<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 12, 1997
CFX CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Hampshire 1-10633 02-0402421
---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (I.R.S. employer
of incorporation) file number) 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
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
As previously disclosed in CFX Corporation's Current Report on
Form 8-K filed on September 15, 1997, CFX Corporation consummated the
acquisitions of Portsmouth Bank Shares, Inc. and Community Bankshares,
Inc. and their respective subsidiaries on August 29, 1997 (the
"Acquisitions"). Filed herewith as Exhibit 99.1 are restated audited
consolidated financial statements of CFX Corporation and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996, giving
effect to the Acquisitions, and the independent auditor's report
thereon.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(c) Exhibits.
The exhibits listed in the Exhibit Index are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, CFX has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CFX CORPORATION
Date: December 12, 1997 By: /s/ Gregg R. Tewksbury
----------------------
Gregg R. Tewksbury
Chief Financial Officer
- 2 -
<PAGE> 3
EXHIBIT INDEX
<TABLE>
<CAPTION>
Location in
Sequentially
Numbered Copy
-------------
<S> <C>
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Shatswell, MacLeod &
Company, P.C. (with respect to
Portsmouth Bank Shares, Inc.)
23.3 Consents of KPMG Peat Marwick LLP
(with respect to The Safety
Fund Corporation and Community
Bankshares, Inc.)
23.4 Consent of Deloitte & Touche, LLP
(with respect to Orange Savings Bank)
99.1 Restated audited consolidated
financial statements of CFX
Corporation and subsidiaries as of
December 31, 1996 and 1995, and the
related consolidated statements of
income, stockholders' equity and cash
flows for each of the years in the
three-year period ended December 31,
1996, giving effect to the Acquisitions,
and the independent auditor's report
thereon.
99.2 Report of Shatswell, MacLeod & Company,
P.C. (with respect to Portsmouth Bank
Shares, Inc.)
99.3 Report of KPMG Peat Marwick LLP (with
respect to Community Bankshares, Inc.)
99.4 Report of KPMG Peat Marwick LLP (with
respect to The Safety Fund Corporation)
99.5 Report of Deloitte & Touche, LLP. (with
respect to Orange Savings Bank)
</TABLE>
- 3 -
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Form 8-K of our report dated January 29,
1997, except for Note A - "Significant Accounting Policies - Principles of
Presentation and Consolidation" as to which the date is August 29, 1997 and
Note V as to which the date is October 27, 1997, on the restated consolidated
financial statements of CFX Corporation and subsidiaries as of December 31,
1996 and 1995, 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, 1996.
Wolf & Company, P.C.
Boston, Massachusetts
December 12, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation of our report dated January 13, 1997, except
for Note 20 as to which the date is February 13, 1997 of Portsmouth Bank
Shares, Inc. and Subsidiary for the year ended December 31, 1996, that was
previously included in the Annual Report, and incorporated in the Current
Report on Form 8-K of CFX Corporation dated as of December 12, 1997.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
December 11, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
CFX Corporation:
We consent to the use of our report, included elsewhere herein, dated January
22, 1997, relating to the consolidated balance sheets of Community Bankshares,
Inc. and subsidiaries as of December 31, 1996 and 1995 and June 30, 1995, and
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year ended December 31, 1996, the six-months ended December
31, 1995, and for each of the years in the two-year period ended June 30, 1995.
We consent to the use of our report included elsewhere herein, dated January 22,
1996, relating to the consolidated balance sheet of The Safety Fund Corporation
and subsidiaries as of December 31, 1995, and related consolidated statements of
operations stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1995 and 1994.
/s/ KPMG PEAT MARWICK LLP
Boston Massachusetts
December 12, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
CFX Corporation on Form S-8 of our report dated January 27,1995 (relating to the
consolidated financial statements of Orange Savings Bank and subsidiary for the
year ended December 31, 1994 not presented separately herein), appearing in the
Current Report on Form 8-K of CFX Corporation dated December 12, 1997.
Deloitte & Touche LLP
Boston, MA
December 12, 1997
<PAGE> 1
EXHIBIT 99.1
- --------------------------------------------------------------------------------
FINANCIAL CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS.................................................................................. 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets......................................................................................... 17
Consolidated Statements of Income................................................................................... 18
Consolidated Statements of Shareholders' Equity..................................................................... 19
Consolidated Statements of Cash Flows............................................................................... 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Significant Accounting Policies.............................................................................. 22
B. Restrictions on Cash and Due From Bank Accounts.............................................................. 29
C. Investment Securities........................................................................................ 29
D. Loans and Leases............................................................................................. 32
E. Allowance for Loan and Lease Losses.......................................................................... 33
F. Premises and Equipment....................................................................................... 33
G. Foreclosed Assets............................................................................................ 33
H. Deposits..................................................................................................... 34
I. Short-Term Borrowed Funds.................................................................................... 35
J. Advances from Federal Home Loan Bank of Boston............................................................... 35
K. Preferred Stock.............................................................................................. 36
L. Income Taxes................................................................................................. 36
M. Employee Benefit Plans....................................................................................... 39
N. Stock Compensation Plans..................................................................................... 41
O. Commitments and Contingencies................................................................................ 43
P. Related Party Transactions................................................................................... 44
Q. Derivative Financial Instruments............................................................................. 44
R. Financial Instruments with Off-Balance-Sheet Lending Risk.................................................... 46
S. Fair Value of Financial Instruments.......................................................................... 47
T. Regulatory Capital Requirements and Other Restrictions....................................................... 49
U. Mortgage Loan Servicing...................................................................................... 51
V. Subsequent Event - Acquisition of the Company................................................................ 51
W. CFX Corporation (Parent-Company-Only) Condensed Financial Statements ........................................ 52
X. Quarterly Results of Operations (Unaudited).................................................................. 54
Report of Wolf & Company, P.C., Independent Auditors................................................................ 55
Information on Common Stock......................................................................................... 57
</TABLE>
<PAGE> 2
- --------------------------------------------------------------------------------
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 herein 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.
The consolidated financial statements and management's discussion
and analysis have been restated to reflect the Company's acquisition of
Portsmouth Bank Shares, Inc. (Portsmouth) and Community Bankshares, Inc.
(Community) on August 29, 1997. The mergers were accounted for as
poolings-of-interests. See Note A to the consolidated financial statements
for detailed information pertaining to the acquisitions.
During 1996, the Company acquired The Safety Fund Corporation and
Milford Co/operative Bank, and Community acquired Centerpoint Bank. The
acquisitions were accounted for as poolings-of-interest and, accordingly,
the 1996 consolidated financial statements of CFX and of Community as
previously and separately issued had been restated to reflect financial
information for all periods presented on a combined basis.
CFX Corporation is a bank holding company incorporated under the
laws of the State of New Hampshire. Diversified financial services are
provided to customers through its three wholly-owned subsidiaries: CFX
Bank, headquartered in Keene, New Hampshire, Safety Fund National Bank,
headquartered in Fitchburg, Massachusetts, and Orange Savings Bank
(Orange), headquartered in Orange, Massachusetts. CFX Bank has two
wholly-owned subsidiaries: CFX Capital Systems, Inc. (CFX Capital) and CFX
Financial Services, Inc. (CFX Financial). CFX Capital's wholly-owned
subsidiary is CFX Mortgage, Inc. (CFX Mortgage) 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.
Services provided to our customer base by these subsidiaries include
traditional depository banking services, retail and commercial banking,
and investment and trust services. CFX Mortgage offers a full complement
of mortgage products to our customers, as well as mortgage loans through a
correspondent network located throughout northern New England and the
Mid-Atlantic states. CFX Mortgage has been instrumental in the growth of
the Company, both in total assets and profitability.
CFX Corporation has grown profitably over the past several years by
leveraging its capital and through a series of strategic acquisitions.
This activity has strengthened the franchise and assisted in the
transition from a traditional thrift institution to a full-service bank.
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 earnings assets, primarily loans, leases, and
investment securities, and (ii) interest expense on interest bearing
liabilities, which consist of deposits and borrowings. Also affecting the
Company's operations are the levels of the provision for loan and lease
losses; the level of other operating income consisting of deposit fees,
trust and investment fees, gains and losses on the sale of investment
securities, mortgage banking activities and leasing activities; the level
of operating expenses; and income taxes.
1
<PAGE> 3
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL CONDITION--LOANS AND LEASES
- --------------------------------------------------------------------------------
The table below sets forth the composition of the Company's loan and lease
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
% of % of
Balances Portfolio Balances Portfolio
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential $ 872,187 54.47% $ 735,852 55.15%
Construction 19,828 1.24 17,457 1.31
Commercial 247,517 15.46 232,079 17.39
Commercial, financial, and agricultural 169,880 10.61 139,179 10.43
Warehouse lines of credit to leasing companies 18,393 1.15 12,906 0.97
Consumer lease financing 76,343 4.77 27,457 2.06
Other consumer 197,014 12.30 169,381 12.69
----------- ----------- ----------- -----------
1,601,162 100.00% 1,334,311 100.00%
=========== ===========
Unearned income (10,733) (4,277)
Deferred origination costs, net 3,970 1,588
----------- -----------
Total loans and leases 1,594,399 1,331,622
Less: allowance for loan and lease losses 20,332 19,843
----------- -----------
Net loans and leases $ 1,574,067 $ 1,311,779
=========== ===========
</TABLE>
Net loans and leases were $1.6 billion, or 66% of total assets, at
December 31, 1996, compared with $1.3 billion, or 62% of totals assets, at
December 31, 1995. Although each category of loans and leases has
increased from 1995 to 1996, the majority of the $262 million increase in
net loans and leases has been in the residential mortgage portfolio,
increasing $136 million during this timeframe. In addition, the consumer
lease financing portfolio had significant growth in 1996 of nearly $50
million. Loan and lease demand has been strong allowing the Company to
generate a 20% increase in net loans and leases during 1996. Residential
loan production is primarily generated from three sources: originations in
the Company's primary market area; purchases from correspondent banks
within and outside of the Company's primary market area; and purchases of
bulk loans from wholesale markets.
During 1996, lower interest rates spawned higher refinancing
activity generating significant volume in the residential loan portfolio.
These lower rates, coupled with an improving economy, significantly
impacted the Company's origination of residential loans during the year.
The growth in the consumer lease portfolio is the result of a
maturing lease program targeted toward automobile dealerships throughout
New Hampshire and central Massachusetts. This program began in December
1994 and continues to grow as consumers choose leasing as an acceptable
alternative to purchasing.
Commercial lending continues to grow, but at a slower rate as
compared to the other portfolios. Strong lending volumes remain in the
warehouse lines of credit to leasing companies participating in CFX
Funding's lease financing and securitization programs. During 1996, the
average balance of these warehouse lines of credit totaled $14,752,000.
During 1996, CFX Funding facilitated lease portfolio securitizations
totaling approximately $55,814,000, and sold lease portfolios totaling
approximately $16,430,000.
2
<PAGE> 4
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RISK ELEMENTS
- --------------------------------------------------------------------------------
The Company operates principally in New Hampshire and central
Massachusetts. Through acquisitions of banking franchises in new
marketplaces, the opening of de novo branches in geographically dispersed
markets, the purchase and origination of mortgages and leases throughout
northern New England, and with the introduction of CFX Funding's national
lease financing program, the Company has diversified its credit risk in
terms of both loan type and geographic concentrations. Asset quality
remains strong as nonaccrual loans and leases were .68% of total loans and
leases at December 31, 1996, compared to .92% a year earlier.
All loans and leases past due 90 days or more as to principal or
interest are generally placed on nonaccrual status. In addition, a loan
(including a loan impaired under Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
(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.
The following table provides information with respect to the
Company's nonperforming loans and assets at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 10,783 $ 12,301
Foreclosed assets 3,359 2,803
Valuation allowance on foreclosed assets (10) (50)
-------- --------
Total nonperforming assets $ 14,132 $ 15,054
======== ========
Nonaccrual loans as a percent of total loans 0.68% 0.92%
======== ========
Nonperforming assets as a percent of total loans
and leases and foreclosed assets 0.88% 1.13%
======== ========
</TABLE>
3
<PAGE> 5
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following table provides the composition of the Company's
nonperforming loans and assets at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995
----------------------- -----------------------
% of % of
Balances Total Balances Total
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans:
Real estate:
Residential $ 6,944 64.40% $ 6,921 56.26%
Commercial 1,904 17.66 2,717 22.09
Commercial, financial, and agricultural 1,634 15.15 2,235 18.17
Consumer and other 301 2.79 428 3.48
-------- -------- -------- --------
10,783 100.00% 12,301 100.00%
-------- ======== -------- ========
Foreclosed assets:
Residential 2,108 62.95% 1,264 45.91%
Construction 467 13.94 167 6.07
Commercial 496 14.81 1,039 37.74
Repossessed assets 288 8.60 333 12.10
Valuation allowance (10) (0.30) (50) (1.82)
-------- ======== -------- ========
3,349 100.00% 2,753 100.00%
-------- ======== -------- ========
Total nonperforming assets $ 14,132 $ 15,054
======== ========
</TABLE>
The following table provides a rollforward of the Company's
foreclosed assets:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
Balance at beginning of year, net $ 2,753 $ 4,625
Reclassification to nonperforming loans
to reflect adoption of SFAS No. 114
(See Note A to "Notes to Consolidated
Financial Statements") - (665)
Real estate additions 3,619 4,303
Real estate pay-offs/sales/other (3,023) (5,033)
Net increase in other repossessed assets - 126
Change in fiscal year - Community - (603)
------- -------
Balance at end of year, net $ 3,349 $ 2,753
======= =======
</TABLE>
For the six months ended December 31, 1995, Community recorded real
estate additions of $420,000, real estate pay-offs/sales/other of $988,000
and a net decrease in other repossessed assets of $35,000.
- --------------------------------------------------------------------------------
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.
4
<PAGE> 6
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 19,843 $ 18,940 $ 21,080
Provision for loan and lease losses 4,285 3,814 3,622
Loans and leases charged-off (4,757) (4,482) (7,437)
Recoveries of loans and leases previously
charged-off 961 1,428 1,675
Change in fiscal year - Community - 143 -
-------- -------- --------
Balance at end of year $ 20,332 $ 19,843 $ 18,940
======== ======== ========
Allowance for loan and lease losses as
a percent of total loans and leases 1.28% 1.49% 1.60%
======== ======== ========
Allowance for loan and lease losses as
a percent of total nonaccrual loans 188.56% 161.31% 149.31%
======== ======== ========
</TABLE>
For the six months ended December 31, 1995, Community recorded
provisions for loan losses, recoveries and charge-offs of $498,000,
$361,000 and $716,000, respectively. See Note A - "Significant Accounting
Policies - Principles of Presentation and Consolidation."
