<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission file number 1-10633
CFX CORPORATION
(Exact name of registrant as specified in its charter)
NEW HAMPSHIRE 02-0402421
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
102 MAIN STREET
KEENE, NEW HAMPSHIRE 03431
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (603) 352-2502
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of April 30, 1997, 13,095,818 shares of the registrant's common stock were
issued and outstanding.
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<PAGE> 2
CFX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets -- March 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income -- Three
months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 1997 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows -- Three
months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements -
March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
-----------------
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 19
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
----------
</TABLE>
<PAGE> 3
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
=======================================================================================================================
MARCH 31, December 31,
=======================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
=======================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 59,080 $ 50,404
Federal funds sold 3,000 -
----------------- --------------
CASH AND CASH EQUIVALENTS 62,080 50,404
Interest bearing deposits with other banks 4,628 197
Securities available for sale 379,423 245,324
Securities held to maturity 30,951 32,670
Mortgage loans held for sale 21,101 15,212
Loans and leases 1,150,658 1,118,164
Less allowance for loan and lease losses 15,661 15,740
----------------- --------------
NET LOANS AND LEASES 1,134,997 1,102,424
Premises and equipment 28,227 27,386
Mortgage servicing rights 6,555 5,313
Goodwill and deposit base intangibles 9,080 9,235
Foreclosed real estate 1,806 2,223
Bank-owned life insurance 31,376 30,975
Other assets 34,225 25,729
----------------- --------------
$ 1,744,449 $ 1,547,092
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 1,074,879 $ 1,020,332
Noninterest bearing 148,651 136,875
----------------- --------------
TOTAL DEPOSITS 1,223,530 1,157,207
Short-term borrowed funds 104,535 67,374
Advances from Federal Home Loan Bank of Boston 238,681 175,081
Other liabilities 43,884 14,477
----------------- --------------
TOTAL LIABILITIES 1,610,630 1,414,139
----------------- --------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share-authorized
4,000,000 shares, no shares outstanding in
1997 or 1996 - -
Common stock, par value $.66 2/3 per share-authorized
22,500,000 shares, issued 13,080,325 shares at March
31, 1997 and 13,008,787 shares at December 31, 1996 8,718 8,672
Paid-in capital 98,234 97,406
Retained earnings 30,094 28,223
Net unrealized losses on securities available for sale,
after tax effects (2,757) (929)
Cost of 30,364 shares at March 31, 1997 and 28,055 shares
at March 31, 1996 of common stock in treasury (470) (419)
----------------- --------------
TOTAL SHAREHOLDERS' EQUITY 133,819 132,953
----------------- --------------
$ 1,744,449 $ 1,547,092
================= ==============
Number of common shares outstanding 13,050 12,981
================= ==============
Common shareholders' equity per share $ 10.25 $ 10.24
================= ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE> 4
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
=======================================================================================================================
THREE MONTHS ENDED MARCH 31,
=======================================================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
=======================================================================================================================
<S> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 24,399 $ 20,775
Interest on investment securities:
Taxable 4,796 4,423
Tax-exempt 158 221
-------- ---------
4,954 4,644
Dividends on marketable equity securities 59 83
Other 91 238
-------- ---------
TOTAL INTEREST AND DIVIDEND INCOME 29,503 25,740
-------- ---------
Interest expense:
Interest on deposits 10,577 10,079
Interest on borrowings:
Short-term 3,816 1,957
Long-term 106 3
-------- ---------
TOTAL INTEREST EXPENSE 14,499 12,039
-------- ---------
NET INTEREST AND DIVIDEND INCOME 15,004 13,701
Provision for loan and lease losses 702 905
-------- ---------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 14,302 12,796
-------- ---------
Other income:
Service charges on deposit accounts 980 969
Loan servicing fees 407 400
Net gains on trading securities - 153
Net gains (losses) on sales of investment securities (6) 57
Net gains on sales of loans 548 438
Leasing activities 775 702
Trust fees 617 559
Other 1,051 554
-------- ---------
4,372 3,832
-------- ---------
Other expense:
Salaries and employee benefits 6,561 5,753
Occupancy and equipment expense 1,935 1,749
Professional fees 376 619
Advertising and marketing 315 517
Operation of foreclosed real estate 45 91
Goodwill and deposit base intangible amortization 155 167
Other 2,587 2,681
-------- ---------
11,974 11,577
-------- ---------
INCOME BEFORE INCOME TAXES 6,700 5,051
Income taxes 1,958 1,496
-------- ---------
NET INCOME AVAILABLE TO COMMON STOCK $ 4,742 $ 3,555
======== =========
Weighted average common shares outstanding 13,014 12,714
======== =========
Earnings per common share $ .36 $ .28
======== =========
Dividends declared per common share $ .22 $ .17
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE> 5
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
====================================================================================================================
NET
UNREALIZED
LOSSES
COMMON STOCK ON SECURITIES TREASURY STOCK
------------------ PAID-IN RETAINED AVAILABLE ----------------
(IN THOUSANDS) SHARES DOLLARS CAPITAL EARNINGS FOR SALE SHARES DOLLARS TOTAL
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 13,009 $ 8,672 $ 97,406 $ 28,223 $ (929) (28) $ (419) $132,953
Net income - - - 4,742 - - - 4,742
Common cash dividends
declared - $.22 per share - - - (2,871) - - - (2,871)
Issuance of common stock
under stock option plan
and related tax effects 52 34 613 - - - - 647
Issuance of common stock under
employee stock purchase plan 17 12 215 - - - - 227
Change in net unrealized gains
(losses) on securities available
for sale - - - - (1,828) - - (1,828)
Cost of shares acquired for treasury 2 - - - - (2) (51) (51)
------ ------- -------- -------- -------- ----- ------- -------
BALANCE AT MARCH 31, 1997 13,080 $ 8,718 $ 98,234 $ 30,094 $ (2,757) (30) $ (470) $133,819
====== ======= ======== ======== ======== ===== ======= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE> 6
CFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================================
THREE MONTHS ENDED MARCH 31,
==========================================================================================================================
(In thousands) 1997 1996
==========================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,742 $ 3,555
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 1,067 1,439
Amortization of deferred credit on leasehold residual (292) (353)
Provision for loan and lease losses 702 905
Provision for foreclosed real estate losses - 79
Loans originated and acquired for sale (42,726) (25,966)
Principal balance of loans sold 36,837 24,726
Net gain on sale of portfolio loans (320) -
Net gain (loss) on sale of foreclosed real estate (27) 9
Net (gain) loss on investment securities 6 (57)
Net increase in trading securities - (24,400)
Net deferred income tax provision 1,301 239
Increase in cash surrender value of bank-owned life insurance (401) -
Other 409 (2,315)
------------ -------------
NET USED BY OPERATING ACTIVITIES 1,298 (22,139)
------------ -------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 54,837 1,904
Proceeds from maturities of securities available for sale 7,311 20,329
Purchase of securities available for sale (179,721) (25,048)
Proceeds from maturities of securities held to maturity 2,086 15,196
Purchases of securities held to maturity (300) (23,943)
Proceeds from the sale of, or payments on, foreclosed real estate 854 255
Proceeds from the sale of portfolio loans 12,061 -
Net decrease (increase) in interest bearing deposits with other banks (4,431) 13
Net increase in loans and leases (45,667) (23,675)
Purchases of premises and equipment (1,851) (455)
------------ -------------
NET CASH USED BY INVESTING ACTIVITIES (154,821) (35,424)
------------ -------------
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits and savings accounts 11,092 572
Net increase in time certificates of deposit 55,231 61,614
Net increase in short-term borrowings 37,161 5,812
Proceeds from FHLBB advances with maturities in excess of three months 178,260 225
Payments of FHLBB advances with maturities in excess of three months (70,000) -
Net payments of FHLBB advances with maturities of three
months or less (44,660) (3,684)
Common cash dividends paid (2,708) (2,895)
Proceeds from issuance of common stock 874 623
Cost of shares acquired for treasury (51) -
Fractional shares paid out - (26)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 165,199 62,241
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 11,676 4,678
Cash and cash equivalents at beginning of period 50,404 60,041
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,080 $ 64,719
============ ============
SUPPLEMENTARY INFORMATION:
Interest paid on deposit accounts $ 10,226 $ 9,514
Interest paid on borrowed funds 3,104 2,235
Income taxes paid 250 488
Transfers from loans to foreclosed real estate 410 525
Net increase in due to broker 25,214 -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE> 7
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
===============================================================================
NOTE A-BASIS OF PRESENTATION
===============================================================================
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
current fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the CFX Corporation (the
Company) annual report on Form 10-K and Form 10-K/A for the year ended December
31, 1996.
===============================================================================
NOTE B-ACQUISITIONS
===============================================================================
COMPLETED
On July 1, 1996, the Company acquired The Safety Fund Corporation (Safety Fund)
and the Milford Co/operative Bank (Milford). Each of Safety Fund's 1,665,000
outstanding shares of common stock and Milford's 689,000 outstanding shares of
common stock were converted into 1.785 shares and 2.777 shares, respectively,
of the Company's common stock, resulting in the issuance of 2,973,000 shares
and 1,914,000 shares, respectively, of the Company's common stock to Safety
Fund and Milford shareholders. Cash was paid in lieu of issuing fractional
shares. Safety Fund was a bank holding company headquartered in Fitchburg,
Massachusetts. Safety Fund's subsidiary bank, Safety Fund National Bank,
continues to operate as a subsidiary of the Company. Milford was a
state-chartered co/operative bank, headquartered in Milford, New Hampshire.
Milford was merged into CFX's New Hampshire banking subsidiary, CFX Bank, as
part of the transaction.
Both the Safety Fund and Milford mergers were accounted for by the
pooling-of-interests method of accounting, and as such, the financial
information for all prior periods presented has been restated to present the
combined financial condition and results of operations as if the combination
had been in effect for all periods presented.
PENDING
On February 13, 1997, the Company signed a definitive agreement to acquire all
of the outstanding common stock of Portsmouth Bank Shares, Inc. (Portsmouth), a
New Hampshire bank holding company, headquartered in Portsmouth, N.H.
Pursuant to the definitive agreement each of Portsmouth's outstanding shares of
common stock will be converted into .9314 shares of the Company's common stock.
In the event that the average price of the Company's common stock for the ten
trading days immediately before the Company receives the last regulatory
approval required for the transaction is below $15.70, the exchange ratio
becomes 1.0294 shares and the exchange ratio floats between .9314 and 1.0294
shares if the average price of the Company's common stock is between $17.375
and $15.70. Portsmouth has the right to terminate the agreement if the average
price of the Company's common stock is below $14.20 per share unless the
Company agrees to increase the exchange ratio.
At December 31, 1996, Portsmouth had (unaudited) total assets of $272 million,
deposits of $198 million and stockholder's equity of $66 million. Portsmouth's
bank subsidiary, Portsmouth Savings Bank, operates 3 full service offices in
Portsmouth, North Hampton and Greenland, New Hampshire.
On March 24, 1997, the Company entered into a definitive agreement to acquire
all of the outstanding common stock of Community Bankshares, Inc. (Community),
a New Hampshire bank holding company, headquartered in Concord, New Hampshire.
Pursuant to the definitive agreement, each outstanding share of Community
common stock will be converted into 2.2 shares of CFX common stock. If the
average price of CFX common stock for the fifteen days preceding the closing
date is between $18.18 and $20.00, the exchange ratio floats between 2.2 and
2.0 shares. Community may terminate the agreement if the average price of CFX
common stock is below $13.50 per share unless CFX agrees to increase the
exchange ratio.
