEF PHILIP A. MASON TREASURER KAREN M. MAYO, CPA
EXECUTIVE OFFICER, ATTORNEY, MASON & JOHN F. FOLEY DIRECTOR OF COMPLIANCE
CFX CORPORATION AND CFX MARTIN SENIOR VICE PRESIDENT, CHRISTOPHER V. BEAN
BANK EMERSON H. O'BRIEN HUMAN RESOURCES SECRETARY
RICHARD B. BAYBUTT PRESIDENT, ECONOMY LAURENCE E. BABCOCK WINIFRED M. BROOKS
CHAIRMAN OF THE BOARD, PLUMBING & HEATING VICE PRESIDENT, ASSISTANT SECRETARY
BAYBUTT CONSTRUCTION WALTER R. PETERSON DATA PROCESSING
CHRISTOPHER V. BEAN INTERIM PRESIDENT,
ATTORNEY, UNIVERSITY OF NEW
BEAN LAW OFFICES HAMPSHIRE
CALVIN L. FRINK L. WILLIAM SLANETZ
RETIRED OWNER, CHESHIRE REALTY
</TABLE>
TRUSTEES AND BANKING PARTNERS OF CFX BANK
<TABLE>
<S> <C> <C> <C>
TRUSTEES BANKING PARTNERS
EUGENE E. GAFFEY PETER J. BAXTER
CHAIRMAN OF THE BOARD PRESIDENT AND
RETIRED JUSTICE, CHIEF EXECUTIVE OFFICER
HINSDALE DANIEL J. LAPLANTE
MUNICIPAL COURT TREASURER
RICHARD B. BAYBUTT BENOIT J. ASSELIN
CHAIRMAN OF THE BOARD, JUDITH AVERY-DUNNING
BAYBUTT CONSTRUCTION LAURENCE E. BABCOCK
PETER J. BAXTER A. JANE BEAUCHAMP
PRESIDENT AND KATHLEEN A. CLEVELAND
CHIEF EXECUTIVE OFFICER MARTHA A. CURTIS
CFX BANK WILLIAM H. DENNISON
DELCIE D. BEAN BRIAN P. DONOVAN
PRESIDENT, GORDON R. EDMONDS
D.D. BEAN & SONS, INC. JOHN F. FOLEY
WILLIAM H. DENNISON CAROLE E. FREDERICKS
BANKING PARTNER, MARK A. GAVIN, CPA
CFX BANK CAROL M. HARWOOD
CALVIN L. FRINK DONALD E. LEROUX, CPA
RETIRED KAREN M. MAYO, CPA
EMERSON H. O'BRIEN WILLIAM J. MCIVER
PRESIDENT, ECONOMY LEE K. ROBATOR
PLUMBING & HEATING LARRY E. RUEST
L. WILLIAM SLANETZ PAUL D. SPIESS
OWNER, CHESHIRE REALTY GREGG R. TEWKSBURY, CPA
DAVID B. WALTERS PETER T. WHITTEMORE
DIRECTOR OF COMMUNITY
RELATIONS,
CFX BANK
HONORARY TRUSTEE
MARIO G. FARINA
CHAIRMAN OF THE BOARD,
M.G.F., INC.
</TABLE>
61
<PAGE>
DIRECTORS AND MORTGAGE BANKING PARTNERS OF CFX MORTGAGE, INC.
<TABLE>
<S> <C> <C> <C>
DIRECTORS MORTGAGE BANKING PARTNERS
PAUL D. SPIESS PAUL T. POULIOT, CMB
CHAIRMAN OF THE BOARD PRESIDENT
BANKING PARTNER, WINNIE F. THIBAULT
CFX BANK TREASURER
PAUL T. POULIOT, CMB DIANNE M. BISHOP
PRESIDENT DANIEL J. MCKENNEY
MORTGAGE BANKING PAULINE D. TESSIER
PARTNER,
CFX MORTGAGE, INC.