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.
5
<PAGE> 7
- --------------------------------------------------------------------------------
TRADING SECURITIES AND INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment securities consist of the following at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- ---------
(In thousands)
<S> <C> <C>
Securities available for sale $ 414,896 $ 376,386
Securities held to maturity 104,682 164,733
--------- ---------
Total $ 519,578 $ 541,119
========= =========
</TABLE>
As a result of the Company's acquisitions of Safety Fund and Milford
on July 1, 1996, (see Note A to the consolidated financial statements) and
to be consistent with the Company's current interest rate risk profile,
certain securities held to maturity were transferred to securities
available for sale.
The table below describes those securities and the net unrealized
losses associated with such securities which were transferred to
securities available for sale from securities held to maturity as a result
of the 1996 acquisitions of Safety Fund and Milford:
<TABLE>
<CAPTION>
Net
Amortized Unrealized
Cost Losses
--------- ----------
(In thousands)
<S> <C> <C>
U.S. Treasury and agency obligations $ 54,581 $ 2,036
Federal agency mortgage pass-through securities 22,268 486
--------- ----------
$ 76,849 $ 2,522
========= ==========
</TABLE>
During 1996 and 1995, the Company had activity in its trading
portfolio, although no trading securities were held at the respective
year-ends. Trading securities primarily related to investments in money
market mutual funds that generated capital gains to offset capital loss
carryforwards. The average balances in the trading portfolio for 1996 and
1995 were $15,220,000 and $19,636,000, respectively.
6
<PAGE> 8
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEPOSITS AND BORROWED FUNDS
- --------------------------------------------------------------------------------
The following table shows the various components of deposits and borrowed
funds for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1996 1995
-------------------------- ---------------------------
Amount % of Total Amount % of Total
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Deposits:
Noninterest bearing demand deposits $ 193,579 11.05% $ 167,380 10.22%
Regular savings deposits 299,411 17.10 312,539 19.08
NOW and money market deposits 367,266 20.97 369,340 22.55
Time deposits 820,925 46.88 767,906 46.89
---------- ---------- ---------- ----------
Total retail deposits 1,681,181 96.00 1,617,165 98.74
Brokered time deposits 69,960 4.00 20,666 1.26
---------- ---------- ---------- ----------
Total deposits $1,751,141 100.00% $1,637,831 100.00%
========== ========== ========== ==========
Borrowed funds:
Advances from Federal Home Loan
Bank of Boston $ 246,593 70.19% $ 158,858 72.95%
Other borrowed funds 104,750 29.81 58,904 27.05
---------- ---------- ---------- ----------
Total borrowed funds $ 351,343 100.00% $ 217,762 100.00%
========== ========== ========== ==========
</TABLE>
The increase in total deposits of $113,310,000 in 1996 primarily
came in the higher cost categories of retail and brokered time deposits,
and to a lesser extent, demand deposits. The increase in retail time
deposits resulted primarily from targeted marketing efforts coupled with
rate enhancements on new products. Demand deposit growth of $26,199,000,
or 16%, is largely due to the increase in the commercial business loan
portfolio as commercial borrowers often bring their entire banking
relationship to one bank.
The increase in Federal Home Loan Bank of Boston advances, brokered
deposits and other borrowings funded asset growth. Management customarily
directs movement of funding between brokered deposits, advances from the
Federal Home Loan Bank and repurchase agreements (included in other
borrowed funds) in order to achieve a more favorable cost of funds.
7
<PAGE> 9
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS--GENERAL
- --------------------------------------------------------------------------------
CFX Corporation (the Company) reported net income of $23,553,000, or $1.01
per share, compared to earnings of $21,465,000, or $.93 per share, for the
prior year. Return on assets and return on equity were 1.04% and 10.03%,
respectively, for 1996 compared to 1.06% and 9.77%, respectively, for
1995. Excluding charges for mergers and other adjustments, earnings and
earnings per share were $27,160,000 and $1.16 per share, respectively, in
1996 representing an increase of $5,606,000, or 26% over prior year
earnings. Return on assets and return on equity in 1996 were 1.20% and
11.57%, respectively, excluding merger charges and special adjustments.
During 1996, the Company incurred charges associated with the
mergers of Safety Fund and Milford totaling $3,722,000 (after tax
effects). Other adjustments included a special assessment related to the
recapitalization of the Savings Association Insurance Fund (SAIF) of
$424,000 (after tax effects) and a gain of $539,000 (after tax effects)
related to the termination of certain of the Company's previous pension
plans in order to transfer the assets and liabilities to a multi-employer
pension plan.
The increase in 1996 earnings over 1995 was primarily due to
increased net interest and dividend income and higher non-interest income,
partially offset by an increase in non-interest expenses. The increased
net interest and dividend income of $7,779,000 was primarily due to
leveraging the Company's balance sheet with loans and leases which
increased $262 million, or 20% over the past twelve months. The increase
in non-interest income of $4,524,000 in 1996 over that in 1995 primarily
came from mortgage banking and leasing activities, gains on the sales of
investment securities, and the pension settlement gain of $877,000
discussed above. Non-interest expense for 1996 totaled $71,270,000, or
$66,057,000 excluding merger-related charges and the one-time SAIF
assessment charge.
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1996 AND 1995--NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
Taxable-equivalent net interest and dividend income was $89,671,000 in
1996, up 9.5% from $81,867,000 in 1995. The $7,804,000 increase in net
interest and dividend income was due to an increase in average interest
earning assets in 1996, offset by a decline in the Company's interest rate
spread from 3.76% in 1995 to 3.68% in 1996.
The increase in average interest earning assets resulted primarily
from an increase in loans and leases. See "Financial Condition--Loans and
Leases" of this "Management's Discussion and Analysis."
The interest rate spread in 1996 decreased eight basis points to
3.68% compared to 3.76% for 1995, primarily due to the increase in costs
of interest bearing liabilities outpacing the increase in yields on
interest earning assets, indicating an increasingly competitive market for
retail deposits. Most of the interest earning assets were funded by higher
cost products such as certificates of deposit or borrowings. The cost of
time deposits increased from 5.30% in 1995 to 5.57% in 1996. The Company
continues to see a shift in its deposit mix from lower variable rate
deposits (NOW, savings and money market accounts) to the higher rate time
deposits. The dollar effect of the decline in net interest spread was
partially offset by an increase in demand deposits in 1996 compared to
1995.
8
<PAGE> 10
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 tax-exempt loans and
investments in state and municipal securities and to present data on a
comparative basis, the income from and yields on these loans 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 $346,000, $294,000, and $211,000 for
the years ended December 31, 1996, 1995, and 1994, respectively. The
taxable-equivalent income adjustments for investment securities are
$603,000, $630,000, and $533,000 for the years ended December 31, 1996,
1995, and 1994, respectively. These adjustments, however, are for
comparison purposes only and have no impact on reported net income.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1996 1995
---------------------------------- ---------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------- ----------- ------ ----------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loan and leases (1) $ 1,458,970 $ 127,860 8.76% $ 1,246,880 $ 109,030 8.74%
Tax-exempt loans and leases (2) 8,925 1,019 11.42 7,332 865 11.80
Taxable securities (3) 535,450 34,665 6.47 550,217 34,734 6.31
Tax-exempt securities (4) 30,228 1,780 5.89 29,523 1,890 6.40
Other 76,468 3,930 5.14 56,383 3,213 5.70
----------- ----------- ----------- ----------
Total interest earning assets 2,110,041 169,254 8.02 1,890,335 149,732 7.92
----------- ----------
Noninterest earning assets 156,998 128,395
----------- -----------
Total $ 2,267,039 $ 2,018,730
=========== ===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 684,801 16,323 2.38 $ 715,508 18,337 2.56
Time deposits 849,926 47,311 5.57 741,772 39,337 5.30
Advances from Federal Home
Loan Bank of Boston 197,312 11,196 5.67 122,247 7,441 6.09
Other borrowed funds 99,863 4,753 4.76 52,138 2,750 5.27
----------- ----------- ----------- ----------
Total interest bearing liabilities 1,831,902 79,583 4.34 1,631,665 67,865 4.16
----------- ----------
Noninterest bearing liabilities:
Demand deposits 176,423 147,984
Other 23,952 19,454
Shareholders' equity 234,762 219,627
----------- -----------
Total $ 2,267,039 $ 2,018,730
=========== ===========
Net interest and dividend income $ 89,671 $ 81,867
=========== ==========
Interest rate spread 3.68% 3.76%
Net interest margin 4.25% 4.33%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1994
-------------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Assets
Interest and dividend
earning assets:
Loan and leases (1) $ 1,125,036 $ 90,341 8.03%
Tax-exempt loans and leases (2) 6,441 621 9.64
Taxable securities (3) 545,348 32,557 5.97
Tax-exempt securities (4) 34,699 1,755 5.06
Other 52,161 2,266 4.34
----------- --------
Total interest earning assets 1,763,685 127,540 7.23
--------
Noninterest earning assets 149,006
-----------
Total $ 1,912,691
===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 787,820 19,601 2.49
Time deposits 601,562 25,834 4.29
Advances from Federal Home
Loan Bank of Boston 108,409 5,000 4.61
Other borrowed funds 30,957 1,219 3.94
----------- --------
Total interest bearing liabilities 1,528,748 51,654 3.38
----------- --------
Noninterest bearing liabilities:
Demand deposits 125,704
Other 47,413
Shareholders' equity 210,826
-----------
Total $ 1,912,691
===========
Net interest and dividend income $ 75,886
========
Interest rate spread 3.85%
Net interest margin 4.30%
</TABLE>
(1) For the purpose of these computations, nonaccrual loans and mortgage loans
held for sale are included in loans and leases.
(2) Tax-exempt loans are included within loans and leases.
(3) Taxable securities include trading securities and investment securities.
(4) Tax-exempt securities are included within investment securities.
9
<PAGE> 11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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>
1996 vs 1995 1995 vs 1994
---------------------------------------- ---------------------------------------
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 $ 18,580 $ 250 $ 18,830 $ 10,289 $ 8,400 $ 18,689
Tax-exempt loans and leases 183 (29) 154 93 151 244
Taxable securities (941) 872 (69) 292 1,885 2,177
Tax-exempt securities 44 (154) (110) (287) 422 135
Other 1,057 (340) 717 194 753 947
-------- -------- -------- -------- -------- --------
Total interest and
dividend income 18,923 599 19,522 10,581 11,611 22,192
-------- -------- -------- -------- -------- --------
Interest paid on:
Savings deposits (764) (1,250) (2,014) (1,812) 548 (1,264)
Time deposits 5,909 2,065 7,974 6,717 6,786 13,503
FHLB advances 4,299 (544) 3,755 695 1,746 2,441
Other borrowings 2,292 (289) 2,003 1,025 506 1,531
-------- -------- -------- -------- -------- --------
Total interest expense 11,736 (18) 11,718 6,625 9,586 16,211
-------- -------- -------- -------- -------- --------
Change in net interest
and dividend income $ 7,187 $ 617 $ 7,804 $ 3,956 $ 2,025 $ 5,981
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
The allowance for loan and lease losses is maintained primarily 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 1996 was $4,285,000,
compared to $3,814,000 in 1995. Total net charge-offs amounted to
$3,796,000 for 1996, compared to $3,054,000 for 1995. The increase in net
charge offs in 1996 as compared to 1995 was primarily attributable to the
higher volume of loans in the residential loan portfolio as well as the
resolution of certain long-term problem loan relationships.
At December 31, 1996, nonaccrual loans stood at $10,783,000, or .68%
of total loans and leases, compared to $12,301,000, or .92% of total loans
and leases, as of December 31, 1995. The allowance for loan and lease
losses as a percentage of nonaccrual loans as of December 31, 1996 and
December 31, 1995 amounted to 188.56% and 161.31%, respectively.
The increase of $471,000 in the 1996 provision for loan and lease
losses over 1995 was due to the increase in net charge-offs in 1996 as
well as the continued growth in the loan and lease portfolio.
10
<PAGE> 12
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER INCOME
- --------------------------------------------------------------------------------
Other income totaled $22,262,000 for 1996, up $4,524,000, or 26%,
when compared to $17,738,000 for 1995. Excluding the pension settlement
gain of $877,000 recognized in 1996, year-over-year increases in
non-interest income totaled $3,647,000, or 23%. Although service charges
on deposit accounts and trust fees were up 11% and 5%, respectively, the
significant increases came in the areas of mortgage banking services,
leasing activities and income earned on an investment in bank-owned life
insurance.
Mortgage banking income includes net gains on sales of loans and
loan servicing fees. Net gains on sales of loans totaled $2,250,000 in
1996 compared to $1,149,000 in 1995, a 96% increase in income. This is
primarily due to the higher level of mortgage production in 1996 compared
to 1995 resulting from a more favorable interest rate environment as well
as a larger correspondent network. Total net loan servicing fees in 1996
were up $218,000 or 10% compared with 1995 totals despite higher
amortization of mortgage servicing rights resulting from a high level of
refinancing activity.
Income generated from leasing activities totaled $2,487,000 in 1996,
up $520,000, or 26%, from 1995 levels. The increase is due to more lease
securitizations in 1996 than in 1995, and an increase in servicing income
as a result of a larger servicing base.
The pension settlement gain of $877,000 resulted when the Company
terminated certain pension plans and transferred the plans' assets and
liabilities to a multi-employer benefit plan. See Note M - "Employee
Benefit Plans" of the Notes to Consolidated Financial Statements for more
detail on this transaction.
Included in other non-interest income is $975,000 of income
resulting from the Company's investment in bank-owned life insurance
(BOLI). During 1996, the Company invested $30 million in bank-owned life
insurance to help finance the cost of certain employee benefit plan
expenses. The BOLI investment is accomplished through the purchase of life
insurance on the lives of certain employees through two insurance
companies with a Standard & Poors rating of AA+ or better. The Company,
not the employee or family, is the beneficiary of the insurance policies.