-5-
<PAGE> 8
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
===============================================================================
NOTE B-ACQUISITIONS - (Cont'd.)
===============================================================================
Both proposed transactions are expected to be tax free to the owners of
Portsmouth and Community and are subject to regulatory approval and the
approval of the Company's, Portsmouth's and Community's shareholders. It is
anticipated that the transactions will be accounted for by the
pooling-of-interests method of accounting.
At December 31, 1996, Community had (unaudited) total assets of $551 million,
deposits of $396 million and shareholder's equity of $41 million. Community's
bank subsidiaries, Concord Savings Bank, headquartered in Concord, New
Hampshire and Centerpoint Bank, headquartered in Bedford, New Hampshire,
operate 11 branches located in Merrimack, Hillsborough, Belknap and Rockingham
Counties.
===============================================================================
NOTE C-RECENT ACCOUNTING PRONOUNCEMENTS
===============================================================================
EARNINGS PER SHARE
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
requires dual presentation of basic and diluted earnings per share (EPS) on the
face of the income statement and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The Company will be required to report both basic
and diluted EPS, showing the effects of any dilution for common stock options.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997. The dilutive effect of stock options is immaterial for
the quarter ended March 31, 1997.
CAPITAL STRUCTURE
Also in March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure", to consolidate existing disclosure requirements to
nonpublic and public entities. The Statement is effective for financial
statements issued for periods ending after December 13, 1997. Management does
not believe that additional disclosure is required for the Company at this
time.
-6-
<PAGE> 9
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MARCH 31, 1997
===============================================================================
GENERAL
===============================================================================
All information within this section should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this Form
10-Q. All references in this discussion to the financial condition and results
of operations are to the consolidated position of the Company and its
subsidiaries taken as a whole.
CFX Corporation is a multi-bank holding company incorporated under the laws of
the State of New Hampshire. The Company's wholly-owned subsidiaries are CFX
Bank, headquartered in Keene, New Hampshire, Orange Savings Bank, headquartered
in Orange, Massachusetts, and Safety Fund National Bank, headquartered in
Fitchburg, Massachusetts.
CFX Bank's direct subsidiaries, both of which are wholly-owned, are CFX Capital
Systems, Inc. (CFX Capital) and CFX Financial Services, Inc. (CFX Financial).
CFX Capital's wholly-owned subsidiary is CFX Mortgage, Inc. which engages in
mortgage banking. CFX Financial owns 51% of CFX Funding L.L.C. (CFX Funding),
which engages in the facilitation of lease financing and securitization.
Orange Savings Bank has one wholly-owned subsidiary, OSB Securities Corp.,
which is engaged in investment activities. Safety Fund National Bank's direct
subsidiaries, all of which are wholly-owned, are Prichard Plaza Realty Corp.
(Prichard Plaza), which engages in property management, The
Lenders/Massachusetts, Inc. (Lenders) which engages in mortgage banking, and
Safety Fund Securities Corp., which is engaged in investment activities.
The results of operations for the Company depend primarily on its net interest
and dividend income, which is the difference between (i) interest and dividend
income on earning assets, primarily loans, leases, trading and investment
securities, and (ii) interest expense on interest bearing liabilities, which
consist of deposits and borrowings. The Company's results of operations are
also affected by the provision for loan and lease losses, resulting from the
Company's assessment of the adequacy of the allowance for loan and lease
losses; the level of its other operating income, including gains and losses on
the sale of loans and securities, and loan and other fees; operating expenses;
and income tax expenses.
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings per share, cost savings related to
acquisitions, credit quality and other financial business matters for 1997 and,
in certain instances, subsequent periods. The Company cautions that these
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, and that statements for periods subsequent to 1997 are subject
to greater uncertainty because of the increased likelihood of changes in
underlying factors and assumptions. Actual results could differ materially from
forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: continued
pricing pressures on loan and deposit products, actions of competitors, changes
in economic conditions, the extent and timing of actions of the Federal Reserve
Board, continued customer disintermediation, customers' acceptance of the
Company's products and services, and the extent and timing of legislative and
regulatory actions and reforms.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
NET INCOME & EARNINGS PER COMMON SHARE
Net income was $4,742,000, or $.36 per share, for the quarter ended March 31,
1997, compared to $3,555,000, or $.28 per share, for the corresponding period a
year ago. Net income increased 33% while earnings per common share increased
29%.
The increase in net income was primarily due to increased core earnings (net
interest and dividend income and other income). Total core earnings were
$19,376,000 and $17,533,000 for the three months ended March 31, 1997, and
March 31, 1996, an increase of $1,843,000, or 10.5%. The increase was comprised
of increases in net
-7-
<PAGE> 10
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
RESULTS OF OPERATIONS - GENERAL- (CONT'D.)
===============================================================================
interest and dividend income of $1,303,000 and other income of $540,000. The
stronger core earnings were the result of a $218 million, or 23%, increase in
average loans and leases over the past twelve months and an increased focus on
the generation of noninterest income. However, a portion of the increase in
income was offset by an increase in certain operating expenses.
NET INTEREST AND DIVIDEND INCOME
The following tables set forth comparisons of average interest earning assets
and interest bearing liabilities, and interest income and interest expense
expressed as a percentage of the related asset or liability. In order to
reflect the economic impact of the Company's tax-exempt loans and leases and
investments in state and municipal securities and to present data on a
comparative basis, the income from and yields on these loans and leases and
securities have been restated to a taxable-equivalent basis using a 34.00% and
38.62% tax rate, respectively. The taxable-equivalent income adjustments for
loans and leases are $75,000 and $80,000 for the three months ended March 31,
1997 and 1996, respectively. The taxable-equivalent income adjustments for
investment securities are $100,000 and $139,000 for the three months ended
March 31, 1997 and 1996, respectively. These adjustments, however, are for
comparison purposes only and have no impact on reported net income.