PETER J. BAXTER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
CFX CORPORATION AND CFX
BANK
</TABLE>
MANAGEMENT OF CFX FUNDING L.L.C.
<TABLE>
<S> <C> <C> <C>
MANAGEMENT
WILLIAM C. MEARS
PRESIDENT
STEVEN T. PLATTEN
VICE PRESIDENT
MARK A. GAVIN, CPA
TREASURER
JAMES VALZ
CONTROLLER
</TABLE>
DIRECTORS AND BANKING PARTNERS OF ORANGE SAVINGS BANK
<TABLE>
<S> <C> <C> <C>
DIRECTORS DIRECTORS BANKING PARTNERS
ELWYN C. HAYDEN ANDREA L. SHAUGHNESSY RICHARD F. ASTRELLA
CHAIRMAN OF THE BOARD PRESIDENT, CONNIE A. ZANI
RETIRED, DUALL PLASTICS, INC.
HAYDEN REALTY & JOHN B. STEVENSON
DEVELOPMENT CORP. ACCOUNTING & MIS
RICHARD F. ASTRELLA MANAGER
PRESIDENT, RIVETO MANUFACTURING
ORANGE SAVINGS BANK COMPANY
ROBERT G. ALLEN ARLAN D. WILLARD
SALES ENGINEER, RETIRED,
L.S. STARRETT, CO. L. S. STARRETT, CO.
CHRISTOPHER V. BEAN
ATTORNEY
BEAN LAW OFFICES
PAUL A. LAROCQUE,
D.D.S.
SEMI-RETIRED,
DENTIST
THOMAS S. MANN, III
PRESIDENT,
T. S. MANN LUMBER
COMPANY
PHILIP A. MASON
ATTORNEY, MASON &
MARTIN
</TABLE>
62
<PAGE>
INFORMATION ON COMMON STOCK
At December 31, 1995, there were 3,340 holders of record of CFX
Corporation's common stock. The stock is traded on the American Stock Exchange
(AMEX) under the symbol "CFX." The following table sets forth cash dividends
declared on the Company's common stock and the high and low sale prices as
reported by AMEX for the appropriate periods.
<TABLE>
<CAPTION>
1995
CALENDAR QUARTERS
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dividends declared per share (1).................................... $ .1475 $ .1524 $ .1524 $ .3429
Stock price (1):
High.............................................................. $ 121/8 $ 161/8 $ 171/8 $ 171/2
Low............................................................... 101/8 115/8 141/4 141/8
Last sale......................................................... 113/4 153/4 171/8 155/8
<CAPTION>
1994
CALENDAR QUARTERS
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTERS QUARTERS QUARTERS QUARTERS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dividends declared per share (1).................................... $ .1143 $ .1143 $ .1249 $ .1292
Stock price (1):
High.............................................................. $ 11 $ 121/8 $ 113/4 $ 11
Low............................................................... 10 97/8 103/8 10
Last sale......................................................... 10 105/8 111/4 10
</TABLE>
- ------------------------
(1) Common cash dividends and common stock sale prices have been restated to
reflect the Companys 5% common stock dividend declared on December 12, 1995
and the 3 for 2 stock split declared on June 13, 1995.