The first source of income is from the growth of the cash value of the
policy. The cash value increases each year as interest (rate is guaranteed
each year and changes annually to reflect market rates) is added by the
insurance company. The second source of income comes from the insurance
proceeds paid to the bank upon the death of an employee. The payment of
the insurance proceeds and the earnings from the cash value are income tax
free (unless the policy is surrendered).
- --------------------------------------------------------------------------------
OTHER EXPENSE
- --------------------------------------------------------------------------------
Non-interest expenses for 1996 totaled $71,270,000, compared to
$63,251,000 for 1995. Included in the 1996 totals are merger-related
charges incurred with the acquisitions of Safety Fund and Milford for
$4,522,000 and a one-time SAIF special assessment of $691,000. Excluding
these charges, total non-interest expenses would be $66,057,000, an
increase of $2,806,000, or 4% over 1995 totals.
Salaries and employee benefits increased 7% in 1996 due to increases
in wage rates and incentive compensation resulting from increased
profitability, additional hires to staff new initiatives, and a full year
of salary expense for new branches opened in 1995, partially offset by
employee reductions resulting from efficiencies gained from the mergers.
The increase in occupancy and equipment expenses resulted from the opening
of new branches in 1995 and the enhancement of data processing equipment
to meet customer needs in several of the Company's subsidiary banks.
Similarly, professional fees are down 11% from the prior year as a result
of the mergers and the elimination of certain services required as
separate institutions.
The insurance premiums assessed by the Federal Deposit Insurance
Corporation (FDIC) were $383,000 in 1996, down $2,060,000 from $2,443,000
in 1995. Effective June 1, 1995, the FDIC's Bank Insurance Fund was
adequately reserved allowing the FDIC to charge significantly lower
premiums for future periods. The reduction of expense in 1996 reflects the
benefit of the lower premiums for an entire year.
11
<PAGE> 13
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
In conjunction with the acquisitions of Safety Fund and Milford, the
Company incurred charges of $4,522,000. These charges were comprised of
the following:
<TABLE>
<CAPTION>
December 31,
1996
-------------
(In thousands)
<S> <C>
Personnel $ 1,440
Data processing 118
Facilities 157
Other 2,807
--------
$ 4,522
========
</TABLE>
Personnel charges relate primarily to the costs of employee
severance and employment outplacement assistance. Data processing costs
consist primarily of write-offs due to duplication of computer hardware,
software, and certain telecommunications equipment. Facilities charges are
the result of the consolidation of certain back-office operations and
consist of write-downs of properties owned. Other merger expenses include
investment banking fees, legal and accounting fees, due diligence costs,
proxy registration/filing fees and mailing costs. All costs were recorded
in earnings during 1996, although not all cash has been paid out for such
expenses. The following table presents a summary of activity with respect
to the merger accrual:
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
-------------
(In thousands)
<S> <C>
Balance at beginning of year $ -
Provision charged against income 4,522
Cash outlays (3,207)
Noncash write-downs (275)
--------
Balance at end of year $ 1,040
========
</TABLE>
In 1996, Congress passed a bill which required savings institutions
(i.e., Milford) which have deposits insured by the FDIC-Savings
Association Insurance Fund (SAIF) be charged a special assessment in order
to capitalize the insurance fund. This assessment totaled $691,000 and was
paid to the SAIF during the fourth quarter of 1996.
- --------------------------------------------------------------------------------
INCOME TAXES
- --------------------------------------------------------------------------------
In 1996, the Company recognized income tax expense of $11,876,000, an
effective tax rate of 33.5%, compared to $10,062,000 and an effective tax
rate of 31.8% for 1995. The higher tax rate for 1996 is primarily due to
nondeductible merger-related expenses, partially offset by income earned
from the bank-owned life insurance investment which is exempt from income
taxes, higher tax credits pertaining to low income housing projects, and
the reversal of a valuation allowance established by Safety Fund for net
operating loss carryforwards at one of their subsidiaries as a result of
current and projected profits from that subsidiary.
12
<PAGE> 14
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARISON OF YEARS 1995 AND 1994
- --------------------------------------------------------------------------------
CFX Corporation reported earnings of $21,465,000, or $.93 per
share, for 1995 compared to $16,450,000, or $.73 per share, for the prior
year. The increase of $5,015,000, or 30%, in earnings from 1994 to 1995
was primarily due to stronger core earnings (net interest and dividend
income and other income). Core earnings for the year ended December 31,
1995 were $98,681,000 compared to $89,542,000 for 1994. Return on assets
and return on equity were 1.06% and 9.77%, respectively, for 1995 compared
to .86% and 7.80%, respectively, for 1994.
- --------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME
- --------------------------------------------------------------------------------
Net interest and dividend income on a fully taxable equivalent
basis totaled $81,867,000 in 1995, compared to $75,886,000 in 1994. The
interest rate spread and net interest margin were 3.76% and 4.33%,
respectively, for 1995 compared to 3.85% and 4.30%, respectively, for
1994. The decrease of 9 basis points in the interest rate spread was
principally due to the rise in interest rates during 1995 as the increased
cost of funding sources outpaced the increase in yield on earning assets.
An increase of 3 basis points in net interest margin was due to an
increase of $127 million in average earning assets from $1.76 billion in
1994 to $1.89 billion in 1995. This increase in average earning assets was
primarily comprised of loans and leases which have higher yields than
other interest earning assets.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
The provision for loan and lease losses in 1995 was $3,814,000,
compared to $3,622,000 in 1994. The increase in the provision for loan and
lease losses in 1995 was due to the increase in outstanding loans and
leases of $143 million from 1994 to 1995, and was offset by a decrease in
nonaccrual loans during 1995.
At December 31, 1995, nonaccrual loans stood at $12,301,000, or .92%
of total loans and leases, compared to $12,685,000 or 1.07% of total loans
and leases, as of December 31, 1994. The allowance for loan and lease
losses as a percentage of nonaccrual loans as of December 31, 1995 and
1994 amounted to 188.56% and 161.31%, respectively.
- --------------------------------------------------------------------------------
OTHER INCOME
- --------------------------------------------------------------------------------
Other income totaled $17,738,000 for 1995, up $3,338,000, or 23%,
from $14,400,000 in 1994. The increase is primarily due to increases of
$855,000 in service charges on deposit accounts, $1,586,000 in leasing
activities, and $1,349,000 in gains on trading securities, partially
offset by a decrease in mortgage banking revenues of $899,000.
The increased income from service charges on deposit accounts was
due to an increase in fees and enhanced collection practices. 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. The increase in gains on trading
securities principally represents capital gains realized from an
investment in a money market mutual fund. This investment reflected gains
totaling $1,092,000 in 1995 compared to gains of $271,000 in 1994,
principally due to a larger investment during 1995. In addition, 1994 had
$528,000 in losses associated with a wholesale leverage program. The
decrease in mortgage banking activities (loan servicing fees, net gains on
sale of loans and net gain on sale of servicing rights) is due to a sale
of servicing rights with a gain of $677,000 in 1994 without a
corresponding gain in 1995.
- --------------------------------------------------------------------------------
OTHER EXPENSE
- --------------------------------------------------------------------------------
Other expense for 1995 totaled $63,251,000, compared to $61,709,000
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, 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 group
insurance 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 late 1994 and 1995.
13
<PAGE> 15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The above increase in other expense was offset by lower insurance
premiums from the 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.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Total shareholders' equity at December 31, 1996 was $239,837,000,
compared to $231,575,000 a year earlier. The increase is primarily due to
the retention of 45% of earnings, partially offset by an increase in the
net unrealized losses on securities available for sale. The Consolidated
Statements of Shareholders' Equity provide details of changes in equity
since December 31, 1993.
The Company's capital position is an indication of financial
performance and stability and provides protection against loss to
depositors and creditors. The Company's objective is to maintain an
optimum level of capital to provide maximum shareholder return while
serving the needs of the depositor and creditor.
Federal regulation requires the Company to maintain minimum capital
standards. Tier 1 capital is composed primarily of common stock and
retained earnings 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 the allowances for loan
and lease losses, equal to 8% of total risk-weighted assets.
As of December 31, 1996, the Company's combined Tier 1 leverage
capital ratio was 9.7%. In addition, the Company's combined Tier 1
risk-based capital ratio and total risk-based capital ratio were 16.1% and
17.2%, respectively. In an effort to optimize the capital level, the
Company has leveraged its balance sheet by originating and purchasing
loans and leases and funding these assets with deposits and borrowed
funds. The combined Tier 1 leverage capital has been reduced from 11.0% at
December 31, 1995 yet remains substantially above the minimum level of 6%
to be considered well capitalized by the regulatory agencies.
- --------------------------------------------------------------------------------
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.
14
<PAGE> 16
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 believes that the above method of measuring and managing
interest rate risk is consistent with the FDIC regulation regarding an
interest rate risk component of regulatory capital.
- --------------------------------------------------------------------------------
LIQUIDITY
- --------------------------------------------------------------------------------
The Company maintains numerous sources of liquidity in the form of
marketable assets and borrowing capacity. Interest bearing deposits with
other banks, trading and available for sale securities, regular cash flows
from loan and securities portfolios and Federal Home Loan Bank of Boston
borrowings are the primary sources of asset liquidity. At December 31,
1996, unrestricted cash equivalents and interest bearing deposits with
other banks totaled $131,393,000 and available for sale securities totaled
$414,896,000.
Because the Company's bank subsidiaries 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.
- --------------------------------------------------------------------------------
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 interest rate sensitive assets and interest rate
sensitive liabilities and, where practical, by adjusting service fees to
reflect changing costs.
- --------------------------------------------------------------------------------
SUBSEQUENT ACCOUNTING PRONOUNCEMENT
- --------------------------------------------------------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." See
Note A - "Significant Accounting Policies," of the Notes to Consolidated
Financial Statements for more detail.
15
<PAGE> 17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The
"year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time for testing. To
date, confirmations have been received from the Company's primary
processing vendors that plans are being developed to address processing of
transactions in the year 2000. Management has not yet assessed the year
2000 compliance expense and related potential affect on the Company's
earnings.