<TABLE>
<CAPTION>
===========================================================================================================================
THREE MONTHS ENDED MARCH 31, 1997 1996
===========================================================================================================================
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest and dividend earning assets:
Loans and leases $ 1,156,557 $ 24,252 8.50% $ 939,378 $ 20,621 8.83%
Tax-exempt loans and leases 9,231 222 9.75 8,184 234 11.50
Taxable securities 297,922 4,855 6.61 309,298 4,507 5.86
Tax-exempt securities 14,047 258 7.45 19,808 359 7.29
Other 6,187 91 5.97 21,027 238 4.55
----------- ---------- ----------- ------------
Total interest earning assets 1,483,944 29,678 8.11 1,297,695 25,959 8.05
---------- ------------
Noninterest earning assets 134,153 96,516
----------- -----------
Total $ 1,618,097 $ 1,394,211
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 432,542 2,413 2.26 $ 450,187 2,653 2.37
Time deposits 592,975 8,164 5.58 528,492 7,426 5.65
Advances from Federal Home Loan
Bank of Boston 198,438 2,745 5.61 93,207 1,382 5.96
Other borrowed funds 98,140 1,177 4.86 50,984 578 4.56
----------- ---------- ----------- ------------
Total interest bearing liabilities 1,322,095 14,499 4.45 1,122,870 12,039 4.31
---------- ------------
Noninterest bearing liabilities:
Demand deposits 136,624 121,942
Other 23,418 14,793
Shareholders' equity 135,960 134,606
----------- -----------
Total $ 1,618,097 $ 1,394,211
=========== ===========
Net interest and dividend income $ 15,179 $ 13,920
========== ============
Interest rate spread 3.66% 3.74%
Net interest margin 4.15% 4.31%
</TABLE>
-8-
<PAGE> 11
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
================================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
================================================================================
The following table presents changes in interest and dividend income, interest
expense, and net interest income which are attributable to changes in the
average amounts of interest earning assets and interest bearing liabilities
and/or changes in rates earned or paid thereon. The net changes attributable to
both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
===================================================================================================================
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 VS. 1996
INCREASE (DECREASE) DUE TO
===================================================================================================================
(IN THOUSANDS) VOLUME RATE NET
===================================================================================================================
<S> <C> <C> <C>
Interest and dividends earned on:
Loans and leases $ 8,463 $(4,832) $ 3,631
Tax-exempt loans and leases 125 (137) (12)
Taxable securities (958) 1,306 348
Tax-exempt securities (153) 52 (101)
Other (516) 369 (147)
------ ------- -------
Total interest and
dividend income 6,961 (3,242) 3,719
------- ------- -------
Interest paid on:
Savings deposits (110) (130) (240)
Time deposits 1,342 (604) 738
Advances from Federal Home
Loan Bank of Boston 1,915 (552) 1,363
Other borrowed funds 558 41 599
------- ------- -------
Total interest expense 3,705 (1,245) 2,460
------- ------- -------
Change in net interest
and dividend income $ 3,256 $(1,997) $ 1,259
======= ======= =======
</TABLE>
-9-
<PAGE> 12
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
RESULTS OF OPERATIONS - GENERAL - (Cont'd.)
===============================================================================
Taxable-equivalent net interest and dividend income was $15,179,000 for the
three months ended March 31, 1997, compared to $13,920,000 for the same period
a year ago. The increase in net interest and dividend income in the 1997 period
was principally due to higher average interest earning assets and higher demand
deposits. The increase in average interest earning assets resulted principally
from growth in loans and leases (see "Financial Condition - Loans and Lease"
section of this Management's Discussion and Analysis), as loan and lease demand
increased in the current environment.
The Company's net interest margin of 4.15% for the three months ended March 31,
1997 decreased from 4.31% for the corresponding period a year ago. The
decrease in net interest margin was partially due to the increase in average
earning assets being funded with higher cost liabilities (predominantly FHLBB
borrowings, repurchase agreements and brokered certificates of deposits) and
due to the Company's investment in Bank-Owned Life Insurance ("BOLI") which
totaled $30 million at March 31, 1997. This investment in BOLI, which occurred
in the second and third quarters of 1996, had a negative impact on the net
interest margin of 5 basis points. BOLI generates non-interest income for the
Company, tax free, as the cash surrender value of the policies increase.
However, these insurance policies are funded with wholesale borrowings, which
decrease the Company's net interest margin. (For more information on BOLI, see
"Other Assets" section of this analysis.)
Volatile interest rates can have a material impact on the performance of
financial institutions. Since late 1993 interest rates have alternated between
periods of significant increase and rapid decline. The Company attempts to
manage and minimize the earnings impact of changing interest rates by
comprehensively assessing the impact of interest rate changes on forecasted
income and equity levels. Included in these analyses are estimates of
prepayment variability in certain asset categories, changes in mix and cost of
deposits and other liabilities, and other imbedded options throughout the
balance sheet, and equity leverage or arbitrage activities. Policy guidelines
for interest rate risk exposure are established and have allowed the Company to
maintain a relatively stable interest margin throughout several interest rate
cycles.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses in the three months ended March 31,
1997 was $702,000, compared to $905,000, for the same period a year ago. The
lower provision for loan and lease losses in 1997 is primarily the result of
the higher net charge-offs in 1996 compared to 1997 as discussed in the "Risk
Elements - Allowance for Loan and Lease Losses" section of the Management's
Discussion and Analysis. Total net charge-offs amounted to $781,000 for the
three months ended March 31, 1997 as compared to $1,032,000 for the three
months ended March 31, 1996. The higher net charge-offs in 1996 were
principally due to residential real estate foreclosures and the resolution of
several long-term problem commercial loan relationships. The majority of the
total charge-offs for the first quarter of 1997 resulted from one borrower
totaling $537,000 in a full settlement.