63
<PAGE>
CORPORATE INFORMATION
<TABLE>
<S> <C>
EXECUTIVE OFFICES
102 Main Street
Keene, NH 03431
REGISTRAR AND TRANSFER AGENT COMMON STOCK INFORMATION
Chemical Mellon Shareholder Services, L.L.C. Listed on AMEX: CFX
Overpeck Centre Shares outstanding as of 12/31/95: 7,509,921
85 Challenger Road FORM 10-K
Ridgefield Park, NJ 07660 A copy of Form 10-K filed for the year
1-800-288-9541 ended December 31, 1995 by the Company
INDEPENDENT AUDITORS with the Securities and Exchange
Wolf & Company, P.C. Commission may be obtained without
One International Place charge by written request to:
Boston, MA 02110-9801 Mark A. Gavin, Chief Financial Officer
ANNUAL MEETING CFX Corporation
May 15, 1996, 10 a.m. P.O. Box 429
Keene Country Club 102 Main Street
West Hill Road Keene, NH 03431
Keene, NH 03431 (603) 352-2502
</TABLE>
DIVIDEND REINVESTMENT PLAN
CFX Corporation offers a dividend reinvestment plan which permits
participating shareholders of record to reinvest dividends in CFX Corporation
Common Stock without paying brokerage commissions or service charges. A minimum
of fifty shares of common stock owned is required to be eligible for
participation in the plan. Participating shareholders may also invest up to
$5,000 in additional funds each quarter for purchase of additional shares. A
copy of the dividend reinvestment plan prospectus and application may be
requested from the transfer agent at the above address or from Shareholder
Services at CFX Corporation.
64
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-17071) pertaining to the 1986 Stock Option Plan of CFX
Corporation, in the Registration Statement (Form S-8, No. 33-52598) pertaining
to the 1992 Employee Stock Purchase Plan of CFX Corporation, and in the
Registration Statement (Form S-8, No. 33-61787) pertaining to the 1995 Stock
Option Plan of CFX Corporation of our report dated January 18, 1996, except for
Note X as to which the date is February 9, 1996, with respect to the
consolidated financial statements of CFX Corporation as of December 31, 1995,
and for the year then ended, incorporated by reference in the Annual Report on
Form 10-K of CFX Corporation for the year ended December 31, 1995.
Wolf & Company, P.C.
Boston, Massachusetts
April 1, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
Nos. 33-61787, 33-17071, and 33-52598 of CFX Corporation on Form S-8 of our
report on the financial statements of Orange Savings Bank dated January 27,
1995, appearing in the Annual Report on Form 10-K of CFX Corporation and
Subsidiaries for the year ended December 31, 1995.
Deloitte & Touche LLP
Boston, Massachusetts
March 29, 1996
<PAGE>
EXHIBIT 23.3
The Board of Directors
Orange Savings Bank
We consent to the incorporation by reference in Registration Statements #
33-17071, 33-52598 and 33-61787 of CFX Corporation of our report dated February
4, 1994 on the consolidated financial statements of Orange Savings Bank and
subsidiary for the year ended December 31, 1993 included in the filing on Form
10-K of CFX Corporation for December 31, 1995.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS
AND FOOTNOTES OF THE DECEMBER 31, 1995 FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 28,766
<INT-BEARING-DEPOSITS> 327
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,047
<INVESTMENTS-CARRYING> 19,729
<INVESTMENTS-MARKET> 19,843
<LOANS> 698,972
<ALLOWANCE> 7,689
<TOTAL-ASSETS> 900,549
<DEPOSITS> 665,723
<SHORT-TERM> 132,348
<LIABILITIES-OTHER> 12,323
<LONG-TERM> 201
0
0
<COMMON> 5,007
<OTHER-SE> 84,542
<TOTAL-LIABILITIES-AND-EQUITY> 900,549
<INTEREST-LOAN> 56,908
<INTEREST-INVEST> 6,598
<INTEREST-OTHER> 1,069
<INTEREST-TOTAL> 64,575
<INTEREST-DEPOSIT> 25,362
<INTEREST-EXPENSE> 6,332
<INTEREST-INCOME-NET> 32,881
<LOAN-LOSSES> 1,624
<SECURITIES-GAINS> 1,250
<EXPENSE-OTHER> 28,397
<INCOME-PRETAX> 12,281
<INCOME-PRE-EXTRAORDINARY> 12,281
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,946
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 8.05
<LOANS-NON> 7,844
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,558
<CHARGE-OFFS> 1,882
<RECOVERIES> 389
<ALLOWANCE-CLOSE> 7,689
<ALLOWANCE-DOMESTIC> 7,689
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 647
</TABLE>