16
<PAGE> 18
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 77,123 $ 69,085
Federal funds sold and other overnight deposits 53,983 57,958
----------- -----------
Cash and cash equivalents 131,106 127,043
Interest-bearing deposits with other banks 287 25,442
Securities available for sale 414,896 376,386
Securities held to maturity 104,682 164,733
Mortgage loans held for sale 16,967 10,025
Loans and leases 1,594,399 1,331,622
Less allowance for loan losses 20,332 19,843
----------- -----------
Net loans and leases 1,574,067 1,311,779
----------- -----------
Premises and equipment 38,195 35,086
Mortgage servicing rights 7,644 6,886
Goodwill and deposit base intangibles 9,235 9,884
Foreclosed assets 3,349 2,753
Bank-owned life insurance 30,975 -
Other assets 37,854 40,138
----------- -----------
Total assets $ 2,369,257 $ 2,110,155
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing $ 1,557,562 $ 1,470,451
Noninterest bearing 193,579 167,380
----------- -----------
Total deposits 1,751,141 1,637,831
Short-term borrowed funds 104,750 58,904
Advances from Federal Home Loan Bank of Boston 246,593 158,858
Other liabilities 26,936 22,987
----------- -----------
Total liabilities 2,129,420 1,878,580
----------- -----------
Shareholders' equity:
Preferred stock, par value $1.00 per share - authorized 4,000,000 shares;
no shares outstanding in 1996 or 1995 - -
Common stock, par value $.66 2/3 per share - authorized 50,000,000 shares,
issued 23,609,000 shares in 1996 and 22,542,000 shares in 1995 15,740 15,030
Paid-in capital 142,829 129,434
Retained earnings 81,198 82,483
Unearned compensation - ESOP - (118)
Net unrealized gains on securities available for sale, after tax
effects 489 4,746
Cost of 28,055 shares of common stock in treasury (419) -
----------- -----------
Total shareholders' equity 239,837 231,575
----------- -----------
Total liabilities and shareholders' equity $ 2,369,257 $ 2,110,155
=========== ===========
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
17
<PAGE> 19
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 128,533 $ 109,601 $ 90,751
Interest on investment securities:
Taxable 33,287 33,185 29,418
Tax-exempt 1,106 1,233 1,201
--------- --------- ---------
34,393 34,418 30,619
Interest and dividends on trading securities - 6 1,725
Dividends on marketable equity securities 1,449 1,570 1,435
Other 3,930 3,213 2,266
--------- --------- ---------
Total interest and dividend income 168,305 148,808 126,796
--------- --------- ---------
Interest expense:
Interest on deposits 63,634 57,674 45,435
Interest on borrowings:
Short-term 11,971 7,251 5,536
Long-term 3,978 2,940 683
--------- --------- ---------
Total interest expense 79,583 67,865 51,654
--------- --------- ---------
Net interest and dividend income 88,722 80,943 75,142
Provision for loan and lease losses 4,285 3,814 3,622
--------- --------- ---------
Net interest and dividend income, after provision for loan and lease losses 84,437 77,129 71,520
--------- --------- ---------
Other income:
Service charges on deposit accounts 4,952 4,474 3,619
Loan servicing fees 2,466 2,248 2,338
Net gain (loss) on trading securities 564 1,092 (257)
Net gain on sale of investment securities 2,216 1,291 912
Net gain on sale of loan servicing rights - - 677
Net gain on sale of loans 2,250 1,149 1,281
Leasing activities 2,487 1,967 381
Trust fees 2,351 2,246 2,169
Pension settlement gain 877 - -
Other 4,099 3,271 3,280
--------- --------- ---------
Total other income 22,262 17,738 14,400
--------- --------- ---------
Other expense:
Salaries and employee benefits 34,076 31,941 30,592
Occupancy and equipment 10,306 9,118 8,478
Professional fees 3,030 3,146 3,524
Advertising and marketing 2,366 1,972 1,572
Operation of foreclosed assets 508 607 741
FDIC deposit insurance 383 2,443 3,558
Goodwill and deposit base intangible amortization 653 714 757
Merger expenses 4,522 - -
SAIF special assessment 691 - -
Other 14,735 13,310 12,487
--------- --------- ---------
Total other expense 71,270 63,251 61,709
--------- --------- ---------
Income before income taxes 35,429 31,616 24,211
Income taxes 11,876 10,062 7,474
--------- --------- ---------
Net income 23,553 21,554 16,737
Preferred stock dividends - 89 287
--------- --------- ---------
Net income available to common stock $ 23,553 $ 21,465 $ 16,450
========= ========= =========
Weighted averages shares outstanding 23,383 23,180 22,528
========= ========= =========
Earnings per common share $ 1.01 $ 0.93 $ 0.73
========= ========= =========
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
18
<PAGE> 20
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ---------------------- Paid-In Retained
Shares Dollars Shares Dollars Capital Earnings
--------- --------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 327 $ 327 22,166 $ 14,778 $ 125,984 $ 73,520
Net income - - - - - 16,737
Common cash dividends declared-$.39 per share - - - - - (8,161)
Preferred cash dividends declared-$1.3875 per share - - - - - (287)
Issuance of common stock under stock
option and purchase plans - - 242 161 1,239 -
Issuance of common stock under dividend
reinvestment plan - - 16 11 53 -
Purchase and retirement of treasury stock - - (93) (62) (963) -
Redemption of preferred stock (76) (76) - - (210) -
Preferred stock converted to common stock (58) (58) 58 40 18 -
Decrease in unearned compensation - ESOP - - - - - -
Common stock dividends declared - - 276 185 3,042 (3,247)
Change in net unrealized gain (loss)
on securities available for sale - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 193 193 22,665 15,113 129,163 78,562
Net income - - - - - 21,554
Common cash dividends declared-$.53 per share - - - - - (11,712)
Preferred cash dividends declared-$.4625 per share - - - - - (89)
Issuance of common stock under stock
option and purchase plans - - 199 132 1,114 -
Issuance of common stock under dividend
reinvestment plan - - 22 15 312 -
Purchase and retirement of treasury stock - - (1,029) (686) (7,993) -
Preferred stock converted to common stock (193) (193) 318 212 (19) -
Decrease in unearned compensation - ESOP - - - - - -
Fractional shares paid out - - (1) (1) (17) -
Common stock dividends declared - - 357 238 6,825 (7,063)
Change in net unrealized gain (loss)
on securities available for sale - - - - - -
Activity applicable to change in fiscal year -
Community
Net income - - - - - 1,774
Common cash dividends declared - - - - - (543)
Issuance of common stock under stock
option plan - - 11 7 49 -
Decrease in unearned compensation - ESOP - - - - - -
Change in net unrealized gain (loss) on
securities available for sale - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 - - 22,542 15,030 129,434 82,483
Net income - - - - - 23,553
Common cash dividends declared-$.58 per share - - - - - (13,416)
Issuance of common stock under stock option
and purchase plans and related tax effects - - 494 329 2,963 -
Purchase and retirement of treasury stock - - (45) (30) (553) -
Decrease in unearned compensation - ESOP - - - - - -
Fractional shares paid out - - (2) (1) (25) -
Common stock dividends declared - - 620 412 11,010 (11,422)
Change in net unrealized gain (loss)
on securities available for sale - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 - $ - 23,609 $ 15,740 $ 142,849 $ 81,198
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Unearned Gain (Loss) on Treasury Stock
Compensation - Securities Available -----------------
ESOP for Sale Shares Dollars Total
-------------- -------------------- ------ ------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ (660) $ 1,303 (866) $(7,198) $ 208,054
Net income - - - - 16,737
Common cash dividends declared-$.39 per share - - - - (8,161)
Preferred cash dividends declared-$1.3875 per share - - - - (287)
Issuance of common stock under stock
option and purchase plans - - - - 1,400
Issuance of common stock under dividend
reinvestment plan - - - - 64
Purchase and retirement of treasury stock - - - - (1,025)
Redemption of preferred stock - - - - (286)
Preferred stock converted to common stock - - - - -
Decrease in unearned compensation - ESOP 231 - - - 231
Common stock dividends declared - - - - (20)
Change in net unrealized gain (loss)
on securities available for sale - (5,723) - - (5,723)
-------------- -------------------- ------ ------- ---------
Balance at December 31, 1994 (429) (4,420) (866) (7,198) 210,984
Net income - - - - 21,554
Common cash dividends declared-$.53 per share - - - - (11,712)
Preferred cash dividends declared-$.4625 per share - - - - (89)
Issuance of common stock under stock
option and purchase plans - - - - 1,246
Issuance of common stock under dividend
reinvestment plan - - - - 327
Purchase and retirement of treasury stock - - 866 7,198 (1,481)
Preferred stock converted to common stock - - - - -
Decrease in unearned compensation - ESOP 232 - - - 232
Fractional shares paid out - - - - (18)
Common stock dividends declared - - - - -
Change in net unrealized gain (loss)
on securities available for sale - 8,739 - - 8,739
Activity applicable to change in fiscal year -
Community
Net income - - - - 1,774
Common cash dividends declared - - - - (543)
Issuance of common stock under stock
option plan - - - - 56
Decrease in unearned compensation - ESOP 79 - - - 79
Change in net unrealized gain (loss) on
securities available for sale - 427 - - 427
-------------- -------------------- ------ ------- ---------
Balance at December 31, 1995 (118) 4,746 - - 231,575
Net income - - - - 23,553
Common cash dividends declared-$.58 per share - - - - (13,416)
Issuance of common stock under stock option
and purchase plans and related tax effects - - - - 3,292
Purchase and retirement of treasury stock - - (28) (419) (1,002)
Decrease in unearned compensation - ESOP 118 - - - 118
Fractional shares paid out - - - - (26)
Common stock dividends declared - - - - -
Change in net unrealized gain (loss)
on securities available for sale - (4,257) - - (4,257)
-------------- -------------------- ------ ------- ---------
Balance at December 31, 1996 $ - $ 489 (28) $ (419) $ 239,837
============== ==================== ====== ======= =========
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
19
<PAGE> 21
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 23,553 $ 21,554 $ 16,737
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,123 6,722 7,119
Amortization of deferred credit on leasehold residual (1,412) (1,347) -
Provision for loan and lease losses 4,285 3,814 3,622
Provision for foreclosed real estate losses 21 31 418
Loans originated and acquired for resale (153,836) (120,897) (220,179)
Principal balance of loans sold 146,894 124,333 242,968
Net (gain) loss on sale of portfolio loans (256) (14) 227
Net gain on sale of foreclosed real estate (76) (71) (378)
Net gain on sale of investment securities (2,216) (1,291) (912)
Net decrease in trading securities - 236 39,595
Deferred income tax provision 6,136 2,905 91
Increase in cash surrender value of bank-owned
life insurance (975) - -
Other (270) (6,419) (3,751)
--------- --------- ---------
Net cash provided by operating activities 26,971 29,556 85,557
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 77,663 60,635 62,326
Proceeds from maturities of securities available for sale 178,071 58,019 56,179
Purchase of securities available for sale (210,357) (80,235) (111,360)
Proceeds from sales of securities held to maturity 1,005 6,006 -
Proceeds from maturities of securities held to maturity 88,750 68,488 102,294
Purchase of securities held to maturity (87,253) (85,810) (188,290)
Proceeds from the sale of, or payments on, foreclosed real estate 2,489 2,193 4,072
Proceeds from the sale of portfolio loans 16,356 10,027 999
Net (increase) decrease in interest-bearing deposits with other banks 25,155 (3,606) 11,451
Net increase in loans and leases (312,391) (162,951) (142,416)
Purchases of bank-owned life insurance (30,000) - -
Purchases of premises and equipment (7,748) (2,859) (5,906)
--------- --------- ---------
Net cash used in investing activities (258,260) (130,093) (210,651)
--------- --------- ---------
</TABLE>
(continued)
See notes to consolidated financial statements and independent auditors' report.
20
<PAGE> 22
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS CFX CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in noninterest bearing deposits and savings accounts 10,997 (51,887) (6,489)
Net increase in time certificates of deposit 102,313 142,290 23,666
Proceeds from borrowings with maturities in
excess of three months 235,500 163,883 31,382
Payment of borrowings with maturities in excess of
three months (178,640) (57,803) (13,394)
Net increase (decrease) in borrowings with maturities of
three months or less 76,721 (32,716) 57,873
Repayment of liability in connection with ESOP (118) (232) (231)
Common cash dividends paid (13,312) (10,041) (8,080)
Preferred cash dividends paid - (89) (287)
Proceeds from issuance of common stock 2,919 1,509 1,436
Payments for fractional shares (26) (18) (20)
Redemption of preferred stock - - (286)
Acquisition of treasury shares (1,002) (1,481) (1,025)
--------- --------- ---------
Net cash provided by financing activities 235,352 153,415 84,545
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 4,063 52,878 (40,549)
Change in fiscal year - Community - 1,858 -
Cash and cash equivalents at beginning of year 127,043 72,307 112,856
--------- --------- ---------
Cash and cash equivalents at end of year $ 131,106 $ 127,043 $ 72,307
========= ========= =========
Supplementary information:
Interest paid on deposit accounts $ 61,559 $ 56,730 $ 45,431
Interest paid on borrowed funds 16,147 9,715 5,834
Income taxes paid 5,930 7,662 6,490
</TABLE>
See notes to consolidated financial statements and independent auditors' report.
21
<PAGE> 23
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRINCIPLES OF PRESENTATION AND CONSOLIDATION
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of CFX
Corporation and its wholly-owned subsidiaries, CFX Bank, Safety Fund
National Bank and Orange Savings Bank (collectively referred to as Banks),
and the Banks' subsidiaries which engage in investment activities,
mortgage banking, and property management. One of the Bank's subsidiaries
has a 51% ownership interest in 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.
The consolidated financial statements have been restated to reflect
the Company's acquisition of Portsmouth Bank Shares, Inc. (Portsmouth) and
Community Bankshares, Inc. (Community) on August 29, 1997.
Upon acquisition, each of Portsmouth's 5,907,242 outstanding shares
of common stock and Community's 2,510,314 outstanding shares of common
stock were converted into 0.9314 shares and 2.113 shares, respectively, of
the Company's common stock, resulting in the issuance of 5,502,005 shares
and 5,304,293 shares, respectively, of the Company's common stock to
Portsmouth and Community shareholders. Outstanding stock options were
similarly exchanged for CFX stock options. Portsmouth was a New Hampshire
corporation and its subsidiary, Portsmouth Savings Bank, was a New
Hampshire state-chartered savings bank headquartered in Portsmouth, New
Hampshire. Portsmouth Savings Bank was merged into CFX Bank as part of the
transaction. Community was a New Hampshire corporation and its bank
subsidiaries, Concord Savings Bank, a New Hampshire state-chartered
savings bank, and Centerpoint Bank, a New Hampshire state-chartered
commercial bank, were merged into CFX Bank as part of the transaction.
Both the Portsmouth and Community mergers were accounted for by the
pooling-of-interests method of accounting, and, accordingly, the financial
information for all 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. Expenses
directly attributable to the mergers amounted to $11,031,000 and were
charged to earnings at the date of combination. Separate financial
information of CFX Corporation, Portsmouth and Community is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- --------------------------------- ---------------------------------
CFX Portsmouth Community CFX Portsmouth Community CFX Portsmouth Community
-------- ---------- --------- -------- ---------- --------- -------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest and
dividend income $ 56,859 $ 10,043 $ 21,820 $ 52,026 $ 10,862 $ 18,055 $ 47,998 $ 11,709 $ 15,435
Provision for loan and
lease losses (2,935) - (1,350) (3,037) - (777) (2,697) - (925)
Other income 16,827 1,888 3,547 14,311 1,226 2,201 11,079 503 2,818
Other expense (51,370) (3,527) (16,373) (46,202) (3,608) (13,441) (44,864) (4,035) (12,810)
Income taxes (6,740) (2,447) (2,689) (5,760) (2,439) (1,863) (4,272) (2,305) (897)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income 12,641 5,957 4,955 11,338 6,041 4,175 7,244 5,872 3,621
Preferred dividends - - - (89) - - (268) - (19)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income available
to common stock $ 12,641 $ 5,957 $ 4,955 $ 11,249 $ 6,041 $ 4,175 $ 6,976 $ 5,872 $ 3,602
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Effective December 31, 1995, Community changed its fiscal year end
from June 30 to December 31. Accordingly, the financial information
presented above for the years ended December 31, 1995 and 1994 includes
financial information for Community for the years ended June 30, 1995 and
1994, respectively.
22
<PAGE> 24
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial information (in thousands) pertaining to Community for
the six months ended December 31, 1995, is as follows:
<TABLE>
<S> <C>
Net interest and dividend income $ 9,748
Provision for loan and lease losses (498)
Other income 1,807
Other expense (8,019)
Income taxes (1,264)
-------
Net income $ 1,774
=======
</TABLE>
For the six months ended December 31, 1995, cash flow information
(in thousands) pertaining to Community was as follows:
<TABLE>
<S> <C>
Net cash provided by operating activities $ 3,917
Net cash provided by investing activities 8,348
Net cash used by financing activities (10,407)
--------
Net increase in cash and cash equivalents $ 1,858
========
</TABLE>
During 1996, the Company acquired The Safety Fund Corporation and
Milford Co/operative Bank, and Community acquired Centerpoint Bank. The
acquisitions were accounted for as poolings-of-interest and, accordingly,
the 1996 consolidated financial statements of CFX and of Community as
previously and separately issued had been restated to reflect financial
information for all periods presented on a combined basis.
- --------------------------------------------------------------------------------
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 valuation
allowances applicable to loans and leases, foreclosed real estate and
deferred tax assets, and to prepayment speeds used to value mortgage
servicing rights.
- --------------------------------------------------------------------------------
BUSINESS
- --------------------------------------------------------------------------------
The Company, 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 58 full service offices and
three loan production offices in New Hampshire and central Massachusetts.
The Company's Trust Division furnishes trust and investment services to
individuals, corporations, municipalities and charitable organizations.
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
- --------------------------------------------------------------------------------
Certain amounts have been reclassified in the 1995 and 1994
consolidated financial statements to conform to the 1996 presentation.
- --------------------------------------------------------------------------------
CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
Cash equivalents include amounts due from banks and federal funds
sold and other overnight deposits. Generally, federal funds are sold for
one-day periods.