At March 31, 1997, nonperforming loans were $8,803,000, or .77% of total loans
and leases, compared to $8,299,000, or .74% of total loans and leases, as of
December 31, 1996. The allowance for loan and lease losses as a percentage of
nonperforming loans as of March 31, 1997 and December 31, 1996 amounted to
177.91% and 189.66%, respectively. The increase in nonperforming loans was in
the commercial loan portfolio.
-10-
<PAGE> 13
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
OTHER INCOME
Other income for the three months ended March 31, 1997 totaled $4,372,000,
compared to $3,832,000, for the same period a year ago. The increase of
$540,000 in other income for the first quarter of 1997 compared to first
quarter of 1996 is principally due to investments in Bank-Owned Life Insurance
(BOLI). This investment, totaling $30,000,000 at March 31, 1996 generated
$401,000 in other income during the first quarter of 1997. This investment was
not in place during the first quarter of 1996. (For more information on BOLI,
see "Other Assets" section of this analysis.)
Income from leasing activities and trust fees increased slightly in the first
quarter of 1997 as compared to the first quarter of 1996. The increase of
$73,000 in leasing activities was the result of the 67% growth in the leases
serviced for others, which totaled $108,294,000 at March 31, 1997, as well as
the increase in the amount of leases securitized/sold of 18%. Trust assets
increased 6% over the past year, to end at $371 million at March 31, 1997.
Offsetting the increase in other income was a net decrease of $106,000 for the
first quarter of 1997 compared to the first quarter of 1996 in net gains on
trading and investment securities and sale of loans. Net gains on the sale of
loans increased $110,000 from the sale of approximately $37 million in the
first quarter of 1997 as compared to $25 million in the first quarter of 1996.
Net gains on trading securities decreased $153,000 as a result of not investing
in trading securities in the first quarter of 1997.
OTHER EXPENSE
Other expense for the three months ended March 31, 1997 totaled $11,974,000,
compared to $11,577,000, for the same period a year ago.
The increase in other expenses of $397,000 in the three month period ended
March 31, 1997, compared to the same period a year ago, is principally due to
increases in salaries and employees benefits of $808,000, partially offset by a
reduction in professional fees of $243,000 and advertising and marketing
expenses of $202,000. The reduction in professional fees is due to efficiencies
gained in the 1996 mergers. The increase in salaries was the result of merit
increases, the development of a trust function at CFX Bank, the additional
staffing for two de novo branches, and the increase in staffing in the lending
functions. The decrease in advertising and marketing is primarily due to timing
of expenditures related to specific product initiatives. Beginning in the
second quarter of 1997 a relationship account will be announced which is
anticipated to increase these expenses to the 1996 levels.
INCOME TAXES
Income taxes for the three months ended March 31, 1997 was 29.22% of pretax
income, compared to 29.62%, of pretax income for the same period a year ago.
-11-
<PAGE> 14
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
FINANCIAL CONDITION
===============================================================================
GENERAL
Over the past several years, the Company has actively acquired banks and
leveraged the balance sheet. Both strategies have been undertaken to enhance
shareholder value. In the first quarter of 1997, two additional acquisitions
were announced and continued the leverage of shareholders' equity. Total assets
increased $197 million during the first quarter to $1.7 billion at March 31,
1997. This increase was primarily comprised of securities of $132 million and
loans and leases of $32 million.
INVESTMENT SECURITIES
The carrying value and estimated fair value of investment securities at March
31, 1997 and December 31, 1996, follows:
<TABLE>
<CAPTION>
======================================================================================================================
MARCH 31, December 31,
1997 1996
======================================================================================================================
AMORTIZED FAIR AMORTIZED FAIR
(IN THOUSANDS) COST VALUE COST VALUE
======================================================================================================================
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
United States Treasury and agency obligations $ 176,249 $ 173,368 $ 129,426 $128,863
State and municipal 439 432 439 441
Corporate bonds 1,133 1,146 3,138 3,163
Federal agency mortgage pass-through securities 68,758 66,817 76,068 75,153
Other collateralized mortgage
obligations (CMO's) 119,270 118,709 19,799 19,608
Marketable equity securities 2,987 3,719 5,961 5,961
Federal Home Loan Bank of Boston and Federal
Reserve Bank of Boston stock 15,232 15,232 12,135 12,135
--------- --------- --------- --------
TOTAL SECURITIES AVAILABLE FOR SALE $ 384,068 $ 379,423 $ 246,965 $245,324
========= ========= ========= ========
Securities held to maturity:
Debt securities:
United States Treasury and agency obligations $ 8,491 $ 8,317 $ 9,417 $ 9,389
State and municipal 13,568 13,517 13,986 14,083
Federal agency mortgage pass-through securities 7,598 7,642 7,783 7,874
Other collateralized mortgage
obligations (CMO's) 994 994 1,184 1,185
Other 300 300 300 300
--------- --------- --------- --------
TOTAL SECURITIES HELD TO MATURITY $ 30,951 $ 30,770 $ 32,670 $ 32,831
========= ========= ========= ========
</TABLE>
As discussed in Note B-Acquisitions in the "Notes to Consolidated Financial
Statements" section the Company signed a definitive agreement to acquire all of
the outstanding capital stock of Portsmouth. At December 31, 1996, Portsmouth
has a Tier 1 leverage capital ratio of 24.3%. A total of approximately $300
million in interest earning assets and interest bearing liabilities are
anticipated to be added to the Company to leverage this higher capital base.
The Company commenced the leverage program during the first quarter of 1997 by
purchasing $118,539,000 in investment securities and $35,731,000 in mortgage
loans. The purchase of the investment securities and loans were funded through
additional advances from the Federal Home Loan Bank of Boston. See "Financial
Condition - Deposits and Borrowed Funds" of this Management's Discussion and
Analysis.