23
<PAGE> 25
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRADING AND INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investments in debt securities that management has the positive
intent and ability to hold to maturity are classified as "held to
maturity" and reflected at amortized cost. Investments that are purchased
and held principally for the purpose of selling them in the near term are
classified as "trading securities" and reflected on the consolidated
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 consolidated balance sheet at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity, net of related
tax effects.
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 recorded on the trade date and
are computed by the specific identification method.
The carrying values of Federal Home Loan Bank of Boston and Federal
Reserve Bank of Boston stock are reflected at cost.
- --------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
INTEREST RATE SWAP AGREEMENTS: Interest rate swap agreements are
designated as hedges against future fluctuations in the interest rates of
specifically identified assets or liabilities, and 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.
INTEREST RATE FLOOR AGREEMENTS: Interest rate floor agreements are
used to manage exposure to interest rate risk. The amounts paid on the
floors are accounted for as adjustments to the yield on the hedged assets.
The Company applies hedge accounting as the asset being hedged exposes the
Company to interest rate risk, and the floor is designated and effective
as a hedge of a specific pool of assets. The Company receives an interest
payment if the three-month London Interbank Offered Rate (LIBOR) declines
below a predetermined rate. This payment would be based upon the rate
difference between current LIBOR and the predetermined rate accrued on the
notional value of the instrument. The transaction fee paid is amortized
over the life of the contract.
FINANCIAL FUTURES CONTRACTS: Interest rate futures contracts had
been entered into by the Company as hedges against interest rate risk in
its trading securities portfolio. These instruments were 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
1996 and 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 available for sale securities
are marked to fair value and changes in fair value are reflected in
shareholders' equity, net of related tax effects.
- --------------------------------------------------------------------------------
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 earnings when applicable.
24
<PAGE> 26
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount is amortized as an adjustment of
the related loan's yield using the interest method 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 (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," which was amended in October 1994 by
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan, Income
Recognition and Disclosure." The Company adopted SFAS No. 114 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. 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, 1996, the Company had $5,906,000 in impaired loans of which
approximately 94% were measured by the fair value of collateral and 6% 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 was 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, prevailing economic conditions and historical loss
experience.
25
<PAGE> 27
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
BANK-OWNED LIFE INSURANCE
--------------------------------------------------------------------------
During 1996, the Company invested $30 million in bank-owned life
insurance (BOLI) to help finance the cost of certain employee benefit plan
expenses. BOLI represents life insurance on the lives of certain employees
through insurance companies with a Standard & Poors rating of AA+ or
better. The Company is the beneficiary of the insurance policies.
Increases in the cash value of the policies, as well as insurance proceeds
received, are recorded in other income, and are not subject to income
taxes.
--------------------------------------------------------------------------
PREMISES AND EQUIPMENT
--------------------------------------------------------------------------
Premises and equipment are stated at cost less accumulated
depreciation and amortization. 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 to
estimate 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 $370,000 or $.02 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 1996 or 1995.
--------------------------------------------------------------------------
INVESTMENTS IN LEASEHOLD RESIDUALS AND LIMITED PARTNERSHIPS
--------------------------------------------------------------------------
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, 1996 and 1995, the leasehold residual position of $1,906,000
is included in other assets and deferred credits of $3,184,000 and
$4,596,000, respectively, are included in other liabilities in the
consolidated balance sheets.
Investments in real estate development limited partnerships are
accounted for using the equity method.
--------------------------------------------------------------------------
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.
The accumulated amortizations of deposit base intangibles and
goodwill were $1,605,000 and $4,087,000, respectively, as of December 31,
1996.
26
<PAGE> 28
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
FORECLOSED ASSETS
--------------------------------------------------------------------------
Foreclosed assets consists of assets 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
foreclosed assets to fair value at the time of acquisition 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 earnings if the
carrying value of foreclosed assets exceeds its fair value less estimated
costs to sell.
Prior to 1995, the Company classified certain loans meeting more
extensive 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.
--------------------------------------------------------------------------
PENSION AND 401(K) PLANS
--------------------------------------------------------------------------
The Company and its subsidiaries have defined benefit and defined
contribution 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 plans for employees
of the Company, Safety Fund National Bank, CFX Bank (excluding former
employees of Portsmouth) and CFX Bank's subsidiaries. Under the plans, the
Company makes a matching contribution of one-half to one-third of the
amount contributed by each participating employee, up to 6% of the
employee's annual salary. The plan allows for supplementary profit sharing
contributions by the Company, at its discretion, for the benefit of
participating employees.
--------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLANS (ESOP)
--------------------------------------------------------------------------
Compensation expense is recognized based on cash contributions paid
or committed to be paid to the ESOPs. All shares held by the ESOPs are
deemed outstanding for purposes of earnings per share calculations.
Dividends declared on all shares held by the ESOP are charged to retained
earnings. The value of unearned compensation to be contributed to the
ESOPs for future services not yet performed is reflected as a reduction of
stockholders' equity.
--------------------------------------------------------------------------
STOCK COMPENSATION PLANS
--------------------------------------------------------------------------
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. The
disclosure requirements of this statement are effective for the Company's
consolidated financial statements for the year ended December 31, 1996.
The pro forma disclosures include the effects of all awards granted on or
after January 1, 1995. See Note N - "Stock Compensation Plans."
27
<PAGE> 29
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
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 temporary 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.
Tax credits generated from limited partnerships are reflected in
earnings when realized for federal income tax purposes.
--------------------------------------------------------------------------
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 subsidiaries.
--------------------------------------------------------------------------
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 material 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 PRONOUNCEMENT
--------------------------------------------------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The accounting and reporting standards of this Statement are
based on a financial components approach that focuses on control, whereby
after a transfer of financial assets, an entity recognizes only financial
and servicing assets it controls and liabilities it has incurred.
Liabilities incurred will be initially recognized at fair value, if
practicable. Financial assets are derecognized when control has been
surrendered, and liabilities are derecognized when extinguished. The
determination of whether control over a financial asset has been
surrendered is based on meeting specific criteria as defined in the
Statement.
The Statement provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings, and impacts the accounting for various transactions including
the servicing of financial assets, securitizations, securities lending
transactions, repurchase agreements, loan participations, and transfers of
receivables with recourse.
The Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied on a prospective basis. In December 1996, the
FASB voted to defer for one year the provisions of the Statement that
relate to secured borrowings and collateral.
Management is currently evaluating the impacts of the Statement on
its secured borrowings such as repurchase agreements but does not expect,
based on the general terms of its current agreements, that the Statement
will significantly change its accounting for similar transactions in the
future. Other provisions of the Statement will not, in management's
opinion, have a significant impact on the consolidated financial
statements, except that servicing rights pertaining to lease sales and
securitizations will be capitalized prospectively at their estimated fair
value, if practicable, with a corresponding credit to earnings, and
amortized over the servicing period.
28
<PAGE> 30
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE B--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, 1996 and 1995 were approximately $30,389,000 and
$28,169,000, respectively.
- --------------------------------------------------------------------------------
NOTE C--INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment
securities, with gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- -------------------------------------------- --------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Debt securities:
U.S. Treasury and agency obligations $ 225,708 $ 2,087 $ 1,669 $ 226,126
State and municipal 2,003 2 - 2,005
Corporate bonds 14,071 217 4 14,284
Federal agency mortgage
pass-through securities 109,886 434 1,389 108,931
Other collateralized mortgage
obligations (CMO's) 19,799 15 206 19,608
Other 4,749 132 12 4,869
--------- -------- -------- ---------
Total debt securities 376,216 2,887 3,280 375,823
Marketable equity securities 20,336 1,371 214 21,493
Federal Home Loan Bank of Boston
and Federal Reserve Bank of Boston
stock 17,580 - - 17,580
--------- -------- -------- ---------
Total securities available
for sale $ 414,132 $ 4,258 $ 3,494 $ 414,896
========= ======== ======== =========
Securities Held to Maturity
- -----------------------------
Debt securities:
U.S. Treasury and agency obligations $ 45,883 $ 70 $ 193 $ 45,760
State and municipal 13,986 118 21 14,083
Corporate bonds 2,013 2 8 2,007
Federal agency mortgage
pass-through securities 28,338 206 74 28,470
Other collateralized mortgage
obligation (CMO's) 1,184 1 - 1,185
Other 13,278 - - 13,278
--------- -------- -------- ---------
Total securities held to maturity $ 104,682 $ 397 $ 296 $ 104,783
========= ======== ======== =========
</TABLE>
At December 31, 1996, the Company pledged debt securities with an
amortized cost of $156,328,000, and a fair value of $155,298,000, as
collateral to secure public funds and repurchase agreements. See Note I -
"Short-Term Borrowed Funds."
29
<PAGE> 31
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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>
Available for Sale Held to Maturity
------------------------ ------------------------
Amortized Fair Amortized Fair
December 31, 1996 Cost Value Cost Value
- ------------------------------------ --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Within one year $ 32,238 $ 32,385 $ 28,143 $ 28,133
After one year through five years 130,199 131,526 38,034 38,005
After five years through ten years 61,402 60,975 7,983 7,991
After ten years through twenty years 22,692 22,398 1,000 999
--------- --------- --------- ---------
246,531 247,284 75,160 75,128
Pass -through securities and CMO's 129,685 128,539 29,522 29,655
--------- --------- --------- ---------
$ 376,216 $ 375,823 $ 104,682 $ 104,783
========= ========= ========= =========
</TABLE>
Proceeds from the sale of securities available for sale during the
years ended December 31, 1996, 1995 and 1994 were $77,663,000, $60,635,000
and $62,326,000, respectively. Gross gains of $1,748,000, $777,000 and
$1,005,000, respectively, were recognized on such sales. Gross losses of
$83,000, $122,000 and $88,000, respectively, were realized on such sales.
In the third quarter of 1996, the acquisitions of The Safety Fund
Corporation and Milford Co/operative Bank necessitated a transfer of
securities classified as held to maturity with an amortized cost of
$76,849,000 and a net unrealized loss of $2,522,000 to securities
available for sale in order to maintain the Company's existing interest
rate risk profile.
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 $111,386,000 and a net unrealized loss
of $864,000 were transferred to securities available for sale and
securities held to maturity with an amortized cost of $6,000,000 were sold
at a net realized gain of $6,000.
30
<PAGE> 32
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- -------------------------------------------- --------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Debt securities:
U.S. Treasury and agency obligations $ 191,948 $ 5,110 $ 183 $ 196,875
State and municipal 971 - - 971
Corporate bonds 24,523 575 1 25,097
Federal agency mortgage
pass-through securities 89,701 476 519 89,658
Other collateralized mortgage
obligation (CMO's) 24,345 75 262 24,158
Other 6,371 242 26 6,587
--------- -------- -------- ---------
Total debt securities 337,859 6,478 991 343,346
Marketable equity securities 17,043 2,653 265 19,431
Federal Home Loan Bank of Boston
and Federal Reserve Bank of Boston
stock 13,609 - - 13,609
--------- -------- -------- ---------
Total securities available
for sale $ 368,511 $ 9,131 $ 1,256 $ 376,386
========= ======== ======== =========
Securities Held to Maturity
- -----------------------------
Debt securities:
U.S. Treasury and agency obligations $ 98,275 $ 902 $ 266 $ 98,911
State and municipal 19,799 154 38 19,915
Corporate 4,546 21 37 4,530
Federal agency mortgage
pass-through securities 33,815 462 183 34,094
Other collateralized mortgage
obligation (CMO's) 8,098 167 22 8,243
Other 200 - 28 172
--------- -------- -------- ---------
Total securities held to maturity $ 164,733 $ 1,706 $ 574 $ 165,865
========= ======== ======== =========
</TABLE>
31
<PAGE> 33
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE D--LOANS AND LEASES
- --------------------------------------------------------------------------------
Loans and leases consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
Real estate:
Residential $ 872,187 $ 735,852
Construction 19,828 17,457
Commercial 247,517 232,079
Commercial, financial and agricultural 169,880 139,179
Warehouse lines of credit to leasing companies 18,393 12,906
Consumer lease financing 76,343 27,457
Indirect and other consumer 197,014 169,381
----------- -----------
1,601,162 1,334,311
Unearned income (10,733) (4,277)
Deferred origination costs, net 3,970 1,588
----------- -----------
Loans and leases, net $ 1,594,399 $ 1,331,622
=========== ===========
</TABLE>
The following is a summary of information pertaining to impaired and
nonaccrual loans:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Loans with a valuation allowance $ 2,816 $ 7,655
Loans without a valuation allowance 3,090 3,867
-------- --------
Total impaired loans $ 5,906 $ 11,522
======== ========
Valuation allowance allocated to impaired loans $ 934 $ 2,884
======== ========
Nonaccrual loans $ 10,783 $ 12,301
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Average investment in impaired loans $ 7,931 $ 14,201
======== ========
Interest income recognized on impaired loans $ 620 $ 1,104
======== ========
Interest income recognized on cash basis $ 500 $ 1,002
======== ========
</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 central
Massachusetts. The remainder of the portfolio is distributed principally
throughout the other New England states. The ability of the Company's
debtors to honor their contracts is dependent upon the real estate and
general economic sectors in this area.
32
<PAGE> 34
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E--ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
Changes in the allowance for loan and lease losses are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 19,843 $ 18,940 $ 21,080
Provision for loan and lease losses 4,285 3,814 3,622
Loan and leases charged-off (4,757) (4,482) (7,437)
Recoveries of loans and leases previously charged-off 961 1,428 1,675
Change in fiscal year - Community - 143 -
-------- -------- --------
Balance at end of year $ 20,332 $ 19,843 $ 18,940
======== ======== ========
</TABLE>
For the six months ended December 31, 1995, Community recorded
provisions for loan losses, recoveries and charge-offs of $498,000,
$361,000 and $716,000, respectively. See Note A - "Significant Accounting
Policies - Principles of Presentation and Consolidation."
- --------------------------------------------------------------------------------
NOTE F--PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Land $ 5,531 $ 5,467
Buildings and leasehold improvements 33,524 34,875
Furniture and equipment 26,771 23,248
-------- --------
65,826 63,590
Less accumulated depreciation (27,631) (28,504)
-------- --------
$ 38,195 $ 35,086
======== ========
</TABLE>
Depreciation and amortization expense was $4,609,000, $4,306,000 and
$3,940,000, for the years ended December 31, 1996, 1995 and 1994,
respectively.