-12-
<PAGE> 15
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
FINANCIAL CONDITION - (CONT'D.)
===============================================================================
LOANS AND LEASES
The table below sets forth the composition of the Company's loan and lease
portfolio, net of unearned income and deferred costs, at the dates indicated:
<TABLE>
<CAPTION>
=============================================================================================================
MARCH 31, December 31,
=============================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
=============================================================================================================
% OF % of
AMOUNT PORTFOLIO Amount Portfolio
=============================================================================================================
<S> <C> <C> <C> <C>
Real estate:
Residential $ 745,987 64.83% $ 712,980 63.76%
Construction 7,070 .61 8,101 .72
Commercial 147,224 12.79 142,989 12.79
Commercial, financial, and agricultural 117,211 10.19 120,380 10.77
Warehouse lines of credit to leasing companies 6,823 .59 18,393 1.64
Consumer lease financing 80,773 7.02 67,146 6.01
Other consumer 45,570 3.96 48,175 4.31
------------ --------- ---------- ------
Total loans and leases 1,150,658 100.00% 1,118,164 100.00%
========= ======
Less allowance for loan and lease losses 15,661 15,740
------------ ----------
Net loans and leases $ 1,134,997 $1,102,424
============ ==========
</TABLE>
The $32,494,000 increase in total loans and leases was primarily due to a
$33,007,000 increase in residential real estate loans, and a $13,627,000
increase in indirect automobile leasing offset by a $11,570,000 decline in
warehouse lines to leasing companies due to an end of quarter securitization.
Residential loan production is generated by a combination of originations and
purchases by the Company's mortgage banking affiliate, CFX Mortgage. The
consumer lease financing is generated through a lease program targeted towards
automobile dealerships throughout New Hampshire and central Massachusetts. In
addition, lending volumes remain strong in the warehouse lines of credit to
leasing companies participating in CFX Funding's lease financing and
securitization programs. CFX Funding services approximately $108 million in
leases for others.
OTHER ASSETS
During 1996, the Company invested $30,000,000 in Bank-Owned Life Insurance
(BOLI) to help finance the cost of certain employee benefit plan expenses.
The BOLI investment is accomplished through the purchase of life insurance on
the lives of certain employees through two insurance companies with a Standard
& Poors rating of AA+ or better. The Company, not the employee or family, is
the beneficiary of the insurance policies. The first source of income is from
the growth of the cash surrender value (CSV) of the policy. The CSV increases
each year as interest (rate is guaranteed each year and changes annually to
reflect market rates) is added by the insurance company. The second source of
income comes from the insurance proceeds paid to the bank when an employee
dies. The payment of the insurance proceeds and the earnings from the cash
value are income tax free (unless the policy is surrendered). The Company
finances the cost of the premium payment with wholesale funding (i.e. Federal
Home Loan Bank of Boston advances). While the earnings from the investment are
recorded in other income as the CSV increases, the net interest margin is
negatively impacted as a result of funding the investment with wholesale
borrowings.
-13-
<PAGE> 16
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
DEPOSITS AND BORROWED FUNDS
===============================================================================
The following table shows the various components of deposits and borrowed funds
at the dates indicated:
<TABLE>
<CAPTION>
===========================================================================================================
MARCH 31, December 31,
===========================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
===========================================================================================================
% OF % of
AMOUNT TOTAL Amount Total
===========================================================================================================
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 148,651 12.15% $ 136,875 11.83%
Regular savings deposits 174,319 14.25 167,465 14.47
NOW & money market deposits 260,483 21.29 268,022 23.16
Time deposits 526,118 43.00 515,085 44.51
------------ ------- ----------- -------
Total retail deposits 1,109,571 90.69 1,087,447 93.97
Brokered time deposits 113,959 9.31 69,760 6.03
------------ ------- ----------- -------
Total deposits $ 1,223,530 100.00% $ 1,157,207 100.00%
============ ======= =========== =======
Borrowed Funds:
Advances from Federal Home Loan Bank
of Boston $ 238,681 69.54% $ 175,081 72.21%
Other borrowed funds 104,535 30.46 67,374 27.79
------------ ------- ----------- -------
Total borrowed funds $ 343,216 100.00% $ 242,455 100.00%
============ ======= =========== =======
</TABLE>
The increase in deposits, advances from the Federal Home Loan Bank of Boston,
and other borrowed funds funded asset growth over the past twelve months.
Management customarily directs movement of funding between brokered deposits,
advances from the Federal Home Loan Bank of Boston and repurchase agreements
(included in other borrowed funds) in order to achieve a more favorable cost of
funds.
===============================================================================
SHAREHOLDERS' EQUITY
===============================================================================
Shareholders' equity increased by $866,000 as of March 31, 1997 from
$132,953,000 at December 31, 1996 to $133,819,000 at March 31, 1997. The
increase was due to $4,742,000 in net income, issuance of $647,000 in common
stock under the stock option plan, issuance of $227,000 in common stock under
the employee stock purchase plan offset by a $1,828,000 increase in net
unrealized losses on securities available for sale, cost of shares acquired for
treasury of $51,000, and declaration of $2,871,000 in cash dividends on common
stock.
-14-
<PAGE> 17
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
RISK ELEMENTS
===============================================================================
Nonperforming assets are evaluated quarterly by management to ensure proper
classification and to confirm that the recorded carrying value of the assets is
reasonable and in accordance with generally accepted accounting principles,
regulatory requirements, and the Company's policies. Loans are placed on
nonaccrual status when management determines that significant doubt exists as
to the collectibility of principal or interest on a loan. Moreover, loans past
due 90 days or more as to principal or interest are placed on nonaccrual
status.
The following table provides information with respect to the Company's
nonperforming loans and assets at the dates indicated:
<TABLE>
<CAPTION>
=======================================================================================================================
MARCH 31, December 31,
=======================================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
=======================================================================================================================
% OF % of
AMOUNT TOTAL Amount Total
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans:
Real estate:
Residential $ 5,318 60.41% $ 5,986 72.13%
Commercial 2,410 27.38 1,146 13.81
Commercial, financial, and agricultural 977 11.10 1,021 12.30
Consumer and other 98 1.10 146 1.76
---------- ------- ---------- ------
8,803 100.00% 8,299 100.00%
---------- ======= ---------- ======
Foreclosed real estate:
Residential 1,101 60.96% 1,383 62.21%
Construction 428 23.70 428 19.25
Commercial 287 15.89 422 18.98
Valuation allowance (10) (.55) (10) (.44)
---------- ------- ---------- ------
1,806 100.00% 2,223 100.00%
---------- ====== ---------- ======
Total nonperforming assets $ 10,609 $ 10,522
========== ==========
Nonperforming loans as a percent of total
loans and leases .77% .74%
====== ======
Nonperforming assets as a percent of total
loans and leases and foreclosed real
estate .92% .94%
====== ======
</TABLE>
-15-
<PAGE> 18
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
RISK ELEMENTS - (Cont'd.)
===============================================================================
The decrease in foreclosed real estate over the December 31, 1996 balance is
reflective of the efforts to expedite the foreclosure sale process. Loans
delinquent less than 90 days have decreased since year end to $24,118,000 at
March 31, 1997 from $27,051,000 at December 31, 1996. The reduction is
primarily noted in the residential real estate portfolio and is principally due
to a more intensified collection process.
The following is a summary of information pertaining to impaired loans:
<TABLE>
<CAPTION>
===========================================================================================================
MARCH 31 December 31
===========================================================================================================
(DOLLARS IN THOUSANDS) 1997 1996
===========================================================================================================
<S> <C> <C>
Loans with a valuation allowance $ 2,176 $ 2,816
Loans without a valuation allowance 3,100 2,585
-------- ---------
Total impaired loans $ 5,276 $ 5,401
======== =========
Valuation allowance allocated to impaired loans $ 754 $ 934
======== =========
</TABLE>
===============================================================================
ALLOWANCE FOR LOAN AND LEASE LOSSES
===============================================================================
The allowance for loan and lease losses is maintained through charges to
earnings. Loan and lease losses recognized, and recoveries received, are
charged or credited directly to the allowance. The Company's management
determines the level of the allowance for loan and lease losses based upon a
review of the Company's loan and lease portfolio. This review identifies
specific problem loans and leases requiring allocations of the allowance and
also estimates an allocation for potential loan and lease losses based on
current economic conditions and historical experience.
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
===============================================================================================================
THREE MONTHS ENDED MARCH 31, (IN THOUSANDS) 1997 1996
===============================================================================================================
<S> <C> <C>
Balance at beginning of period $ 15,740 $ 15,449
Provision for loan and lease losses 702 905
Loans charged-off (1,021) (1,203)
Recoveries of loans previously charged-off 240 171
--------- ---------
Balance at end of period $ 15,661 $ 15,322
========= =========
Allowance for loan and lease losses
as a percent of total loans and leases 1.36% 1.62%
========= =========
Allowance for loan and lease losses as a
percent of total nonperforming loans 177.91% 135.79%
========= =========
Net charge-offs/average loans and leases (1) .27% .44%
--------- ---------
</TABLE>
(1) Annualized
Management considers the allowance for loan and lease losses to be adequate in
view of its evaluation of the Company's loan and lease portfolio, the level of
nonperforming loans and leases, current economic conditions and historical
experience with loan and lease losses. However, if economic conditions
deteriorate, the Company may have to increase the allowance for loan and lease
losses from its current level.
-16-
<PAGE> 19
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONT'D.
MARCH 31, 1997
===============================================================================
ASSET/LIABILITY MANAGEMENT
===============================================================================
The Company's primary objective regarding asset/liability management is to
position the Company so that changes in interest rates do not have a materially
adverse impact upon forecasted net income and the net fair value of the
Company. The Company's primary strategy for accomplishing its asset/liability
management objective is achieved by matching the cash flows and repricing
characteristics of assets, liabilities, and off-balance-sheet items.
To measure the impact of interest rate changes, the Company utilizes a
comprehensive financial planning model that recalculates the fair value of the
Company assuming instantaneous, permanent parallel shifts in the yield curve of
both up and down 100 and 200 basis points, or four separate calculations.
Larger increases or decreases in forecasted net income and the net market value
of the Company as a result of these interest rate changes represent greater
interest rate risk than do smaller increases or decreases.
The results of the financial planning model are highly dependent on numerous
assumptions. These assumptions generally fall into two categories: those
relating to the interest rate environment and those relating to general
business and economic factors. Assumptions related to the interest rate
environment include the prepayment speeds on mortgage-related assets and the
cash flows and maturities of financial instruments. Assumptions related to
general business and economic factors include changes in market conditions,
loan volumes and pricing, deposit sensitivity, customer preferences,
competition, and management's financial and capital plans. The assumptions are
developed based on current business and asset/liability management strategies,
historical experience, the current economic environment, forecasted economic
conditions and other analyses. These assumptions are inherently uncertain and
subject to change as time passes. Accordingly, the Company adjusts the pro
forma net income and net fair values as it believes appropriate on the basis of
historical experience and prudent business judgment. The Company endeavors to
maintain a position where it experiences no material change in net fair value
and no material fluctuation in forecasted net income as a result of assumed 100
and 200 basis point increases and decreases in interest rates. However, there
can be no assurances that the Company's projections in this regard will be
achieved.
Management considers interest rate risk exposure in concert with other business
risks, such as credit risk and liquidity risk. The Company's Board of Directors
and the directors of each subsidiary bank establish various policy guidelines
and limitations for interest rate risk. Management communicates regularly with
boards of directors and board committees about key assumptions, current
strategies, and exposure positions being deliberated by the Company's
Asset/Liability Management Committee. Management feels that these processes in
place at the Company are in compliance with new risk management guidelines
issued jointly by the Company's three primary regulatory agencies.