- --------------------------------------------------------------------------------
NOTE G--FORECLOSED ASSETS
- --------------------------------------------------------------------------------
Foreclosed assets is presented net of a valuation allowance as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
Foreclosed real estate $ 3,071 $ 2,470
Non-real estate repossessions 288 333
Less allowance for losses (10) (50)
------- -------
$ 3,349 $ 2,753
======= =======
</TABLE>
33
<PAGE> 35
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
An analysis of the allowance for losses on foreclosed assets
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 50 $ 367 $ 407
Reclassification to non-performing loans upon
adoption of SFAS No. 114 - (131) -
Provision for losses 21 31 418
Charge-offs, net of recoveries (61) (217) (458)
----- ----- -----
Balance at end of year $ 10 $ 50 $ 367
===== ===== =====
</TABLE>
For the six months ended December 31, 1995, Community recorded a
provision for losses of $100,000 and charge-offs of $100,000. See Note A -
"Significant Accounting Policies - Principles of Presentation and
Consolidation."
The following table presents the components of the operation of
foreclosed assets:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Operating expenses, net of rental income $ 563 $ 647 $ 701
Provision for losses 21 31 418
Net gain on sales of foreclosed assets (76) (71) (378)
----- ----- -----
$ 508 $ 607 $ 741
===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
NOTE H--DEPOSITS
- --------------------------------------------------------------------------------
Total deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ----------
(In thousands)
<S> <C> <C>
Noninterest bearing $ 193,579 $ 167,380
Savings:
Regular savings 299,411 312,539
NOW accounts 193,274 185,606
Money market deposits 173,992 183,734
---------- ----------
Total savings 666,677 681,879
Time certificates of deposit 890,885 788,572
---------- ----------
Total deposits $1,751,141 $1,637,831
========== ==========
</TABLE>
Time deposits with a minimum balance of $100,000 at December 31,
1996 and 1995 totaled $181,597,000 and $114,427,000, respectively.
Brokered certificates of deposit at December 31, 1996 and 1995 amounted to
$69,960,000 and $20,666,000, respectively.
34
<PAGE> 36
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of time certificates, by maturity, is as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------ ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year $ 702,744 5.51% $ 556,669 5.63%
After one year through three years 160,604 5.71 177,668 5.91
After three years through five years 27,537 6.19 54,235 6.21
--------- ---------
$ 890,885 5.57% $ 788,572 5.73%
========= =========
</TABLE>
- --------------------------------------------------------------------------------
NOTE I--SHORT-TERM BORROWED FUNDS
- --------------------------------------------------------------------------------
The following summarizes short-term borrowed funds:
<TABLE>
<CAPTION>
1996 1995
--------- --------
(In thousands)
<S> <C> <C>
Securities sold under agreements to repurchase:
Retail $ 81,267 $ 40,451
Wholesale 23,160 14,264
Other 323 4,189
--------- --------
Total short-term borrowed funds $ 104,750 $ 58,904
========= ========
</TABLE>
Retail securities sold under agreement to repurchase at December 31,
1996 and 1995 mature within three months at a weighted average interest
rate of 4.49% and 4.42%, respectively. Wholesale repurchase agreements
mature within three months at a weighted average interest rate of 5.50%
and 5.83% at December 31, 1996 and 1995, respectively. Short-term borrowed
funds are secured by investment securities. See Note C - "Investment
Securities."
- --------------------------------------------------------------------------------
NOTE J--ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
- --------------------------------------------------------------------------------
A summary of advances from the Federal Home Loan Bank of Boston
(FHLBB) by maturity follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within one year $ 219,734 5.83% $ 137,213 6.06%
After one year through three years 25,875 5.57 20,800 5.67
After three years 984 6.01 845 6.52
--------- ----
$ 246,593 5.80% $ 158,858 6.01%
========= ====
</TABLE>
35
<PAGE> 37
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Banks have available lines of credit with the FHLBB at an
interest rate that adjusts daily. Borrowings under the lines are limited
to $30,000,000 as of December 31, 1996. 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 and 90% of the fair value of U.S.
Government and federal agency securities.
- --------------------------------------------------------------------------------
NOTE K--PREFERRED STOCK
- --------------------------------------------------------------------------------
The Company's preferred stock was converted to common stock on April
30, 1995, the mandatory conversion date.
- --------------------------------------------------------------------------------
NOTE L--INCOME TAXES
- --------------------------------------------------------------------------------
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current tax provision:
Federal $ 5,618 $ 6,868 $ 6,817
State 561 466 566
Federal tax credits (439) (177) -
-------- -------- --------
Total current 5,740 7,157 7,383
-------- -------- --------
Deferred tax provision (benefit):
Federal 5,767 2,926 563
State 992 547 (63)
Effect of tax law change - 10 17
Effect of change in valuation allowance (623) (578) (426)
-------- -------- --------
Total deferred 6,136 2,905 91
-------- -------- --------
Provision for income taxes $ 11,876 $ 10,062 $ 7,474
======== ======== ========
</TABLE>
The components of the net deferred tax asset included in other
assets are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Federal $ 12,595 $ 12,811
State 1,929 2,305
Valuation allowance - (623)
-------- --------
Total deferred tax assets, net 14,524 14,493
-------- --------
Deferred tax liabilities:
Federal 9,931 6,459
State 1,145 1,125
-------- --------
Total deferred tax liabilities 11,076 7,584
-------- --------
Net deferred tax asset $ 3,448 $ 6,909
======== ========
</TABLE>
36
<PAGE> 38
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 6,909 $ 7,810 $ 5,291
Deferred tax provision (6,136) (2,905) (91)
Purchase accounting effects of leasehold
residual acquisition - 6,907 -
Tax effects of net unrealized gains/losses on investment
securities reflected in shareholders' equity 2,675 (4,669) 2,610
Change in fiscal year - Community - (234) -
------- ------- -------
Balance at end of year $ 3,448 $ 6,909 $ 7,810
======= ======= =======
</TABLE>
For the six months ended December 31, 1995, Community recorded a
deferred tax provision of $10,000 and a $224,000 increase in the tax
effects of net unrealized gain on investment securities reflected in
shareholders' equity. See Note A "Significant Accounting Policies -
Principles of Presentation and Consolidation."
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,
-----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 6,889 $ 6,668
Investment in leasehold residual 4,354 5,654
Alternative minimum tax credit carryforward 1,079 282
State net operating loss carryforward 40 261
Capital loss carryforwards - 208
Severance accrual 368 96
Book reserves 1,016 1,415
Other, net 192 532
-------- --------
13,938 15,116
Valuation allowance - (623)
-------- --------
Total deferred tax assets, net 13,938 14,493
-------- --------
Deferred tax liabilities:
Depreciation 701 1,032
Deferred point income 1,217 220
Mortgage servicing rights 1,125 1,085
Consumer lease financing 5,986 1,368
Net unrealized gains on investment securities
available for sale 303 2,978
Other, net 1,158 901
-------- --------
Total deferred tax liabilities 10,490 7,584
-------- --------
Net deferred tax asset $ 3,448 $ 6,909
======== ========
</TABLE>
37
<PAGE> 39
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The change in the valuation allowance applicable to deferred tax
assets is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 623 $ 1,335 $ 1,504
Benefits generated by current year's operations (623) (578) (169)
Benefits lost - (79) -
Change in fiscal year - Community - (55) -
------- ------- -------
Balance at end of year $ - $ 623 $ 1,335
======= ======= =======
</TABLE>
For the six months ended December 31, 1995, Community recorded
benefits generated by the current year's operations of $55,000. See Note A
- "Significant Accounting Policies - Principles of Presentation and
Consolidation."
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 uncertainty existed with respect
to future realization of a portion of its capital loss carryforwards and
with respect to deferred Massachusetts state tax assets. Therefore, the
Company had established a valuation allowance relating to net operating
and capital loss carryforwards. The valuation allowance was reversed to
the extent that capital gains and ordinary income for state tax purposes
in certain subsidiaries were realized.
For CFX Bank and Orange Savings Bank, the base amounts of federal
income tax reserves for loan losses are permanent differences for which
there is no recognition of deferred tax liabilities. However, the loan
loss allowance maintained for financial reporting purposes is a temporary
difference with allowable recognition of a related deferred tax asset, if
it is deemed realizable.
At December 31, 1996, retained earnings include tax loan loss
reserves of approximately $19,619,000 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, the Company
will incur a tax liability at the current applicable income tax rates. The
Company anticipates that the $19,619,000 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 at December 31, 1996 is
approximately $7,603,000.
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>
1996 1995 1994
----------------------- ----------------------- -----------------------
Years Ended December 31, Amount Percent Amount Percent Amount Percent
- ----------------------------------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at the
statutory rate $ 12,046 34% $ 10,749 34% $ 8,231 34%
Increase (decrease) resulting from:
Tax-exempt interest income (528) (1) (556) (2) (508) (2)
Goodwill and deposit base
intangible amortization 199 1 212 1 232 1
Nondeductible merger expenses 872 2 75 1 3 -
State income taxes, net of
federal income tax benefit 990 3 679 2 332 1
Cash surrender value (349) (1) (86) - (40) -
Low income housing tax credits (439) (1) (177) (1) - -
Change in valuation allowance (623) (2) (578) (2) (426) (2)
Other, net (292) (1) (256) (1) (350) (1)
-------- -------- -------- -------- -------- --------
Income tax expense $ 11,876 34% $ 10,062 32% $ 7,474 31%
======== ======== ======== ======== ======== ========
</TABLE>
38
<PAGE> 40
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE M--EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The Company's employee benefit plans are summarized below:
--------------------------------------------------------------------------
MULTI-EMPLOYER PENSION PLAN
--------------------------------------------------------------------------
During 1996, CFX Corporation and certain subsidiaries terminated
their defined benefit pension plans, and transferred plan assets to a
multi-employer plan in amounts that would effectively settle the plans'
accumulated benefit obligations as of January 1, 1996. As a result, the
Company recognized settlement and curtailment gains totaling $877,000 in
1996.
The multi-employer plan is a defined benefit pension plan that
covers all eligible employees of CFX Corporation, CFX Bank (excluding
former employees of Community and Portsmouth - See Note A) and Safety Fund
National Bank. Pension expense attributable to the plan in 1996 was
$479,000.
--------------------------------------------------------------------------
SINGLE-EMPLOYER PENSION PLANS
--------------------------------------------------------------------------
The following table sets forth the funded status of the Company's
single-employer defined benefit plans and amounts recognized in the
Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,619,000 in 1996 and $6,830,000 in 1995 $ (2,759) $ (7,279)
======== ========
Projected benefit obligation for service rendered to date $ (4,668) $ (9,994)
Plan assets at fair value 5,817 9,802
-------- --------
Excess (deficiency) of plan assets over projected benefit obligation 1,149 (192)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (570) (2)
Prior service cost not yet recognized in net periodic pension cost 28 144
Unrecognized net assets at end of year (704) (854)
-------- --------
Accrued pension cost included in other liabilities $ (97) $ (904)
======== ========
</TABLE>
39
<PAGE> 41
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
SINGLE-EMPLOYER PENSION PLANS (CONCLUDED)
--------------------------------------------------------------------------
Net pension expense attributable to these plans includes the
following components:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 387 $ 850 $ 840
Interest cost on projected benefit obligation 307 694 693
Actual return on plan assets (648) (225) (105)
Net amortization and deferral 164 (584) (668)
----- ----- -----
$ 210 $ 735 $ 760
===== ===== =====
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation under these plans, and the expected long-term
rate of return on plan assets, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Weighted average discount rates 7.5% 7.25%-8.0% 7.5%-8.0%
Annual salary increases 5.0%-6.0% 5.0%-6.0% 5.0%-6.0%
Expected return on plan assets 7.5%-8.0% 7.5%-8.0% 7.0%-8.0%
</TABLE>
--------------------------------------------------------------------------
401(k) PLAN
--------------------------------------------------------------------------
The following table sets forth the Company's 401(k) plan expense:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Matching contributions $ 335 $ 325 $ 129
Supplemental profit sharing contributions 503 414 439
----- ----- -----
$ 838 $ 739 $ 568
===== ===== =====
</TABLE>
--------------------------------------------------------------------------
SUPPLEMENTAL PENSION AND DEFERRED COMPENSATION PLANS
--------------------------------------------------------------------------
The Company makes payments to certain current and retired officers
with supplemental retirement and deferred compensation agreements. The
cost of these agreements is accrued but not funded. The Company purchased
corporate-owned life insurance policies on the lives of the retirees. The
death benefits are payable to the Company and will assist in the funding
of the deferred compensation liability. The Company will recover the costs
of premium payments from the cash value of these policies.
40
<PAGE> 42
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE N--STOCK COMPENSATION PLANS
- --------------------------------------------------------------------------------
At December 31, 1996, the Company has stock-based compensation plans
as described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for the plans. Accordingly, no compensation
cost has been recognized for the option plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995
---------- ----------
(In thousands, except per share data)
<S> <C> <C>
Net income available to common stock:
As reported $ 23,553 $ 21,465
Pro forma 23,370 20,835
Earnings per share:
As reported $ 1.01 $ 0.93
Pro forma 1.00 0.90
</TABLE>
--------------------------------------------------------------------------
FIXED STOCK OPTION PLANS
--------------------------------------------------------------------------
The Company has a 1996 and a 1995 stock option plan (the Option
Plans) 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 Plans. A total of 658,000 shares of
authorized but unissued common stock of the Company has been reserved for
issuance pursuant to incentive stock options granted under the Option
Plans, and 443,000 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.
The fair value of each option grant is estimated on the date of
grant using the Black - Scholes option-pricing model with the following
weighted average assumptions used in 1996 and 1995, respectively: dividend
yield of 5.5% and 5.2%; expected volatility of 29%; risk-free interest
rates of 5.8% and 5.4%; and expected lives of 6.9 years for both periods.
Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- --------------------------------- ----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(Options in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,713 $ 7.41 1,549 $ 5.93 1,701 $ 5.55
Granted 101 13.32 373 12.66 136 8.15
Excercised (488) 5.60 (199) 5.56 (239) 4.99
Cancelled (5) 10.26 (6) 5.39 (49) 9.86
Change in fiscal year - Community - - (4) - - -
------- -------- ------- -------- ------- --------
Outstanding at end of year 1,321 $ 8.57 1,713 $ 7.40 1,549 $ 5.93
======= ======== ======= ======== ======= ========
Exercisable at end of year 1,287 $ 8.64 1,645 $ 7.44 1,102 $ 6.76
======= ======== ======= ======== ======= ========
Weighted average fair value
of options granted during
the year $17.20 $16.22 N/A
</TABLE>
41
<PAGE> 43
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
FIXED STOCK OPTION PLANS (CONCLUDED)
--------------------------------------------------------------------------
For the six months ended December 31, 1995, option activity relating
to Community was as follows: 2,000 options granted, 5,000 options
exercised and 1,000 options cancelled at weighted average exercise prices
of $7.93, $4.44 and $4.73, respectively. See Note A - "Significant
Accounting Policies - Principles of Presentation and Consolidation."
Information pertaining to options outstanding at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
- ------------------------ ------ ----------- -------- ------ --------
(Options in thousands)
<S> <C> <C> <C> <C> <C>
$0.47 - $5.70 447 3.44 years $ 4.44 441 $ 4.43
6.56 - 9.27 457 3.80 7.83 429 7.85
9.60 - 14.29 417 8.78 13.73 417 13.73
------ ------
1,321 5.24 years $ 8.57 1,287 $ 8.64
====== ======
</TABLE>
--------------------------------------------------------------------------
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 183,000 shares
of the Company's common stock. During the years ended December 31, 1996,
1995 and 1994, eligible employees purchased 20,000, 8,000 and 23,000
shares, respectively.
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%.
Purchase discounts have not been material to date and, accordingly, no
compensation cost has been recognized.
--------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLANS
--------------------------------------------------------------------------
In connection with the acquisitions of Community and Portsmouth, the
Company assumed their respective Employee Stock Ownership Plans (Plans).
Employees were generally eligible to participate in the Plans after
reaching age twenty-one and completing one year of service. Certain shares
previously acquired by the Plans had been acquired with proceeds of loans
from unrelated third parties. Community and Portsmouth had made
contributions to the Plans in amounts sufficient to satisfy the debt
service requirements of the Plans, and as debt was paid down, shares were
allocated to participants. At December 31, 1996, there were 240,112 shares
held by the Plans which were fully allocated to participants.
Contribution expense applicable to the Plans amounted to $122,000,
$168,000 and $253,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Company does not expect to make contributions to the Plans
subsequent to its assumption of the Plans.
42
<PAGE> 44
- --------------------------------------------------------------------------------
NOTE O--COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
In the ordinary course of business, there are outstanding
commitments and contingencies which are not reflected in the accompanying
consolidated financial statements.
--------------------------------------------------------------------------
EMPLOYMENT AND SPECIAL TERMINATION AGREEMENTS
--------------------------------------------------------------------------
The Company has entered into employment agreements with three senior
executives. The agreements provide for automatic one-year extensions
unless either party elects to limit the agreement to its then existing
term, and 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.
--------------------------------------------------------------------------
INVESTMENTS IN LIMITED PARTNERSHIPS
--------------------------------------------------------------------------
At December 31, 1996, the Company was committed to invest $4,098,000
in seven real estate development limited partnerships. At December 31,
1996 and 1995, the Company had $2,493,000 and $937,000, respectively,
invested in such partnerships, which are included in other assets.
--------------------------------------------------------------------------
LEASE SECURITIZATION
--------------------------------------------------------------------------
In connection with the lease securitization transactions completed
by CFX Funding, the Company has guaranteed a portion of the loss reserve
accounts by executing letters of credit arrangements with third party
lenders. At December 31, 1996, the letters of credit amounted to
$1,716,000 and will reduce monthly and expire during the period April 1998
through December 1998. The Company's guarantees are secured by the
equipment giving rise to the securitizations.
--------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS
--------------------------------------------------------------------------
At December 31, 1996, the Company was committed to purchase
servicing rights applicable to approximately $105,000,000 in mortgage
loans for $1,300,000.
--------------------------------------------------------------------------
OPERATING LEASE COMMITMENTS
--------------------------------------------------------------------------
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1996, pertaining to banking premises and equipment, future
minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, (In Thousands)
- -------------------------
<S> <C>
1997 $1,244
1998 1,102
1999 937
2000 761
2001 439
Thereafter 643
------
$5,126
======
</TABLE>
Certain of the leases include options to renew for periods ranging
from 5 to 15 years. The cost of such rentals is not included above. Total
rent expense for the years ended December 31, 1996, 1995 and 1994 amounted
to $1,017,000, $817,000 and $508,000, respectively.
--------------------------------------------------------------------------
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.
43
<PAGE> 45
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE P--RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
In the ordinary course of business, the Company makes loans to
directors, 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 $6,822,000 and $13,588,000 at December 31, 1996 and 1995,
respectively. During the year ended December 31, 1996, new loans totaling
$2,924,000 were made, and reductions were made to outstanding loan
balances totalling $9,690,000, of which $2,675,000 was from repayments and
$7,015,000 was attributable to directors no longer being affiliated with
the Company.
During the year ended December 31, 1996, payments amounting to
$695,000 were made by the Company to a construction company in which a
director holds a 100% ownership interest, for renovations to banking
facilities. In addition, at December 31, 1996, the Company was committed
to pay $500,000 to this company for further construction services.
Prior to January 1, 1996, Community from time to time originated
automobile consumer finance contracts through an automobile dealership
owned and operated by one of its directors, subject to Community's credit
approval, on terms comparable to those accorded other dealers. The
Director currently has no continuing relationships with the dealership.
Contracts amounting to $319,000 during the six months ended December 31,
1995 and $1,003,000 during the fiscal year ended June 30, 1995 were
originated through the dealership.
- --------------------------------------------------------------------------------
NOTE Q--DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The Company uses certain derivative financial instruments in
managing the interest rate risk included in the consolidated balance
sheet.
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.
The detail on the specific financial instruments used is as follows:
--------------------------------------------------------------------------
INTEREST RATE AGREEMENTS
--------------------------------------------------------------------------
Interest-rate swaps generally involve the exchange of fixed and
floating-rate interest 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.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller.
Interest rate floor agreements provide for the receipt of interest
to the extent that the three-month LIBOR is less than the specified rate.
44
<PAGE> 46
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
INTEREST RATE AGREEMENTS (CONTINUED)
--------------------------------------------------------------------------
At December 31, 1996 and 1995, interest rate agreements were
comprised of the following:
<TABLE>
<CAPTION>
Assets Interest Interest Notional Maturity Unrealized
Hedged Received Paid Amount Date Gain
- ------------------------- ---------------------- ----------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996:
Variable rate Fixed - 7.95% Variable - $ 5,000 12/16/97 $ 99
commercial loans 3 mo. LIBOR
Variable rate Variable - N/A $ 10,000 02/15/00 $ 174
commercial loans LIBOR floor (6.25%)
Variable rate Variable - N/A $ 10,000 06/03/99 $ 74
DECEMBER 31, 1995:
Variable rate Fixed - 7.95% Variable - $ 5,000 12/16/97 $ 254
commercial loans 3 mo. LIBOR
Variable rate Variable - N/A $ 10,000 02/15/00 $ 400
commercial loans LIBOR floor (6.25%)
</TABLE>
--------------------------------------------------------------------------
FINANCIAL OPTION CONTRACTS
--------------------------------------------------------------------------
The Company periodically uses financial options to hedge interest
rate exposure generally on secondary mortgage market operations. 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 minimizing the credit risk of
market participants. Option contracts are used explicitly for hedge
purposes and are not undertaken for speculation. The Company's intent and
general practice is to liquidate option 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 option contracts, but may execute delivery or receipt if it is
financially prudent to do so. At December 31, 1996, 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 treasury
obligations totaling $4,000,000 and covered call options on 5-year
treasury obligations totaling $10,000,000 extending through March 1997.
The unrealized gain on the option contracts at December 31, 1996 was
$189,000.
45
<PAGE> 47
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
TRADING ACTIVITIES
--------------------------------------------------------------------------
In 1994, as mortgage-backed securities were purchased for the
trading portfolio, the Company assessed their price volatility under
varying interest rates. A hedge using a combination of interest rate swap
agreements, financial futures contracts and financial option contracts was
constructed to closely resemble the volatility of the underlying security.
Derivatives held for trading purposes, as well as the overall program for
which they were used, were liquidated in October, 1994.
Net gains (losses) on trading securities, included separately in the
consolidated statements of income, are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities $ - $ - $(2,985)
Other debt securities - - (4)
Equity securities 564 1,092 271
Futures, options and swaps - - 2,461
------- ------- -------
$ 564 $ 1,092 $ (257)
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
NOTE R--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET LENDING RISK
- --------------------------------------------------------------------------------
In addition to using derivative financial instruments to manage
interest rate risk (see Note Q), 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. These financial instruments
include commitments to extend credit, standby letters of credit and
forward delivery contracts. These instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Company's exposure to credit loss 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.
At December 31, 1996 and 1995, the following financial instruments
were outstanding:
<TABLE>
<CAPTION>
Contract or
Notional Amount
-----------------------
December 31,
-----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Financial instruments for which contract amounts
represent credit risk:
Commitments to originate and purchase loans $ 70,267 $ 77,084
Unadvanced funds on lines of credit 177,312 118,291
Standby letters of credit 4,259 4,190
Loans sold with recourse 17,147 24,019
Financial instruments for which contract amounts
exceed credit risk:
Outstanding forward delivery contracts 99,371 158,504
</TABLE>
46
<PAGE> 48
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
The Company has periodically sold automobile loans with credit
enhancements that obligate the Company to assume a certain portion of
credit losses should they occur. At December 31, 1996, $89,000 had been
provided for such losses.
Forward delivery contracts are contracts for delayed delivery of
mortgage loans or mortgage- backed securities in which the Company 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.
--------------------------------------------------------------------------
NOTE S--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.
RESTRICTED SECURITIES: The carrying values of Federal Home Loan Bank
of Boston and Federal Reserve Bank of Boston stock approximate fair value,
based on redemption provisions.
INVESTMENT SECURITIES: Fair values of all other investment
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on market prices of
comparable instruments.
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.
47
<PAGE> 49
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
ACCRUED INTEREST: The carrying amounts of accrued interest
approximate fair value.
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.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for options, swaps and
interest rate agreements 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.
The estimated fair values, and related carrying amounts or notional
amounts, of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 131,106 $ 131,106 $ 127,043 $ 127,043
Interest bearing deposits with other banks 287 287 25,442 25,442
Securities available for sale 414,896 414,896 376,386 376,386
Securities held to maturity 104,682 104,783 164,733 165,865
Mortgage loans held for sale 16,967 17,078 10,025 10,223
Loans and leases, net 1,574,067 1,570,046 1,311,779 1,321,856
Accrued interest receivable 15,384 15,384 16,280 16,280
Financial liabilities:
Deposits 1,751,141 1,754,594 1,637,831 1,641,272
Short-term borrowed funds 104,750 104,750 58,904 58,904
Advances from the Federal Home
Loan Bank of Boston 246,593 246,568 158,858 158,964
Accrued interest payable 5,297 5,297 3,425 3,425
</TABLE>
48
<PAGE> 50
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995
----------------------- -----------------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Commitments to originate and purchase loans $ 70,267 $ (212) $ 77,084 $ (22)
Standby letters of credit 4,259 (2) 4,190 (15)
Unadvanced funds on lines of credit 177,312 (558) 118,291 (304)
Interest-rate swap agreements 5,000 99 5,000 254
Financial option contracts (long position) 4,000 37 - -
Financial option contracts (short position) 10,000 152 - -
Interest-rate floor agreements 20,000 248 10,000 400
</TABLE>
- --------------------------------------------------------------------------------
NOTE T--REGULATORY CAPITAL REQUIREMENTS AND OTHER RESTRICTIONS
- --------------------------------------------------------------------------------
The Company (on a consolidated basis) and each Bank (on a
consolidated basis) are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's and Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Banks must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Holding companies are not
subject to the prompt corrective action standards.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Banks to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 1996, that the Company and the Banks meet all capital
adequacy requirements to which they are subject.
49
<PAGE> 51
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
As of December 31, 1996, the most recent notifications from the
Federal Reserve Board and the Federal Deposit Insurance Corporation
categorized the Company and the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, they must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since the notifications that management
believes have changed these categories. The Company's, the Banks' and the
acquired companies of Community and Portsmouth and their Banks' actual
capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ----------------------
DECEMBER 31, 1996 Amount Ratio Amount Ratio Amount Ratio
--------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated CFX Corporation $ 136,210 14.8% $ 73,875 8.0% N/A N/A
CFX Bank 86,845 12.2 57,110 8.0 $ 71,388 10.0%
Safety Fund National Bank 24,345 13.9 14,048 8.0 17,560 10.0
Orange Savings Bank 10,108 20.9 3,859 8.0 4,823 10.0
Consolidated Community Bankshares, Inc. 44,322 11.3 31,528 8.0 N/A N/A
Concord Savings Bank 33,998 10.8 25,090 8.0 31,362 10.0
Centerpoint Bank 8,418 10.4 6,506 8.0 8,133 10.0
Consolidated Portsmouth Bank Shares, Inc. 65,493 57.1 9,175 8.0 N/A N/A
Portsmouth Savings Bank 46,547 40.6 9,175 8.0 11,468 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated CFX Corporation 124,615 13.5 36,938 4.0 N/A N/A
CFX Bank 78,912 11.0 28,555 4.0 42,833 6.0
Safety Fund National Bank 22,090 12.6 7,024 4.0 10,536 6.0
Orange Savings Bank 9,503 19.7 1,929 4.0 2,894 6.0
Consolidated Community Bankshares, Inc. 40,417 10.3 15,764 4.0 N/A N/A
Concord Savings Bank 30,974 9.9 12,545 4.0 18,817 6.0
Centerpoint Bank 7,537 9.3 3,253 4.0 4,880 6.0
Consolidated Portsmouth Bank Shares, Inc. 64,806 56.5 4,588 4.0 N/A N/A
Portsmouth Savings Bank 45,860 40.0 4,587 4.0 6,881 6.0
Tier 1 Capital to Average Assets:
Consolidated CFX Corporation 124,615 8.0 62,323 - 4.0 - N/A N/A
77,903 5.0
CFX Bank 78,912 6.8 46,406 - 4.0 - 58,008 5.0
58,008 5.0
Safety Fund National Bank 22,090 7.0 12,568 - 4.0 - 15,710 5.0
15,710 5.0
Orange Savings Bank 9,503 9.8 3,870 - 4.0 - 4,837 5.0
4,837 5.0
Consolidated Community Bankshares, Inc. 40,417 7.4 21,814 - 4.0 - N/A N/A
27,268 5.0
Concord Savings Bank 30,974 7.0 17,605 - 4.0 - 22,006 5.0
22,006 5.0
Centerpoint Bank 7,537 6.8 4,461 - 4.0 - 5,577 5.0
5,577 5.0
Consolidated Portsmouth Bank Shares, Inc. 64,806 24.8 10,436 - 4.0 - N/A N/A
13,045 5.0
Portsmouth Savings Bank 45,860 17.6 10,435 - 4.0 - 13,043 5.0
13,043 5.0
</TABLE>
50
<PAGE> 52
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
Accordingly, $95,345,000 of the Company's equity in the net assets
of the Banks was restricted at December 31, 1996.