===============================================================================
LIQUIDITY
===============================================================================
The Company maintains numerous sources of liquidity in the form of marketable
assets and borrowing capacity. Interest bearing deposits with other banks,
trading and available for sale securities and regular cash flows from loan and
securities portfolios are the primary sources of asset liquidity. At March 31,
1997, interest bearing deposits with other banks totaled $4,628,000 and trading
and available for sale securities totaled $379,423,000.
Because two of the Company's subsidiaries, CFX Bank and Orange Savings Bank,
maintain large residential mortgage loan portfolios, a substantial capability
exists to borrow funds from the Federal Home Loan Bank of Boston. Additionally,
investment portfolios are predominantly made up of securities which can be
readily borrowed against through the repurchase agreement market. Relationships
with deposit brokers and correspondent banks are also maintained to facilitate
possible borrowing needs. The holding company also maintains liquid assets
totaling $8,922,000 as of March 31, 1997, comprised of $3,961,000 in cash and
due from banks and interest bearing deposits with bank subsidiaries and notes
receivable from bank subsidiaries of $4,961,000.
-17-
<PAGE> 20
CFX CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONT'D.
MARCH 31, 1997
===============================================================================
LIQUIDITY (CON'T)
===============================================================================
Due to the relatively large investment portfolios and the high proportion of
core deposit funding at both banks acquired in 1996, liquidity levels at the
Company have increased from their previous levels. The Company maintains
liquidity levels in accordance with conservative guidelines established by each
subsidiary bank's board of directors and the Company's board of directors.
===============================================================================
CAPITAL RESOURCES
===============================================================================
Federal regulation requires the Company to maintain minimum capital standards.
Tier 1 capital is composed primarily of common stock, retained earnings and
perpetual preferred stock in limited amounts less certain intangibles. In
addition, the Company and its subsidiary banks are required to satisfy certain
capital adequacy guidelines relating to the risk nature of an institution's
assets. These guidelines, established by the Federal Reserve Board and the
FDIC are applicable to bank holding companies and state chartered non-member
banks, respectively. 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).
As of March 31, 1997, the Company and each of its banking subsidiaries were in
compliance with all applicable regulatory capital requirements.
The following table sets forth the minimum regulatory capital requirements and
the actual capital ratios of the Company and its banking subsidiaries at March
31, 1997:
<TABLE>
<CAPTION>
====================================================================================================
REQUIRED
MINIMUM ACTUAL
====================================================================================================
<S> <C> <C>
Total capital to risk-weighted assets:
Consolidated 8.0% 14.2%
CFX Bank 8.0 11.8
Safety Fund 8.0 13.7
Orange 8.0 21.2
Tier 1 capital to risk-weighted assets:
Consolidated 4.0 13.0
CFX Bank 4.0 10.7
Safety Fund 4.0 12.4
Orange 4.0 19.9
Tier 1 capital to average assets:
Consolidated 4.0 7.9
CFX Bank 4.0 6.8
Safety Fund 4.0 6.8
Orange 4.0 11.3
</TABLE>
-18-
<PAGE> 21
CFX CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
MARCH 31, 1997
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company, its subsidiaries, or any directors, officers, affiliates or
any owner of record or beneficiary of more than five percent (5%) of
the common stock of the Company, or any associate of any such
director, officer, affiliate of the Company or any security holder
is a party adverse to the Company or its subsidiaries or has a
material interest adverse to the Company or its subsidiaries.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
On February 21, 1997, a Form 8-K was filed announcing the
Company entered into a definitive agreement for the acquisition
of Portsmouth Bank Shares, Inc., headquartered in Portsmouth,
New Hampshire.
-19-
<PAGE> 22
CFX CORPORATION AND SUBSIDIARIES
MARCH 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFX CORPORATION
May 15, 1997 /s/ Gregg R. Tewksbury
-------------------------------
Gregg R. Tewksbury
Authorized Officer
Chief Financial Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 0 59,080
<INT-BEARING-DEPOSITS> 0 4,628
<FED-FUNDS-SOLD> 0 3,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 379,423
<INVESTMENTS-CARRYING> 0 30,951
<INVESTMENTS-MARKET> 0 30,770
<LOANS> 0 1,150,658
<ALLOWANCE> 0 15,661
<TOTAL-ASSETS> 0 1,744,449
<DEPOSITS> 0 1,223,530
<SHORT-TERM> 0 276,535
<LIABILITIES-OTHER> 0 43,884
<LONG-TERM> 0 66,681
0 0
0 0
<COMMON> 0 8,718
<OTHER-SE> 0 125,101
<TOTAL-LIABILITIES-AND-EQUITY> 0 1,744,449
<INTEREST-LOAN> 20,775 24,399
<INTEREST-INVEST> 4,644 4,954
<INTEREST-OTHER> 321 150
<INTEREST-TOTAL> 25,740 29,503
<INTEREST-DEPOSIT> 10,079 10,577
<INTEREST-EXPENSE> 12,039 14,499
<INTEREST-INCOME-NET> 13,701 15,004
<LOAN-LOSSES> 905 702
<SECURITIES-GAINS> 648 542
<EXPENSE-OTHER> 11,577 11,974
<INCOME-PRETAX> 5,051 6,700
<INCOME-PRE-EXTRAORDINARY> 3,555 4,742
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,555 4,742
<EPS-PRIMARY> .28 .36
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 4.31 4.15
<LOANS-NON> 0 8,803
<LOANS-PAST> 0 24,118
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 15,449 15,740
<CHARGE-OFFS> 1,203 1,021
<RECOVERIES> 171 240
<ALLOWANCE-CLOSE> 15,322 15,661
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