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, 1996, the maximum
amount available for transfer from the Banks to the Company in the form of
loans approximated $21,521,000.
- --------------------------------------------------------------------------------
NOTE U-- MORTGAGE LOAN SERVICING
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
mortgage loans serviced for others were $1,116,000,000 and $1,017,000,000
at December 31, 1996 and 1995, respectively. 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>
Years Ended December 31,
-------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 6,886 $ 4,207 $ 4,557
Additions 2,321 3,255 406
Sales - - (126)
Amortization (1,563) (525) (630)
Change in fiscal year - Community - (51) -
------- ------- -------
Balance at end of year $ 7,644 $ 6,886 $ 4,207
======= ======= =======
</TABLE>
For the six months ended December 31, 1995, Community recorded
additions to mortgage servicing rights of $150,000 and amortization of
$201,000.
At December 31, 1996 and 1995, the fair value of capitalized
mortgage servicing rights was $10,179,000 and $8,209,000, respectively.
There was no activity in the valuation allowances for mortgage servicing
rights for the years ended December 31, 1996 and 1995.
- --------------------------------------------------------------------------------
NOTE V-- SUBSEQUENT EVENT - ACQUISITION OF THE COMPANY
- --------------------------------------------------------------------------------
On October 27, 1997, the Company announced that it entered into a
definitive agreement to be acquired by Peoples Heritage Financial Group,
Inc. (Peoples Heritage), a multi-bank and financial services holding
company headquartered in Portland, Maine. Under the terms of the
agreement, each of CFX's outstanding shares of common stock will be
converted into .667 shares of Peoples Heritage common stock. The agreement
is subject to approval by shareholders of both companies and by regulatory
authorities. The transaction will be a tax-free reorganization and is
anticipated to be accounted for as a pooling-of-interests. In connection
with the agreement, CFX has granted to Peoples Heritage an option to
acquire up to 19.9 percent of the outstanding shares of CFX common stock
under certain circumstances. Additionally, Peoples Heritage has granted
CFX an option to acquire up to 10.0 percent of the outstanding shares of
Peoples Heritage common stock under certain circumstances.
51
<PAGE> 53
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE W--CFX CORPORATION (PARENT-COMPANY-ONLY) CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------------------------
(In thousands)
<S> <C> <C>
Assets:
Cash and due from banks $ 1,800 $ 2,443
Interest-bearing deposits with bank subsidiaries 21,409 21,632
Securities held to maturity 320 577
Securities available for sale 130 108
Receivables from subsidiaries 7,992 8,233
Investment in bank subsidiaries 204,963 200,429
Other assets 5,856 2,797
--------- ---------
$ 242,470 $ 236,219
========= =========
Liabilities $ 2,633 $ 4,644
Shareholders' equity 239,837 231,575
--------- ---------
$ 242,470 $ 236,219
========= =========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Interest and dividend income $ 951 $ 1,042 $ 911
Dividends from subsidiaries 17,163 9,848 9,842
Management fee from subsidiaries 308 131 145
Gain on sale of investment securities 1 28 -
-------- -------- --------
18,423 11,049 10,898
General and administrative expenses 2,597 1,253 1,398
-------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries 15,826 9,796 9,500
Income tax expense (benefit) 110 (27) (286)
-------- -------- --------
Income before equity in undistributed net income
of subsidiaries 15,716 9,823 9,786
Equity in undistributed net income of subsidiaries 7,837 11,731 6,951
-------- -------- --------
Net income $ 23,553 $ 21,554 $ 16,737
======== ======== ========
</TABLE>
52
<PAGE> 54
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 23,553 $ 21,554 $ 16,737
Adjustments to reconcile net income to net cash
provided by operating activities:
Net deferred income tax provision (benefit) 1 9 (111)
Gain on sale of investment securities (1) (28) -
Equity in undistributed net income of subsidiaries (7,837) (11,731) (6,951)
Net change in other assets and other liabilities (1,984) (2,122) 2,972
-------- -------- --------
Net cash provided by operating activities 13,732 7,682 12,647
-------- -------- --------
Cash flows from investing activities:
Capital contribution to subsidiary (200) (200) -
Net decrease (increase) in interest bearing deposits with bank subsidiaries 223 8,740 (9,299)
Decrease (increase) in receivables from subsidiaries 241 (7,940) 110
Purchases of securities available for sale - (55) (1,027)
Proceeds from sales of securities available for sale 2 1,075 -
Purchases of securities held to maturity (16,601) (6,002) (5,467)
Proceeds from maturities of securities held to maturity 16,857 6,483 11,875
Purchase of bank-owned life insurance (3,250) - -
-------- -------- --------
Net cash provided (used) by investing activities (2,728) 2,101 (3,808)
-------- -------- --------
Cash flows from financing activities:
Common cash dividends paid (13,312) (10,041) (8,080)
Preferred cash dividends paid - (89) (287)
Proceeds from issuance of common stock 2,693 1,509 1,436
Payments on fractional shares (26) (18) (20)
Redemption of preferred stock - - (286)
Acquisition of treasury shares (1,002) (1,481) (1,025)
-------- -------- --------
Net cash used by financing activities (11,647) (10,120) (8,262)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (643) (337) 577
Change in fiscal year - Community - (338) -
Cash and cash equivalents at beginning of year 2,443 3,118 2,541
-------- -------- --------
Cash and cash equivalents at end of year $ 1,800 $ 2,443 $ 3,118
======== ======== ========
</TABLE>
For the six months ended December 31, 1995, cash flow activity
relating to Community consisted of cash provided by operating activities
of $158,000 and cash used in financing activities of $496,000. See Note A
- "Significant Accounting Policies - Principles of Presentation and
Consolidation."
53
<PAGE> 55
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE X--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of the consolidated quarterly results of
operations for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
Three Months Ended March 31 June 30 September 30 December 31
- ----------------------------------- -------- ------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $39,881 $41,654 $42,587 $44,183
Interest expense 18,789 19,530 20,075 21,189
------- ------- ------- -------
Net interest and dividend income 21,092 22,124 22,512 22,994
Provision for loan and lease losses 1,180 1,050 980 1,075
Other income (2&3) 5,284 5,198 5,619 6,161
Other expenses (1) 16,258 16,226 21,526 17,260
------- ------- ------- -------
Income before income taxes 8,938 10,046 5,625 10,820
Income taxes 2,768 3,348 2,459 3,301
------- ------- ------- -------
Net income $ 6,170 $ 6,698 $ 3,166 $ 7,519
======= ======= ======= =======
Earnings per common share $ 0.27 $ 0.29 $ 0.14 $ 0.32
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995
Three Months Ended March 31 June 30 September 30 December 31
- ----------------------------------- -------- ------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $35,022 $36,662 $37,937 $39,187
Interest expense 15,155 16,539 17,577 18,594
------- ------- ------- -------
Net interest and dividend income 19,867 20,123 20,360 20,593
Provision for loan and lease losses 864 1,146 825 979
Other income 3,780 4,578 4,289 5,091
Other expenses (4) 15,888 15,971 15,472 15,920
------- ------- ------- -------
Income before income taxes 6,895 7,584 8,352 8,785
Income taxes 2,229 2,397 2,706 2,730
------- ------- ------- -------
Net income 4,666 5,187 5,646 6,055
Preferred stock dividends 67 22 - -
------- ------- ------- -------
Net income available to
common stock $ 4,599 $ 5,165 $ 5,646 $ 6,055
======= ======= ======= =======
Earnings per common share $ 0.20 $ 0.22 $ 0.24 $ 0.26
======= ======= ======= =======
</TABLE>
(1) For the quarter ended September 30, 1996, the Company recorded costs
related to the mergers of Safety Fund and Milford totaling $4,522,000,
and costs associated with a SAIF special assessment of $691,000.
(2) For the quarter ended September 30, 1996, the Company terminated CFX
Corporation's and Safety Fund's pension plans and transferred the assets
and liabilities to a multi-employer pension plan. A gain from the
settlement of the pension plan was recorded totaling $877,000.
(3) For the quarter ended December 31, 1996, the Company recorded $411,000
in gains on trading securities on an investment purchased and sold
during the same quarter.
(4) 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.
54
<PAGE> 56
- --------------------------------------------------------------------------------
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, 1996 and 1995, 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,
1996. 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 referred to above have been
restated to reflect the pooling of interests with Portsmouth Bank Shares,
Inc. and Community Bankshares, Inc., as described in Note A to the
consolidated financial statements. We did not audit the consolidated
financial statements of Portsmouth Bank Shares, Inc. for the periods
referred to above, which statements reflect total assets of $271,569,000
and $267,272,000 as of December 31, 1996 and 1995, respectively, and net
interest and dividend income of $10,043,000, $10,862,000 and $11,709,000
for the years ended December 31, 1996, 1995 and 1994, respectively. We did
not audit the consolidated financial statements of Community Bankshares,
Inc. as of December 31, 1996 and 1995 and for the year ended December 31,
1996, the six months ended December 31, 1995, and each of the years in the
two-year period ended June 30, 1995, which statements reflect total assets
of $550,596,000 and $498,003,000 as of December 31, 1996 and 1995,
respectively, and net interest and dividend income of $21,821,000,
$9,748,000, $18,055,000 and $15,436,00 for the year ended December 31,
1996, the six months ended December 31, 1995 and each of the years in the
two-year period ended June 30, 1995, 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 Portsmouth Bank
Shares, Inc. and Community Bankshares, Inc. as of December 31, 1996 and
1995 and for the years ended December 31, 1996, 1995 and 1994 is based
solely on the reports of other auditors.
The consolidated financial statements as of December 31, 1995 and
for the years ended December 31, 1996, 1995 and 1994 reflect the pooling
of interests with The Safety Fund Corporation. We did not audit the 1995
and 1994 consolidated financial statements of The Safety Fund Corporation,
which statements reflect total assets of $287,483,000 as of December 31,
1995 and net interest and dividend income of $13,816,000 and $12,036,000
for the years ended December 31, 1995 and 1994, 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 The Safety Fund Corporation as of December 31, 1995 and for
the years ended December 31, 1995 and 1994 is based solely on the reports
of other auditors.
The consolidated financial statements as of and for the year ended
December 31, 1994 reflect the pooling of interests with Orange Savings
Bank. We did not audit the 1994 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 for the year
ended December 31, 1994. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Orange Savings Bank as of and for the
year ended December 31, 1994 is based solely on the report 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 as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
55
<PAGE> 57
As discussed in Note A to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," effective January 1, 1995.
WOLF & COMPANY, P.C.
Boston, Massachusetts
January 29, 1997, except for Note A - "Significant Accounting
Policies - Principles of Presentation and Consolidation" as to
which the date is August 29, 1997 and Note V as to which
the date is October 27, 1997
56
<PAGE> 58
- --------------------------------------------------------------------------------
INFORMATION ON COMMON STOCK
- --------------------------------------------------------------------------------
At December 31, 1996, there were approximately 6,416 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>
1996 First Second Third Fourth
CALENDAR QUARTERS Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dividends declared per share (1) $ 0.1714 $ - $ 0.1905 $ 0.2095
Stock price(1):
High 15 3/8 14 3/8 15 1/4 16 5/8
Low 12 7/8 12 1/4 11 5/8 13 5/8
Last sale 12 12 3/8 14 1/8 15 1/2
1995
CALENDAR QUARTERS
Dividends declared per share (1) $ 0.1391 $ 0.1451 $ 0.1451 $ 0.3266
Stock price(1):
High 11 3/4 15 3/8 16 1/2 16 5/8
Low 9 1/2 11 13 1/2 13 1/4
Last sale 11 1/8 15 16 3/8 14 7/8
</TABLE>
(1) Common cash dividends and common stock sale prices have been restated to
reflect the Company's 5% common stock dividend declared on December 10,
1996.
57
<PAGE> 1
Exhibit 99.2
The Board of Directors
Portsmouth Bank Shares, Inc.
Portsmouth, New Hampshire
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Portsmouth Bank
Shares, Inc. and Subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Portsmouth Bank Shares, Inc. and Subsidiary as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provision of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" as of January 1, 1994.
/s/
Shatswell, MacLeod & Company, P.C.
West Peabody, Massachusetts
January 13, 1997, except for Note 20
as to which the date is February 13, 1997
<PAGE> 1
99.3
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Community Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of Community
Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995 and June 30,
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year ended December 31, 1996, the
six months ended December 31, 1995 and for each of the years in the two-year
period ended June 30, 1995. These consolidated financial statements are the
responsibility of Community's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community
Bankshares, Inc. and subsidiaries at December 31, 1996, and 1995 and June 30,
1995, and the results of their operations and their cash flows for the year
ended December 31, 1996, the six months ended December 31, 1995 and each of the
years in the two-year period ended June 30, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 22, 1997
<PAGE> 1
99.4
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
The Safety Fund Corporation:
We have audited the accompanying consolidated balance sheets of The Safety Fund
Corporation and subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1995.
These consolidated 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Safety Fund
Corporation and subsidiaries at December 31, 1995 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/
------------------------------------
KPMG Peat Marwick LLP
January 22, 1996
<PAGE> 1
99.5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Orange Savings Bank:
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Orange Savings Bank and subsidiary for the year ended
December 31, 1994 (not presented seperately herein). These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and their cash flows of Orange
Savings Bank and subsidiary for the year ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
January 27, 1995
Boston, Massachusetts
